Xi Jinping takes up Trump’s challenge to a trade duel

U.S. President Donald Trump announced a week ago that he was going all in with his big bet on tariffs against China, escalating the scope of threatened import taxes from $50 billion to $250 billion, or even $450 billion if the Chinese didn’t fold.

A couple days later, a group of 20 mostly American and European CEOs visited Beijing and met the Chinese leader, Xi Jinping, who the Wall Street Journal reports (paywall) told them this:

“In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek…In our culture we punch back.”

We detailed in our report last week a few of the ways that the punch back could happen, including ramped-up inspections at American-affiliated factories in China, delayed or denied licensing, or even a full blown boycott of American goods.

• China would have to rely on these so-called “qualitative measures” to match
  Trump’s threatened levels of tariffs, because it doesn’t import enough goods from the U.S. to match tariff-for-tariff.
• China’s uncompromising tone is “dashing hopes among businesses and investors of a settlement by July 6,” the day the first round of tariffs will officially go into effect, the Journal reports.

Meanwhile, Trump backtracked on a plan to restrict Chinese investment in the U.S., telling reporters that he would probably let Congress go ahead with legislation to strengthen the Committee on Foreign Investment in the U.S. (CFIUS), instead of taking executive action.

• The legislation would “strengthen the authority of CFIUS, allowing it to review transfers of minority interests in companies dealing in critical technologies and infrastructure. It also allows for reviews of purchases and leases of property near sensitive U.S. government land and facilities,” Reuters reports.
• The executive actions that had been under discussion would have blocked “firms with at least 25 percent Chinese ownership from buying U.S. companies with ‘industrially significant technology.’”
• Steven Mnuchin and Peter Navarro contradicted each other before Trump talked to the press, with the Treasury Secretary saying that actions would target “all countries that are trying to steal our technology,” and the trade advisor saying that they would be China-specific.

In other trade war news:

• “Shanghai’s benchmark stock index plunged for a second day, sending Asia’s largest equity bourse into official bear market territory, as concerns of a trade war with the US sent investors scurrying to extract their funds from the capital markets,” the SCMP reports.
• Alibaba-affiliated Ant Financial struck a calm note amid the trade war chaos, according to CNBC. Senior VP of global business Doug Feagin expressed enthusiasm for Ant’s ability to innovate new technologies: “The technology that we’re using is based on our existing customer base and expanding that out,” he said, adding that the company is not “looking to go around the world and try to buy technology.”
• Energy dependency may be China’s greatest worry heading into a trade war. The SCMP reports that China is set to become the world’s largest liquified natural gas (LNG) importer by 2019 as it attempts to decrease coal use. The same report shows that the United States will become the world’s second largest energy supplier, highlighting the importance of China maintaining good trade relations to meeting rising LNG demands.
• Likewise, the United States is dependent on China as a growing energy market. The agreements in limbo include a $84 billion deal with China Energy Investment Corp. and a $43 billion deal with Sinopec, according to Bloomberg (paywall).
• Chinese tariffs on American coal stand to harm Trump’s base. The industry, once slated to help balance the trade deficit between China and the United States, is now “walking a tight rope” as it prepares for demand to slow, Reuters reports.
• Chinese airlines’ share values are plummeting, with firms losing a total of $11.4 billion recently, according to Bloomberg (paywall). Many airlines have purchased billions of dollars of equipment in U.S. currency, making it difficult to manage payments as the RMB is devalued.
• Economist Stephen Roach slammed Trump’s approach of “trying to resurrect industries in manufacturing that have been long been lost,” instead urging him to focus on market access as the Chinese economy increasingly turns to consumerism, CNBC reports. If you like the way Roach thinks, check out the Sinica podcast on China and America’s unhealthy co-dependency.
• China slashed tariffs on imports from South Korea, India, Laos, Bangladesh, and Sri Lanka, according to the SCMP. The regulations, effective July 1st, are part of the Asia-Pacific Trade Agreement and could balance against the economic hit that would come with tit-for-tat tariffs with the Americans.

Previously in The China Project’s trade war coverage:

Trade war update: Chinese investment in U.S. plummets, but yuan stays steady