The financial press is all agog about this Trump tweet on Sunday:
President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!
— Donald J. Trump (@realDonaldTrump) May 13, 2018
What is the ZTE Fracas About?
The 50,000 foot version: ZTE is China’s biggest publicly traded telecommunications supplier, with roughly $17 billion in revenues and 75,000 employees. It makes smartphones and other electronic stuff and buys a lot of parts from US companies including Qualcomm and Micron Technology. Even Australia’s Telstra sold ZTE phones under Telstra’s brand name.
The US had fined ZTE $1.2 billion for violating US sanctions by selling product to North Korea and Iran and also imposed a seven-year ban sales by US companies to ZTE, but had suspended the ban based on ZTE paying most of the fine plus agreeing to punish the employees who hid the sales to Iran. The US found out that ZTE was defying the sanctions and gave managers who had been involved in the Iranian-related operations bonuses. In April, the Administration reversed its suspension of the US sales ban. ZTE halted production last week as a result.
Puzzling Out the Trump Move
The theorizing on what Trump’s tweet signifies is over the map. But we’ll try to narrow down the possibilities, if nothing else, because it might give some early clues as to what if anything will come of Trump’s trade threats against China. Given that the English language reporting has been at its usual less than stellar level, please pipe up with information and considerations we may have missed.
Hoever, keep one thing in mind: Trump likes to think of himself as above all a dealmaker. One of the basic rules of negotiating is never never never give a free concession. You always get something when you give something up.
That is one reason for Trump’s “Oh, I’m helping Xi out,” to make Trump not look like the weak party, since he sure looks like one with this action.
So the implication is that either there is another side to this trade that Trump has not gotten yet and hopes to get by this gambit (remember, this is still an offer of sorts) or Trump wants to back out of the ban on ZTE because it is going to do too much damage to American suppliers to ZTE. Also bear in mind that if Trump’s main motivation for reversing the ban is to alleviate damage to US companies, he’d still like to pretend he got something out of Xi whether he did or not.
Here is some other potentially relevant background information in trying to fathom what if anything Trump might be trying to get and what it might be worth to the Chinese:
Analysts expected a ban on ZTE to be reversed in three to five months, at least per the South China Morning Post. ZTE would have to cough up more dough and get spanked some more. So what appears to be in play is an accelerated and awfully high profile new round of sanctions.
Mind you, that is not necessarily to say that getting the ban reversed pronto might not be important to China. For instance, Telstra has had to halt sales of ZTE products. Other private-label sellers will probably think about reducing their exposure. So getting ZTE out of the penalty box quickly could have disproportionate value.
Trump has a much weaker hand with his tariff threat than he likes to pretend. In the long run, as Marshall Auerback has pointed out, China would fare worse in a trade war because creditor countries take the bigger hits. But how far beyond a dust-up would this get?
Bear in mind that everyone from the Financial Times to even The Real News Network (which is as much as I like them generally is a place you go for commentary, not for breaking news) has been saying China has been refusing to negotiate with the Administration over its tariff threat. The US basically announced that Mnuchin was showing up in Beijing for talks, which is remarkably presumptuous, particularly since the timing was so fast there couldn’t have been any ground work even if the Trump team understood the concept. And we apparently presented outrageous demands, tantamount to “stop doing industrial policy”.
Other relevant factors:
Trump probably can’t take the impact of a stocks nosediving. Recall how fast Mnuchin and others started making conciliatory noises as soon as Mr. Market had a hissy fit. Trump has put this trade matter in play with midterms coming up. One thing that televised focus group of Trump v. Clinton supporters found was that the biggest reason the Trump fans said they liked him was their portfolios had gone up in a big way since he’d been elected.
And even though the Chinese are probably not willing to bet the ranch on Trump not following through with his tariff threat (or at least not all the way), they have probably noticed that the financial markets look like his glass jaw.
China has started whacking the US over its tariff threat. China not only threatened to impose tariffs on goods like soyabeans as well as US aircraft in a tit-for-tat manner, buy Chinese buyers are reportedly already shifting agricultural product orders away from the US. From Reuters on April 25:
China’s purchases of U.S. soybeans have come to a grinding halt, trade and industry sources say, as fears of further action by Beijing to curb imports of U.S. crops following last week’s anti-dumping move on sorghum rattles the agriculture industry.
Buyers from China, which takes 60 percent of soybeans traded worldwide, have not signed any new deals to take U.S. beans in the last two weeks, according to a Reuters review of data published by the United States Department of Agriculture (USDA).
At stake are 3 million tonnes of soybeans – estimated worth about $1.3 billion – for which deals have been signed but cargoes have yet to leave U.S. ports, traders say. Soybeans, crushed to make cooking oil and protein-rich animal feed ingredient soymeal, were the biggest U.S. agriculture export to China last year at a value of $12.3 billion, according to the USDA.
Several ships carrying U.S. sorghum originally bound for China have changed course since Beijing imposed hefty anti-dumping deposits on U.S. imports as trade tensions grow between the world’s top two economies.
Given Trump’s vulnerability to bad market reactions, he has incentives to drag things out past the midterms. That may suit the Chinese too. Trump just needs optical, not actual wins. His bluster about ZTE via Twitter is a version of that, to create the impression that he’s dented China so much that Xi is crying uncle. The Chinese may reckon that Trump will probably be no better off after the midterms and could be seriously dented, so time is on their side.
So one possible explanation for Trump’s tweet is that China has said, “We aren’t negotiating with a gun to our head” and a concession on ZTE is a way to acknowledge that without taking the tariffs out of play.
China also has leverage via North Korea. The press has weirdly underplayed China’s role in bringing North Korea to the negotiating table. The media did dutifully report that Kim Jong Un was basically told to appear in China (no previously scheduled visit, not a state visit) and from Beijing announced he’d be willing to denuclearize if he got adequate security guarantees. Mind you, this was his existing position but having him say it from Beijing appears to have had different implications.
This visit also happened after Trump’s tariff threat, and Trump has also made clear that he isn’t putting trade in a separate box, that he wants to negotiate across domains.
The Chinese thus may feel they already gave Trump a concession, and a bigger one than they might have thought, given that Trump’s bounce in the polls appears to be the result of the appearance that he’s Done Something about North Korea (Lambert has separately and regularly pointed out that South Korea has a lot to do with the progress so far as well).
Given that (as many experts have pointed out), the US has started negotiations under previous Administrations with North Korea, only to see them fizzle, there’s no particularly reason to expect these to produce better results (and with John Bolton now in the mix and the Iran deal having just been yanked, it’s hard to see why the North Korea should trust the US at all). So again, can Trump keep the illusion of a possible big deal alive through mid-terms? One would think the Chinese could throw a spanner in the works if they wanted to.
Even if Trump does manage to create some momentum with China via the ZTE gambit, it’s at a cost with Europe. The Chinese and Russians have to be laughing out loud. European leaders and businesses were already upset about Trump exiting the Iran deal, since that also results in sanctions against companies doing business with Iran. That move was seen as further alienating Europe against the US, to the advantage of Russia and China. The hypocrisy of Trump cutting a big Chinese company a break on recidivist behavior in violating US sanctions on Iran, versus about to make life miserable for a lot of European firms who want to trade with Iran and have governments that want them to trade with Iran, will not be lost.
A Washington Post story indicates that talks with China have not been going well:
With Trump’s tweet, some officials familiar with the ZTE issue believe a compromise is possible. “A mini-deal is in sight,” said a person familiar with the matter. “China gets relief for ZTE, and in exchange agrees to return to the status quo for U.S. agriculture,” easing tariffs and implementing other non-tariff remedies.
But the talks have not been amicable. Chinese President Xi Jinping has been irate about the sanctions on ZTE, and his top economic adviser, Liu He, has told U.S. negotiators that there is no chance of a deal without the United States removing the seven-year ban on ZTE, said the person, who spoke on condition of anonymity to discuss a sensitive matter.
As so often happens, members of Team Trump were blindsided. And this again reveals Trump wanting to run the US like a personal fiefdom when he can. Again from the Washington Post:
It’s highly unusual for a president to personally intervene in a way that undercuts the leverage of Treasury and Commerce officials seeking to enforce sanctions and trade rules. A former senior Obama administration official said Trump’s tweet set “a horrible precedent” and violates the basic principle that the White House avoid involvement in law enforcement matters.
This quote came from a source that the Post presented as having to remain anonymous. An apparently different Obama Administration made the same point at the Financial Times:
The reversal marks an unusual intervention by the US president in what the administration had previously portrayed as a legal and procedural rather than political case. US officials insisted when they announced the ban last month that it was not related to broader US-China trade tensions.
“I am speechless,” said Kevin Wolf, who oversaw the launch of the ZTE case as assistant secretary of commerce in the Obama administration. “I’m highly confident that a [US] president has never intervened in a law-enforcement matter like this before . . . It’s so outside the way the rules were set up.”
So buckle up for yet more of a wild ride. Trump is good at generating a lot of motion. Will he be able to persuade enough people that it is progress?
Update 4:30 AM: Lambert just sent this tweet:
— Reuters Top News (@Reuters) May 14, 2018
This is from a foreign ministry spokesman. Perhaps I am being reflexively contrary, but given that China so far has been unwilling to do more than go through the motions of negotiating with the US, these talks may be at most a hostage exchange: ZTE for something to be determined from China.