This coming Friday is when the Trump administration's previously announced 25% tariffs on imported steel and 10% for aluminum officially take effect, and while Canada, Mexico and Australia have been excluded from the protectionist measure, planned retaliation by China has triggered concerns over a global trade war. And confirming that trade - and broader economic and commercial - ties with China are set for a sharp deterioration, on Sunday the Trump administration ended a decade-old formal economic dialogue with China amid US concerns the country is becoming increasingly protectionist and moving backward on its promise to open its markets to foreign competition.
Speaking in Buenos Aires ahead of the Group of 20 finance ministers meeting, David Malpass, Treasury’s undersecretary for international affairs, said that "the administration is disappointed with China and because there wasn’t a path back toward a market orientation, I discontinued the China economic dialogue."
The halt of the main economic channel between the U.S. and China - known as the Comprehensive Economic Dialogue - ends conversations started under one of his predecessors, Hank Paulson, during the George W. Bush administration. Paulson singled out an economic track for the Treasury Department to lead, becoming the point-person on all such matters between the nations.
Still, the severance of ties sounds somewhat more extreme that the underlying reality: quoted by Bloomberg, Malpass said that rather than holding formal discussions, Secretary Steven Mnuchin has frequent private talks with senior-level officials in China to bring back focus to free-market capitalism, he said.
Call it graduated diplomatic escalations meant to find China's trigger point.
“One of the things we are doing is trying to keep open lines of communication with them even as we express concern” about the growing influence of China’s state-owned enterprises.
He also said that China’s movement toward market liberalization has "stalled or reversed" adding that "it’s become more clear that’s the case. We now see China’s political process moving away from a term limit."
Referencing the recent "perpetualization" of Xi Jinping, Malpass also highlighted a risk for the world from China’s autocratic rule, saying that the "risk of autocrats being in power too long now exists" and highlighted China's zombie companies, pointing out that "China is producing steel, aluminum with subsidized finance" which of course is just another form of protectionism.
In a surprisingly accurate take for a government official, Malpass cautioned that "with low bond yields and the availability of capital in both the public and private sphere there is a quiet but very broad leveraging up that we have to recognize as a vulnerability."
This is precisely what the IMF warned about last December in "The Walking Debt: Resolving China’s Zombies."
As Bloomberg adds, the first Comprehensive Economic Dialogue during the Trump administration fell apart in July 2017. The two super-powers were unable to produce a joint statement after Commerce Secretary Wilbur Ross scolded China over its trade imbalance with the U.S. in his opening remarks. Both sides canceled a planned closing news conference.
“After 10 years of discussions, certainly the U.S. has grown frustrated with the lack of progress” that resulted from the Comprehensive Economic Dialogue, said Timothy Adams, president of the Washington-based Institute of International Finance and a former Treasury undersecretary in the George W. Bush administration.
“I don’t fault them for their frustration, they’re looking for different ways of bringing about change of Chinese behavior,” he said in an interview earlier this month.
Anticipating the collapse of formal relations, President Xi Jinping recently sent his top economic adviser, Liu He, to meet with Mnuchin. In that meeting, Liu is said to have asked Mnuchin for a point-person to provide a list of specific demands from China, a sign that Treasury’s shuttering of the formal dialogue process may be hampering the process. Liu pointed out that different U.S. administrations have wanted various things, the person said, with Bush focused on monetary policy and Obama emphasizing investment.
Meanwhile, in the latest indication of bilateral relations, Malpass said the U.S. wants to work with other nations to come up with a united response to what America sees as China’s foot dragging on economic changes, ranging from reforming state-owned enterprises to curbing the ruling party’s role in the economy.
“Above all, their markets are not reciprocal in the sense that there’s not an ability for other countries to work in China the way that China works in elsewhere,” Malpass said later Sunday in a Bloomberg TV interview.
As Bloomberg further notes, the new rhetoric contrasts with the more collaborative approach of both the George W. Bush and Obama administrations, who courted China as an economic partner even as the U.S. asserted its military power in Asia. However, in light of Trump's recent trade war rhetoric, the shift is hardly a surprise.
As discussed last week, as part of the next round of targeted trade wars, Trump is considering clamping down on Chinese investments in the U.S. and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property. A number between $30 and $60 billion (and perhaps even higher) in tariffs on Chinese imports has been floated.
Also last week we laid out a Goldman report analyzing which Chinese imports are most likely to be hit by the upcoming round of China-focused tariffs.
All this takes place ahead of the year's first G-20 meeting of central bankers and finance ministers in Buenos Aires. Talks start Monday and conclude with the release of a statement on Tuesday. They convene at a time when the global economy is in surprisingly strong health, yet concerns are growing that its upswing may boil over, and predictably, the topic of the moment is President Trump’s trade war plans, and as a result many governments are lobbying to be exempted. That could make for an uncomfortable couple of days for U.S. Treasury Secretary Steven Mnuchin as he tries to play down trade frictions. Scandal-plagued Japanese Finance Minister Taro Aso will not be attending.
According to Bloomberg, one of Mnuchin’s primary aims at the G-20 this week is to gain greater visibility into loans China has made to developing countries. The Trump administration is concerned that the U.S.’s top strategic rival is attempting to extend its influence with the loans while moving away from opening its markets to American goods.
"On the positive side, the world is recognizing that and beginning to work together. Recognizing that having such a big economy in the world move away from markets has not been good for us, for the world,” Malpass concluded ominously.