US-China trade negotiations will drag on cause US already used most of leverage

[Marcin + 519]

I think US-China negotiations will drag on probably because not much leverage is left for Trump to use against China. So not much motivation for China to alter its behavior. Most of the damage was already done and is actually irreversible in short-term.

I am sorry if it is presented with too much doom and gloom, please correct me if you see brighter side of this topic.

Leverage at US disposal:

US as market for Chinese goods and China as market for US goods : China exports to US constitute only  17% in 9 months of 2019, decrease from 20% year earlier. This number could not realistically decrease much more in less than 3 years even if 30% tariffs (very unlikely as it would hurt Apple etc. a lot) are imposed on all Chinese exports, spare capacity cannot be build this fast in Vietnam, Thailand etc. Take share of 15% in 2020, 13% in 2021, 10% in 2022: not big problem for China. Bringing all tariffs back to 0% will not stop: changes in supply chains, risk of US as client for Chinese companies, risk of China as manufacturing base for US market for all companies from all countries. Dual supply chains: 1 for US market, 1 for the rest of the world are created by companies that can afford it. Chinese companies are finding alternative suppliers to substitute for US imports, they already decreased by 30%. In agriculture it is permanent once agriculture structure in Latin America adjusts. Not much leverage left.

US as source of imports of technology components and products: After US embargo on ZTE in April 2018, CCP ordered survey of all major companies from major industries to assess Chinese dependency on United States technologies/imports/supply chains in case of total embargo (official rumors). After the survey they immediately started countermeasures, economic war with United States was elevated to number 1 issue in national security. That is why Huawei stockpiled from 6 to12 months of usage of US imported components. The results of the survey or countermeasures were never made public, the only knowledge is from indirect sources, like interviews with Chinese scholars in science fields. As of November 2019 all important Chinese strategic industries are already embraced by US technology ban: telecommunication/semiconductors/electronic components, nuclear power, satellite/space technologies (since 1989), all dual use technologies (since 1989). Not much more could be done, Chinese are moving or already moved to East Asian and European suppliers. Still total embargo is actually not possible overnight as it would isolate US more than China (factory of the world and in 2018 surpassed US as largest retail market), so I think salami strategy of adding new Chinese companies every month or so to Entity List would continue. Still relatively a lot of leverage left but China takes for granted that all important Chinese companies would be on Entity List in 2-3 years and is preparing economy for this inevitability.

US as a partner in academic co-operation and source of know-how from students educated in US. US institutions and scholars are strongly advised to cease co-operation and do not start new projects with Chinese-born scholars (even if US citizens) in national security vulnerable fields (and it is now actually nearly everything from cancer research to theoretical physics as arguably all inventions in the end can be used by Chinese military). Chinese students have more difficulty to enter best universities on nationality not academic merits, and later they have difficulty in obtaining visas. So overseas Chinese students choose UK, Australia, EU countries instead of US. Chinese companies liquidate US based R&D centers and physically insulate technology infrastructure and workers from US based subsidiaries. Leverage is still high as China gets a lot of talent pool from United States and scientific co-operation thriving, US still major destination for Chinese students. Unfortunately situation is deteriorating fast to the point of inflection when working for Chinese company will constitute treason as was working for Soviet Union in Cold War era.

US preventing China access to natural resources of third countries. This means war so cannot be realistically considered. We can imagine some sort of “soft embargo” as a result of some “disaster” in Strait of Hormuz and Malacca&Lombok&SundaStraits, but geography would mean also crippling Japan and South Korean economies so not feasible. Theoretically the highest leverage as China has only 50-70 days of  crude oil imports in SPR, although investment in new capacity was streamlined by conflict with US and high increase of imports.

US cutting off China from SWIFT and banning use of US dollar by China. China developed own banking communication system as competition to SWIFT, so can probably do without SWIFT, although I do not know technical issues with switching. Banning use of US dollar – I do not know what would be consequences and doubt whether this is a real source of leverage as would mean the end of US dollar as reserve currency. Not real leverage.

 

[Douglas Buckland + 6,308]

I do not think that the results of the tariffs, on the Chinese economy, have fully registered yet. In time, they will be.

[Marcin + 519]

1 hour ago, Douglas Buckland said:

I do not think that the results of the tariffs, on the Chinese economy, have fully registered yet. In time, they will be.

I agree with you, it will take at least another 6 months for them to be fully visible in Chinese economic performance.

Technically the problem is that both leaders will not meet in the next 6 or even 12 months, after Chile APEC summit was cancelled. Davos is out of the question for Trump, China or US territory not possible because of face issues. The earliest is April 2020 in Vietnam at ASEAN meeting. Trump cannot meet after June 2020 because of possible damage at polls for perceived weakness/caving to China.

50 billion of 25% and 200 billion of 10% tariffs on Chinese exports is in effect for over 1 year, and in total 25% on 250 billion that is half of Chinese exports since May 2019.

Since 1 September 2019 , 2/3 of Chinese exports is covered by 25% and 15% tariffs, what is left is mainly low value added Chinese reprocessing trade. Transhipments through East Asia countries helped a bit.

So vast majority of damage already done. Till April 2020 the decoupling of both economies with be more advanced. Since April 2020 it would be stupid for China to sign any deal with Trump, they will wait who will be next US President. It will be most probably Trump as Democrats still do not have electable candidate. I will bring popcorn to every Trump-Biden debate, Trump will trash him. Democrats have 3 months for impeachment circus, later Trump will accuse them of coup d'etat.

 

Edited November 4, 2019 by Marcin
spelling

[Douglas Buckland + 6,308]

I do not believe that the full weight of the tariffs will be felt for at least 6 months, the real damage is just beginning.

[Marcin + 519]

But also no venue for them to meet in 6 or even 12 months, so chances for US are that tariffs would have devastating effect on Chinese economy so that Xi will want to meet at specially organized event. As majority of decisions were already made, not much goods left for tariffs to be imposed at, and 50% is way too much for US consumers.

Edited November 4, 2019 by Marcin
spelling

[Ward Smith + 6,615]

6 hours ago, Douglas Buckland said:

I do not believe that the full weight of the tariffs will be felt for at least 6 months, the real damage is just beginning.

Damage smamage, the Chinese already devalued their currency to make the net effect of the tariff zero. They've carefully targeted red states for economic impact, but it hasn't gone as well as they'd hoped. Switching to South America for alternate source of, for example, soybeans has caused it's own problems. American farmers automatically meet USDA requirements and the quality of the export good is uniformly excellent. Brazilian soybeans have rocks in them that seriously damages process equipment. 

[Enthalpic + 1,496]

7 hours ago, Douglas Buckland said:

I do not believe that the full weight of the tariffs will be felt for at least 6 months, the real damage is just beginning.

No way this will go on for another 6 months. Market insiders (bank / corporate masters) already know it's over - just look at the upswing. 

Today was a good day for my portfolio.

Damaging the economy has to stop well before the election. Yes this is damaging the US economy; you can argue China is hurting worse, or this will help in the long-term, but there is no question this currently hurts the US too.

[Marcin + 519]

1 hour ago, Ward Smith said:

Damage smamage, the Chinese already devalued their currency to make the net effect of the tariff zero.

Today USD/CNY 4 Nov 2019 = 7.03

The immediate move in August 2019 was from 6.85 to 7.05 so less than 3%.

If you would like to measure USD/CNY changes/devaluation long term since today:

4 Nov 2018 = 6.94  1.3% devaluation last year

4 Nov 2017 = 6.61  5.97%   devaluation last 2 years                          

4 Nov 2016 = 6.76  3.84%  devaluation last 3 years

Tariffs are:15% for 112 billion USD of exports and 25% for 250 billion USD of exports.

So no matter which moment is starting point to measure CNY devaluation vs USD it definitely has not negated full tariffs effect.

The lowest USD/CNY exchange rate last 25 years was Jan 2014 6.05 , CNY was stronger by 16% but then Trump was media personality, and nobody thought about trade abuses of Chinese "friends"

[Marcin + 519]

39 minutes ago, Enthalpic said:

No way this will go on for another 6 months. Market insiders (bank / corporate masters) already know it's over - just look at the upswing. 

Today was a good day for my portfolio.

Damaging the economy has to stop well before the election. Yes this is damaging the US economy; you can argue China is hurting worse, or this will help in the long-term, but there is no question this currently hurts the US too.

Too much hype already been created by the Trump entourage and media to sign the low profile trade deal by Foreign Ministers.

It has to be 2 leaders and they will definitely not meet in 6 months.

[Ward Smith + 6,615]

1 hour ago, Marcin said:

Today USD/CNY 4 Nov 2019 = 7.03

The immediate move in August 2019 was from 6.85 to 7.05 so less than 3%.

If you would like to measure USD/CNY changes/devaluation long term since today:

4 Nov 2018 = 6.94  1.3% devaluation last year

4 Nov 2017 = 6.61  5.97%   devaluation last 2 years                          

4 Nov 2016 = 6.76  3.84%  devaluation last 3 years

Tariffs are:15% for 112 billion USD of exports and 25% for 250 billion USD of exports.

So no matter which moment is starting point to measure CNY devaluation vs USD it definitely has not negated full tariffs effect.

The lowest USD/CNY exchange rate last 25 years was Jan 2014 6.05 , CNY was stronger by 16% but then Trump was media personality, and nobody thought about trade abuses of Chinese "friends"

What's the turnover? 

Let's analyze it this way. A publicly traded grocery chain claims its gross profits are 24% but an equities firm audits their goods for sale and determines their average profit margin is only 2%. Who's lying?