Trade war, day 62: Both sides dig in for long conflict

President Donald Trump is expected to soon move forward with slapping tariffs on another $200 billion in Chinese goods (day 61). Financial Times Beijing bureau chief Tom Mitchell points out (paywall) that after China’s expected retaliation, the total value of goods caught up in the trade war would reach $360 billion — “an amount equivalent to two-thirds of their bilateral trade last year.”

Mitchell then argues that the impending escalation is “based on false assumptions”:

• “The Trump administration wrongly thinks China’s economy is on the ropes, in part because of the escalating trade war.”
• But the primary cause of a slight moderating of China’s growth is actually a now years-long “campaign to rein in some of the riskiest practices in China’s financial sector” — a campaign which has only been moderately adjusted with the unfortunate timing of the trade war.
• “Chinese officials are fixated on November’s congressional midterm elections, naively believing that Republican losses will force Mr Trump to back down.”
• But China still doesn’t understand that “trade is one of the rare ‘crossover issues’ that appeals as much to Bernie Sanders’ Democrats as it does to the president’s core political base” — so the congressional outcome may not impact trade policy.

Tim Keeler, the former chief of staff at the U.S. Trade Representative, mirrored Mitchell’s point about China misunderstanding American politics in an interview on Bloomberg TV:

• “I think, however, one thing that the Chinese and perhaps some of the markets may not have fully digested is, on this issue of tariffs on chinese imports and this larger fight that the U.S. is having with tariffs — if the democrats take control of the House, there may end up being more support for that type of fight, not less support in Congress.”
• “It does feel like both sides are digging in for a protracted war,” Keeler added.

But even without the midterm elections as a hoped-for turning point, China may be digging in in the hopes of Trump’s next round of tariffs backfiring:

• “China may follow a ‘wait and see’ strategy in the next few months,” economists at Deutsche bank wrote, Bloomberg reports (paywall). The economists went so far as to say, “There is a good reason to follow such a strategy in our view: the trade war will likely become painful for the U.S. soon.”
• The reason: Consumer goods are a much larger proportion of the reported $200 billion in tariffs on the table than the $50 billion already implemented. The economists “estimate the $200 billion list has $78 billion worth of consumer goods versus only $3.7 billion in the $50 billion list,” Bloomberg says.

China is also continuing its strategy of attempting to limit backlash from Washington, but it may not be going so well:

• Reporters from the Associated Press were invited to interview Shen Changyu, the commissioner of China’s State Intellectual Property Office. (AP)
• “China’s work on intellectual property protection is solid and very productive. This point should be evaluated objectively and fairly by the international community,” the commissioner said bluntly.
• The interview “coincided with a series of events organized by Chinese officials, including briefings for foreign reporters by economists and other researchers, seeking to change minds abroad,” the AP says.
• But the talk about IP protection may be missing the point: “The conflict has largely moved on from over rampant Chinese copying of Hollywood movies, music, software and medicines to one focused on the bedrock of Beijing’s state-led development strategy,” best escapulated by the Made in China 2025 initiative.
• “The U.S. shouldn’t take Made in 2025 seriously,” Wang Huiyao, an adviser to China’s cabinet told Bloomberg (paywall). But that same Bloomberg article shined light on another aspect of that policy that hasn’t received much attention yet:
• “The Made in China 2025 Major Technical Roadmap, better known as the Green Book after the color of its original cover,” is an unofficial accompaniment to Made in China 2025’s officials goals.
• The Green Book contains “jaw-dropping targets,” that “if met would virtually lock foreign companies out of many industrial segments in China and threaten market disruption for businesses across the globe,” Bloomberg writes.

Other trade war news:

• Companies and industries in the crosshairs
  American companies in China brace for more trade-war pain / AP via Washington Post
  `I’m in big trouble’: corporate america reels as tariffs pile up / Bloomberg (paywall)
  China’s new threat against Trump has some U.S. farmers nervous / Time
  Purse-maker Vera Bradley says China tariffs will derail recovery / Bloomberg (paywall)
• China economy update and trade deficit
  US trade deficit jumps by the most in 3 years / CNBC
  Chinese, Hong Kong stocks resume slide as tariff threat builds / Bloomberg (paywall)
  Chart of the day: factory activity in Guangdong shrinks for first time in two years / Caixin
  Services Growth Slowest in 10 Months: Caixin Survey / Caixin (paywall)
  China August exports seen strong despite U.S. tariffs, shrinking orders: Reuters poll / Reuters
  Asian satellites buck China’s downward drift / WSJ (paywall)
  “Despite all these not-so-cheery figures,” Nathaniel Taplin writes, referring mostly to the reports linked above, “many of the most recent readings on actual growth suggest that macroeconomic weakness isn’t proving contagious in emerging countries.”
• California state policy diverges from D.C.
  California passes bill that supports trade with China / People’s Daily
  “California’s Legislature will urge the President and Congress of the United States to support actions that further strengthen economic links between the United States, including California, and China.”
  Abigail Grace, who just earlier this year was working on China policy as part of the National Security Council, points out: “It will be very problematic if DC and other wonky types continue to champion a more assertive China line without consulting and educating broader swaths of America.”
• National security scrutiny of deals
  Chinese state tech investments face higher US barriers / FT (paywall)
  A look at one U.S.-based company, Nantero, that received substantial investment from Chinese state investors, and is being scrutinized more after new national security legislation.

Previously in The China Project’s trade war coverage:

Trade war, day 61: Japan and Southeast Asia win; $200 billion more Trump tariffs coming