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China’s clever tariff tiff with the US

I am somewhat bemused by news headlines here in Australia and abroad that China’s response to the US shows a weakness, particularly pointing to the tariffs on LNG as an own goal of sorts. Furthermore, with some suggesting that business will relocate their businesses out of China as trade relations decline between the US and China is proof that China stands to be the loser in this war. When reflecting on these headlines, I am reminded of the adage that one needs to be careful that you don’t win the battle but go on to lose the war.

Some context needs to be added when assessing these claims as they have a superficial veneer to them. For example, those businesses said to be focusing on relocating into other Asian countries are not only responding to the tariffs. Speaking to business owners and local state authorities it is clear that this transition is also framed as a strategic move to secure low cost manufacturing as well as market trade. In reality the question that needs to be asked is whether this transition is a reaction to the trade wars or has it already been proactively in play for some time now?

This transition, I’d argue, has been in play for a number of years, currently driven by the Belt Road Initiative (BRI) as China moves to secure its trade and energy future. It could be argued that the current tariff spat highlights how China has been able to respond as it has due to its growing influence in the region as well as the BRI enabling access to other market supplies.

The BRI has helped facilitate the growth of global markets and open trade, making tariff protections a tactic suited for another time period. Whilst China is the target of US actions, it clearly demonstrates their lack of understanding or appreciation of the geopolitical factors in play. By resorting to a mercantilist tactic to try and end China’s dominant Silk Road trade network, it fails to recognise China’s 100-year plan to restore Chinese pride without a direct challenge to the current status quo. It is through a sophisticated economic strategy that applies the classic Sun Tzu principle of encircling an enemy without having to resort to war.

With the 2013 BRI announcement by Xi Jinping, it was clear that the role of the BRI was to secure China’s security through infrastructure connectivity with key markets. He Yafei, the former PRC foreign affairs vice minister, in an interview in September this year, reinforced this by his claims that countries develop through growing global connectivity and attracting industries. Economies such as Japan and Korea were cited as examples of this. Interestingly, as China grew its middle class and transitions to a consumer based economy, it no longer had the mantle of being a cheap manufacturing destination. He Yafei confirmed that Chinese companies were wanting to relocate manufacturing centers from the east coast to the inland and western regions. It is important to note that this strategic convergence between the BRI and socio-economic conditions on the ground resonates with current news headlines stating that companies in China wish to relocate to other Asian destinations. This can only be done because of the infrastructure that is being put in place.

In the initial phases of China opening up, its outward direct investment (ODI) was diverse and covered many sectors. Whilst focused on 65 countries, some argue that it was not integrated or coherent, therefore not to be taken seriously. However, was this lack cohesion by design so as to divert attention or merely bad planning? Looking at the pattern of ODI over the period we see that investment patterns have become focused on commodities, energy, high tech research, advanced manufacturing, agriculture and logistics. This was made possible by China gaining a foothold in target countries via investment in the likes of sport, property and entertainment. When analysing the destination of the ODI, it demonstrates the width and breadth of China’s reach. Europe remains the largest recipient, with the likes of Switzerland receiving $45bn in 2017, the UK getting $19bn. Asia is the second largest recipient with Singapore receiving $13bn last year. Other countries that have received funds include: India, Japan, Australia, Indonesia, Malaysia, Thailand, Myanmar, Cambodia and Russia.

Logistics and supply chain access to these markets have been dramatically improved via infrastructure improvements. There is increasing rail freight between China and Eurasia, with some 11,000 rail journeys via 2,497 freight trains, having taken place in the first half of 2018. This has been made possible by addressing rail gauge change over practices at Khorgos, as well as delays at the Malaszzewicze border post between Poland and Belarus. By linking ports with rail networks, we are also seeing the convergence of the Maritime Silk Road with the land based One Belt and facilitating manufacturing confidence to relocate, such as garment manufacturing to Thailand / Myanmar and Bangladesh.

What commentaries miss is that the scope of the BRI extends beyond simply building infrastructure. It is a logistics and transportation network that focuses on those regions promising high economic growth with strategic resources, such as steel, concrete and gas by building infrastructure that connects and links manufacturing with key markets. Furthermore it connects a market that has 600m people with access to a market that covers 65% of the world’s population and one third of the world’s GDP.

With the new global order, China no longer has to rely on LNG from the US. It has alternative supplies from countries within the BRI framework, such as Australia, Myanmar, Middle East and Russia. Furthermore it has pipeline connectivity through passages like the Pakistan and Myanmar economic corridors. It has a network now that replaces 80% of the US supply of soya beans.

Whilst the perception is that China is making a mistake, the reality on the ground is that the tariff war will have a limited effect on China’s trade and energy security. The tariff war may have been been effective at the height of US economic dominance, but the geopolitical and socio-economic transformation of trade and economics suggests China has taken long term planning steps to insulate itself. In effect the BRI has given China a mechanism that outflanks the US in the current tariff war.

Andre Wheeler

CEO of Asia Pacific Connex with more than 20 years’ experience in international business, with a diverse network throughout the USA, Asia, SE Asia , Africa and the United Kingdom. Holding a B. Science (Hons) degree and an MBA, he is currently working towards his Doctorate on the Impact of the China One Belt One Road initiative. Andre has expertise in oil/gas, construction, marine services and mining.
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