Environment Scan 01-13 May 2019 China
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ENVIRONMENT SCAN 01-13 MAY 2019 CHINA (Geo-Strat, Geo-Politics & Geo-Economics) Brig RK Bhutani (Retd) US – China Trade War: Both Sides Facing Growing Domestic Pressures. On 13th May, China’s announced higher tariffs on US$60 billion in US goods – in response to the Trump administration’s 25 per cent tariffs on US$200 billion in Chinese goods on 10 May – suggests that both sides are facing growing domestic pressures, reducing room to manoeuvre and increasing uncertainty, say analysts, farmers and industrialists. According to Bonnie Glaser, senior Asia adviser at the Washington-based Centre for Strategic and International Studies think tank, “Both sides are analysing their own economies, domestic pressures, the global situation and both think they have the upper hand, which doesn’t bode well for an agreement.” He further added, “The longer this goes on, the more global the impact is going to be, not just affecting the US economy.” China had appeared close to agreeing on a deal a week ago that included an inventory of laws and regulations Beijing must revise before it reversed and changed the terms, according to Trump administration officials who accused Beijing of reneging. However, China’s top negotiator, Vice-Premier Liu He, denied any bad-faith moves in an interview with the Hong Kong-based Phoenix Television, stating, “So we don't think that China has backtracked or ‘reneged’,” Liu said. “It’s just that there was some disagreement over how certain things should be worded on paper.” The sudden reversal by China, however, suggests that the administration of President Xi Jinping is increasingly worried that it would look weak domestically if it appeared to cave in to US demands, some analysts said. The Trump administration, for its part, faces its own domestic calculus, fearing that its political base would be angry if it accepts a lesser deal than what appeared on the table a week ago, analysts said. US President Donald Trump is also concerned that Americans will blame his administration for the economic pain resulting from higher tariffs on Chinese goods leading up to the 2020 election. The president has repeatedly argued that China pays the tariff bill, a claim disputed by economists. Trump unleashed a tweet storm on 13 May, after a senior member of his own administration, White House economic adviser Larry Kudlow, told Fox News a day earlier that “both sides will pay”. Trump wrote in the tweet, “There is no reason for the U.S. Consumer to pay the Tariffs, which take effect on China 2 today,” “Also, the Tariffs can be completely avoided if you buy from a non-Tariffed Country, or you buy the product inside the USA (the best idea). That’s Zero Tariffs.” Many Tariffed companies will be leaving China for Vietnam and other such countries in Asia. That’s why China wants to make a deal so badly!... According to the Trade Partnership Worldwide consultancy, an average American family of four will pay an extra US$767 annually on household goods if a US tariff of 25 per cent is imposed on US$200 billion in goods, factoring in Chinese retaliation. This would rise to US$2,294 annually if the same tariff level is imposed on all remaining imports from China – as Trump has threatened to do – and Beijing takes retaliatory steps. Some of Trump’s staunchest congressional supporters have tried to reframe the impact as a small, patriotic price to pay in the trade war. In an interview Monday on CBS This Morning, Senator Tom Cotton, Republican of Arkansas, played down the quandary farmers face adjusting to higher tariffs by calling the sacrifice “minimal” in comparison with what soldiers and “fallen heroes” make. The latest tit-for-tat move by China has further unsettled markets and those on trade’s front lines. Among the areas targeted for new tariffs by Beijing on Monday included soy milk, cooking oils, technology products and metals. The International Monetary Fund reported in April that the US economy could lose between 0.3 and 0.6 per cent and the Chinese economy between 0.5 and 1.5 per cent if the two sides raised tariffs to 25 per cent on all goods traded between them, in addition to the global fallout. (https://www.scmp.com/news/china/politics/article/3010080/latest-trade-war-pressures-both-us-and- china-economies-may) China’s ‘Self-Destructive Nuclear Option’ in Trade War: Selling US Treasury Bonds. As the two sides engage in a tit-for-tat tariff exchange, the possibility that China might raise the stakes and stop being the world’s biggest consumer of U.S. debt again reared its imposing head on 13 May. China currently owns $1.13 trillion in Treasuries, a fraction of the total $22 trillion in U.S. debt outstanding but 17.7% of the various securities held by foreign governments, according to data from the Treasury and the Securities Industry and Financial Markets Association. Should the Chinese decide to walk away or reduce their role in the market that, at least in theory, could create a substantial dislocation for a country such as the U.S. that relies so much on sovereign entities to buy its paper. “It’s a self-destructive nuclear option,” said Robert Tipp, chief investment strategist and head of global bonds for PGIM Fixed Income. “Maybe it helps them as a bargaining chip, but it’s endangering the value of something they’re deeply involved in.” In fact, the move actually could help the U.S. 3 For one, a Chinese reduction of Treasurys could weaken the dollar and make U.S. multinationals more competitive. For another, Treasury yields would rise and thus cause prices to fall, lowering the value of China’s portfolio. And further the question is where China would put its money — all that cash would have to go somewhere, and U.S. bonds are among the highest-yielding in the world when weighed against their relatively low risk. “It still seems like Treasuries are the optimal place for security, flight to quality, capital appreciation etc. Moving around that sum of money seems very challenging now,” said Nick Maroutsos, co-head of global bonds for Janus Henderson. “It’s possible and could happen very gradually over a six- to 12-month period. But calling it and having it happen so quickly is very unlikely.” Comments. The U.S. imports far more from China than the other way around hence China needs additional leverage to fight the tariff battle. Reducing its bond holdings would be a last resort. China will continue to use this as a threat, as in reality it hurts them more than it might hurt the US. It will hurt their portfolio, which they may not be willing to endure, therefore, it will be used more as a threat than an actual tool or strategy. (https://www.cnbc.com/2019/05/13/chinas-self-destructive-nuclear-option-in-trade-war-selling-us- treasury-bonds.html) MARITIME SECURITY & IN MODERNISATION Capt KK Agnihotri India-France Naval Exercise 'Varuna' follows India-Australia Naval Drill ‘AUSINDEX’. The Indian and French Navies conducted a mega naval exercise off Goa from 01-10 May 19. French Navy's aircraft carrier FNS Charles de Gaulle, two destroyers, FNS Forbin and FNS Provence, frigate FNS Latouche-Treville, tanker FNS Marne and a nuclear submarine participated. The Indian Navy fielded INS Vikramaditya aircraft carrier, INS Mumbai and Chennai destroyers, INS Tarkash frigate, INS Deepak fleet tanker and a Shishumar-class submarine. The first part of the exercise comprised harbour phase till 04 May 19, followed by the sea exercises from 06-10 May 19. The sea phase comprised various joint drills across the spectrum of maritime operations, which included Air-to-air combat, ASW, air defence exercise, cross-deck helicopter landings, firing by ships and aircraft on land, sea and air targets, carrier flying operations, VBSS and SAR drills. While the Indo-French exercise was conducted off India’s west coast, the eastern coast saw another large bilateral exercise between Indian and Australian Navy, barely a 15 days before, off Visakhapatnam. The two-week long bilateral maritime exercise code- named AUSINDEX-19 was conducted from 02-14 Apr 19, and included advanced warfare drills in all three dimensions, similar to the Indo-French exercises. RAN was represented by five vessels - HMAS Canberra LHA, HMAS New Castle and HMAS Paramatta frigates, HMAS Collins submarine and HMAS Success tanker - and P8A LRMP and ASW aircraft. The Indian Navy participants’ compprised INS Ranvijay destroyer, INS Sahyadri frigate, INS Kora missile corvette, INS Kiltan ASW corvette, INS Sindhukirti, conventional submarine, P8I LRMP & ASW aircraft and Hawk jet trainers participated from. 4 55 American and 20 New Zealand military personnel also embarked the RAN ships to witness the joint exercises, for the first time. Comments. The current edition of Indo-French bilateral naval exercise - largest ever with 12 units including 2 each aircraft carriers and submarines participating - was aimed at developing inter-operability between the two forces in dealing with various security challenges. Conduct of two large scale bilateral exercises by Indian Navy off both its coasts, within a space of one month with distant Indian Ocean partners, demonstrates the rising capabilities of the Indian Navy. The number and variety of units participating in both bilateral exercises is the highest till date from French, Australian and Indian sides; and signifies the importance attached by both countries to engage with India. The enhanced complexity of the exercises is indicative of the greater interoperability towards ensuring the safety and security in the Indian Ocean, through comprehensive collaborative approach.