Was Trump’s Huawei Decision a Trade War Misstep? | Gordon Chang


Huawei, the Chinese telecom giant
is accused of being a national security threat
Trump Banned Huawei
Then postponed the ban
Twice.
Was it a trade war misstep?
Or all part of a larger plan?
Welcome back to China Uncensored,
I’m Chris Chappell.
We are now officially more than a year into
the US-China Trade War.
But unofficially,
it’s been nearly two decades since the Chinese
Communist Party
began its trade war against the US—
using its newfound membership in the World
Trade Organization
to steal American intellectual property,
manipulate its currency,
and twist the law to give Chinese companies
an advantage.
President Trump may not have started the trade
war.
But will he be able to finish it?
I sat down with China expert Gordon Chang
to find out.
Thanks for joining me again, Gordon.
Thank you Chris.
So, almost exactly a year ago
I had you on the show and I asked you,
“Who do you think is winning the trade war?”
At the time, you said it’s too early to tell.
So, a year later, who is winning the trade
war?
Up until yesterday,
the United States was clearly winning the
trade war.
That’s what I’d like to hear.
But today … today’s a pretty dark day for
the United States.
Up until yesterday, President Trump I think
was winning.
He was imposing tariffs.
He was making the Chinese hurt,
and that’s the important thing here.
And that he was willing to use the power of
the United States,
to push the Chinese in a better direction.
Today however, a different story.
Today the president gave Huawei Technologies,
the Chinese telecom equipment manufacturer
a second 90 day reprieve
from being on the commerce department’s entity
list.
If you’re on the entity list,
it means no US company can either license
or sell technology,
and Huawei clearly has stolen US tech.
But also is a national security threat.
And indeed, President Trump yesterday said,
“Huawei is a national security threat?”
But today, commerce secretary Wilbur Ross
says,
“Oh, we’re going to allow American companies
to do whatever they want for the next 90 days.”
That shows I think a failure of political
will.
You got to go back to the Osaka G20 at the
end of June.
And there was this internal arrangement between
Trump and Xi Jinping,
the Chinese ruler.
Basically the Chinese agreed to buy more US
agricultural products.
We agreed to give reprieves to Huawei.
That’s an awful deal from any number of different
perspectives, but the-
Why is that?
Well, it’s because first of all, what we’re
doing is,
we’re making ourselves look like a third world
economy
by selling primary products,
while we’re giving the Chinese a free pass
on high technology.
So by allowing Huawei to use US tech,
license from Google for instance, buy Qualcomm
chips,
we were allowing them to essentially continue
their lead
in the fifth generation of wireless communications.
5G.
The internet of things.
Whoever controls 5G and artificial intelligence,
probably controls the economy of the 21st
century.
And we were allowing Huawei to continue its
lead on us.
We don’t want to look like Brazil for instance,
where you sell primary products-
And our soccer teams aren’t that good.
Well, I wish our men’s team were as good as
the Brazilians,
but that’s a different story.
But the point is,
we don’t want to end up to being a seller
of primary products
and buying manufactured goods,
high tech products from the Chinese.
So it was a bad deal structure.
But this story gets even worse Chris.
Okay.
The story is that, the Chinese did not agree,
did not actually buy more US agricultural
products.
They just stiffed us in that.
So what does President Trump do?
The Chinese dishonored their part of the deal.
Well, Trump goes ahead with our part of the
deal.
So this really looks bad.
I just hope this is a temporary failure of
will,
but this is the second of these 90-day exemptions.
The first one was unwarranted.
As it turns out.
The second one is even worse.
The third one, if it comes, is going to be
a debacle.
Well, so I was going to ask about this
because over the course of the trade war,
you’ve seen the Trump administration
say they’re going to put new tariffs on China
and then they delay the tariffs.
The Huawei ban,
they said they’re going to ban Huawei
and then they delay that.
Do you think that’s sending mixed messages
or is it part of a broader plan by the administration?
Who knows what’s in Trump head?
But when you look at it from the outside,
it doesn’t look good.
It is important to impose those tariffs.
Remember these are remedies
for the theft of US intellectual property.
And when you read the commission
on the theft of US intellectual property,
the Blair Huntsman report,
or look at the US trade representatives, March,
2018 report,
clearly China steals hundreds of billions
of dollars.
People can argue whether it’s 150 billion
or 600 billion,
but the point is, even at the lower end of
the range,
this is a grievous wound to an innovation
based economy.
So, we’ve got to do whatever we can to stop
the Chinese
from stealing our stuff immediately.
And this is separate and apart from China’s
violations
of its World Trade Organization obligations
to us.
So China’s getting worse than that score.
So it’s across the board a deterioration in
their behavior.
And so it’s good that the Trump administration
has identified the problem,
is doing something about it,
but it’s not doing enough.
Well so I’ve heard that the ultimate goal
of the trade war,
is not so much fixing the trade deficit.
What do you think are the Trump administration’s
long term goals?
I think the long term goals disengage the
Chinese economy from ours.
To get our factories out of China.
To buy from our friends,
or to buy from ourselves for that matter.
But if not buy from ourselves at least by
from our friends.
Instead of a country that’s using the proceeds
of trade
to build up its military.
Where it’s senior officers are openly talking
gleefully about killing Americans.
Twice in December you had a senior Chinese
military officer,
urge publicly unprovoked attacks on the US
Navy
and the global commons.
And in the second of those comments,
you had a Chinese Admiral say,
“Look he wanted to use his ballistic missiles
to sink
two US aircraft carriers kill 10,000 Americans.”
We shouldn’t be trading with that country.
And remember, it’s more than just boasting.
Last year, China lasered a US C-130,
temporarily caused eye injuries to two pilots.
If you’re trying to blind pilots of a plane,
you’re trying to bring it down,
you’re trying to kill the crew.
And then also in Guangzhou,
China used Sonic attacks against the US consulate,
caused brain injuries to our diplomats.
It goes on and on.
So clearly we shouldn’t be trading with China
full stop.
I mean this is just wrong.
And clearly with President Trump
giving the reprieve to Huawei today,
that’s a big mistake.
So I know the People’s Bank of China has allowed
the value of the UN to fall versus the US
dollar.
Do you think that was a strategic move?
I think that it was.
China controls the value of its currency.
It does it two ways.
First of all, it’s got capital controls,
but second of all,
it sets a target level every trading day and
it must …
Currency can’t trade outside of a band.
So what it did couple of weeks ago was,
I think move that target ban that fixing number
lower,
and that was a signal to traders that the
currency
should go below that critical seven to one
level.
That’s seven of the Chinese currency
to one of the American currency.
So China devaluing its currency, is that helpful?
Well, it’s helpful to us.
I’m not so sure that it’s a good thing for
China because first of all,
by doing that, they make products to the US
cheaper.
That’s certainly bolstered president Trump’s
arguments
that his tariffs are not being paid for by
the American consumer.
So this I think is not going to be helpful
to the Chinese,
but there’s something really more important
Chris for the Chinese,
that is, their number one always lurking in
the background problem
is capital flight.
Because in 2015, 2016 there was perhaps 2.12,
$2.2 trillion of net capital outflow.
That is a loss that could lead to the end
of the Chinese economy.
And by devaluing the currency,
going below that important psychological seven
to one level,
it shows the Chinese people,
“Look it’s time to get your currency up,
put it into something safer.”
And there’s been increased evidence of gold
buying
on the part of the Chinese public.
I think that that’s largely a feeling.
That’s informal capital flight,
that’s getting your money out of renminbi,
and putting it into a hard asset.
So I think China is going to have a problem.
If they’re going to allow the currency to
erode much more,
are we going to going to eight, one?
Nine, one?
Who knows.
China’s going to have this capital flow problem.
The way they fixed it last time were two things.
They stabilized the value of currency and
second of all,
they imposed even more draconian capital controls.
Well you can do that to stem capital outflow,
but that has serious knockon effects on the
Chinese economy.
People aren’t going to bring money into a
country
if they think they can’t get it out.
And also it sends some really bad signals
internally.
So yeah, the Chinese can devalue the currency
and they can say that this is one of their
tools,
but in the end it’s going to hurt China far
more than the United States.
Well, this is something people have been debating
for a long time,
that the level of control the Chinese Communist
Party
has over the Chinese economy,
actually makes it stronger and more resilient
than the US economy.
Do you agree with that?
Well, short term, yes you can do a number
of things.
So for instance, they did not have a 2008
downturn.
The rest of the world did.
China didn’t.
But what China did by avoiding 2008 with the
massive stimulus,
was it created these even bigger imbalances
in the Chinese economy.
And in some point there’s going to be an adjustment
as economists call it.
In other words, what people would call a crash.
So, they can do this, where they control borrowers,
lenders, banks, courts, everything.
So they can … Yeah, it does give them an
advantage in the short term,
but they’re creating a problem for which there
is no solution
and that is perhaps the biggest crash in history.
So it is an advantage, but it’s also a disadvantage.
Remember.
Because they have the capacity to sort of
overpower the market,
they do it and the more they do it,
the bigger imbalance it becomes,
making the problems even more insoluble.
So there is a real cost to all of this.
Speaking of these sort of corrections,
it’s been 10 years since the US had a recession.
Some people say we’re due for another one.
If that happens,
how do you think that will shift the balance
of power
between the US and China?
Well, that would certainly shift the balance
of power
more to the Chinese side of course.
I mean when you look at the yield curve,
the inverted yield curve where you have your
10-year treasuries
trading well below shorter term maturities.
Yeah, that is a sign of a recession to come.
And when you see that,
it means a recession will come.
So yes, it’s coming.
Weather it’s coming two,
three years down the road,
we just don’t know.
And oftentimes there’s a big lag between the
yield curve
going inverted and a US recession.
And I think part of what we’re seeing right
now is,
the yield’s changing.
Not so much as a reflection of what people
think about the US economy,
but what people in other countries are thinking
about their economy.
It stinks outside, so they’re bringing their
money into safe havens,
like 10-year treasury obligations.
So I think that’s part of it.
Also, you got to remember that recessions
are inevitable,
just as recoveries are inevitable and free
markets.
So yes, a recession is coming,
but whether it’s when.
I think it’s probably pretty far down the
road.
In other words,
I think it’s farther down the road
and it’s not going to help China in the near
term,
which is really what we’re talking about.
Even with the election coming up.
Yeah.
Even with the election coming up.
I’m not saying it’s impossible to have a recession
between now and November, 2020,
I think that it’s probably unlikely.
So this is of course something only time will
tell.
But when you start to look at past recessions,
past patterns, yeah, a recession will be coming,
but probably not in time to affect the election.
So what do you think the economic tools are
that
the Chinese Communist Party possesses to attack
the US?
They don’t really have very many tools.
They’ve got things that they can do Chris.
But those things are going to hurt China
more than they’re going to hurt us.
So as a practical matter,
they don’t have tools.
On this trade war,
the only thing that China would have as an
advantage
would be political will.
And up until today,
I thought that Trump had more political will
than Xi Jinping.
Today I’m not quite so sure.
And the president … our president,
I think has got a long way to go to show to
the American public
that he’s willing to defend our economy.
So right now financially speaking,
what is the average Chinese citizen feeling,
versus the average American citizen?
In China is really hard to say there’s an
average,
because disparity is so great.
I mean, your typical Communist Party cadre
who’s making millions and millions-
Mostly on the side.
… all on the side.
Yeah, I don’t think that they’re going to
feel it.
But when you start looking at the numbers
for the economy,
you got to be very concerned.
China reported 6.3% growth for the first half
of this year.
Really unlikely.
Especially when you go back and you start
looking at
the underlying indicators for instance, June
and July.
Pretty horrible.
And there are indication of really soft domestic
demand.
Most important thing are the soft import numbers,
because that really reflects what the demand
is inside China,
but even some of the consumer numbers,
everyone’s saying,
“Oh China no longer has a manufacturing based
economy.”
Well, it’s good because the manufacturing
PMIs
are both flashing red,
but even if you were to say manufacturing
isn’t important for China anymore,
which I think is wrong,
nonetheless car sales are down in July 13th
straight month.
This year is going to be negative
on car sales as opposed to last year.
That’s a bellwether sign of the economy
and of faith in Chinese people of their own
economy.
You got to go back to December of last year
when you had that professor at Roman university
who said that in 2018,
the Chinese economy was going to grow no more
than 1.67%
and might even contract.
And China comes out with this number,
“Oh, we grew 6.6% in 2018.”
That’s not the case.
I mean, we can argue all day about
where the Chinese economy is in reality,
but it’s probably a lot closer to zero than
it is to six.
A lot of people have said that the trade war
is essentially
an existential threat for the Chinese Communist
Party?
Yeah.
I mean when you set yourself up as an all
powerful,
invincible, infallible organization,
everything Chris is an existential threat,
but the economy is even more so.
And that’s because as people say,
and it’s absolutely correct,
that the party has said that the continual
delivery of prosperity
shows the wisdom of Communist Party rule.
If your economy is crumbling,
it shows that maybe the Communist Party
isn’t infallible and shouldn’t be ruling.
But it creates grievances.
And it creates grievances at a pretty bad
time for China.
So I think that it is very much an issue
which does threaten the continued role of
the party.
As does for instance,
Hong Kong as does for a number of things.
So you think there’s still some hope for the
free market?
There’s great hope for the free market.
I mean, ultimately free markets prevail.
Sometimes it takes decades
as we saw in the case of the Cold War.
But during the Cold War we thought the Soviet
economy
was doing really well.
The CIA would come up with all these estimates
about how they’re outperforming us.
And indeed, Soviet Union was winning the Cold
War
when people thought that the Soviet economy
was productive,
that it was outpacing ours.
Well we’ve going through this same sort of
pattern
with regard to China,
and now people are starting to say,
“Oh, maybe the Chinese economy isn’t that
great.”
And I think what we’re going to witness
going forward essentially will be people saying,
“Oh my God, the places over there is falling
apart.
We better renew our commitment to democracy.”
It’s going to happen.
So in the end,
do you think there will be a trade deal?
If you’re talking decades down the road?
Yeah.
I mean, but right now I don’t,
and I think part of it is because
I think the Chinese political system looks
frozen right now.
There’s a certain amount of paralysis.
It’s got a siege mentality because it’s got
the trade war,
it’s got the crumbling economy,
it’s got Hong Kong.
And of course it’s got fights among various
factions at the top,
which I think had been exacerbated by all
of these problems.
When you’re an all powerful ruler,
it’s great when things are going well for
your country,
such as in 2017 for Xi Jinping.
You fast forward two years 2019,
things ain’t going so well.
Xi Jinping has nobody to blame.
And because he’s taken power from everybody,
which means he’s taken accountability.
He’s accumulated that for himself.
In 2012 when he became general secretary of
the Communist Party,
it was a collective system.
Nobody got blamed for good things.
Nobody got really praised for bad things.
Nobody got really praised for good things
because,
everyone was in on the decision.
Now that’s not the case.
And also of course,
because Xi Jinping has deinstitutionalized
the party.
He’s gotten rid of those rules that constrained
him.
But those were rules that also protected him.
So while people say Trump is facing election
in November, 2020,
Xi Jinping faces an election every day.
And the worst that can happen to Trump
is that he doesn’t get reelected.
But the worst that can happen to Xi Jinping,
is pretty bad.
Well, thank you so much for joining me today,
Gordon.
It was another insightful interview.
Well, thank you so much, Chris.

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