And I feel slightly more upbeat than you might expect
A better idea than the Trump administration’s wrecking strategy would have been to unite most of the world around a set of rules in America’s interest, forming blocs so large that China would have had to choose between compliance and isolation.


That was the idea behind both the Trans-Pacific Partnership (TPP), a pact from which Mr Trump withdrew within days of taking office, and also a stalled trade deal with Europe.


Wrecking strategies do not always fail, however.


A WTO fit to handle complaints about unfair competition would be a gift to the world.


The genius of the rules-based system is that it has torn down barriers by persuading producers that the prize of access to foreign markets is worth the accompanying global competition.


When that competition is deemed lawless, political support for free trade withers.


A world in which China is pursued by its critics through the WTO, and faces proportionate retaliation when necessary, is far preferable to one in which a tit-for-tat trade war can escalate without limit.


If he does, other powers will probably go on building links and writing rules—witness the trade deal that the EU and Japan signed this week.


But if Mr Lighthizer is able to present Mr Trump with an agreement that the president likes, the world trading system may yet be saved.


United States | Sealed with a kiss
Donald Trump agrees to cease fire in the trade war with the EU
But American farmers are already suffering the consequences of his policies

PRESIDENT Donald Trump has not been shy about his admiration for tariffs.


But on July 25th his love of deals appeared to prevail.


Tweeting a picture of Jean-Claude Juncker, the president of the European Commission, kissing his cheek, Mr Trump heralded an advance in trade relations between America and the European Union.


“A breakthrough has been quickly made that nobody thought possible!


” Mr Juncker was triumphant, too, tweeting: “I came for a deal, we made a deal.


”
The two sides agreed to work together towards “zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods.


” Trade barriers in services, chemicals, pharmaceuticals, medical products and soyabeans are on the chopping block, too.


Pundits were quick to point out that Mr Trump had, in fact, secured talks to negotiate something that looks remarkably similar to the Transatlantic Trade and Investment Partnership, an accord put on ice when he became president.


Such a deal might be possible, but it is a lot more remote than Mr Trump’s jubilation suggests.


The meeting’s other outcomes have more immediate consequences.


Mr Trump agreed to “hold off further tariffs”, halting the threat of punitive measures on European cars and avoiding escalation into a nastier tit-for-tat dispute.


Remarkably for a man said to be itching to withdraw from the World Trade Organisation (WTO), Mr Trump announced that he would work with the EU to reform it.


Rather than mindlessly bashing the WTO, Mr Trump may have realised the benefits of using it to tackle China’s economic misdeeds.


Given Mr Trump’s mercurial personality and his peeves over America’s bilateral trade deficit with the EU, the truce may prove fragile.


That means the most lasting policy announcement of the week could yet be the one made on the day before Mr Juncker’s arrival, when Sonny Perdue, Mr Trump’s agriculture secretary, outlined a relief package of up to $12bn for American farmers hit by retaliatory tariffs from America’s trade partners.


American farmers have long worried about their position on the front line of Mr Trump’s trade wars.


Around a fifth of their production is exported, leaving them exposed to retaliation from the likes of China, Mexico and the EU; their political heft at home makes them prime targets for foreigners trying to make the Trump administration reverse course.


The Trump-Juncker deal offered American farmers little relief.


Not only was agriculture conspicuously absent from their joint statement (beyond a promise to buy more soyabeans), but the EU accounts for less than 4% of the agricultural trade flows affected by the new tariffs.


By contrast, $12bn is a big increase in government support for an industry that already gets a lot.


The OECD, a club of mostly rich countries, estimates that in 2016 American farms received $33bn in various types of support.


As generous as Mr Perdue’s plan may be, only its outline is clear.


Producers of soyabeans, sorghum, corn, wheat, cotton, dairy and pigs can expect payments.


They can also expect the government to hoover up unexpected surpluses.


Last, some of the cash will be spent on developing new export markets for farm products.


The subsidies are meant to fortify Mr Trump as he attacks foreign partners with tariffs and quotas.


Most important, he is trying to pay off the domestic losers from his trade war with China lest they cause trouble for him and the Republican Party in the mid-term elections.


So far, the move has attracted a mixed response.


Zippy Duvall, president of the American Farm Bureau Federation, has thanked the administration for offering help, but will continue to argue for a “swift and sure end to the trade war”.


Jimmy Tosh, a Tennessee farmer, is blunter: “To hell with welfare.


”
The administration says that the farm subsidies will be temporary, and they could yet be.


If Mr Trump repeats his dealmaking trick with the Chinese, perhaps after combined pressure with his new European partner, the tariffs could be stripped away as quickly as they came.


The question is how much damage will have been done.


Unfortunately, temporary agricultural support programmes tend to become permanent.


And lost markets may prove difficult to recapture.


Disrupted trade relations can shock countries into the realisation that they rely too heavily on one market.


After an American soyabean export embargo in 1973, spooked Japanese companies invested in Brazil, which then grew to become a colossal competitor to America.


Like real conflicts, trade wars have unintended consequences.


|SHANGHAI

Finance & economics | Trump triumphant
Is China losing the trade war against America?


A weak Chinese stockmarket gives America the edge, at least in confidence

WHEN Donald Trump tweeted on August 5th that tariffs were working “big time”, American media sprang into action to test the claim (see article).


In China, editors were more circumspect.


No major Chinese-language newspaper reported his tweets.


One of his claims—that China’s stockmarket has fallen 27% in the past four months—was an exaggeration.


But why would any self-respecting propagandist in Beijing dwell on that?


Chinese stocks have indeed fallen sharply (see chart), which officials do not wish to emphasise.


And this is just one of a series of awkward facts for China as its trade war with America deepens.


The yuan is down 8% against the dollar since April, and near its weakest in more than a year.


A shrinking trade surplus produced a current-account deficit in the first half of 2018, China’s first such gap in at least two decades.


More broadly, China’s growth is slowing at a time when America’s economy is expanding at its fastest pace since 2014.


No wonder Mr Trump feels that he is on the right path, and that Chinese investors are jittery.


Making matters worse for China is a whiplash effect.


Until recently officials and executives believed their own declarations of technological prowess.


Privately, advisers were confident that Mr Trump could be placated with promises to ramp up imports from America.


An agreement for China to buy more American natural gas and soyabeans collapsed in June.


Chinese officials are keenly aware of vulnerabilities; had America maintained its sanctions on sales of semiconductors to ZTE, the Chinese telecoms giant might well have gone out of business.


Those with a conspiratorial mindset see things in a darker light.


They want to screw us,” says a fund manager.


The asymmetry in the trade war is another uncomfortable fact.


Since America buys far more from China than vice versa, America has more scope to impose tariffs.


This imbalance, long discussed in theoretical terms, is close to becoming a hard reality.


Mr Trump has instructed his trade team to consider 25% tariffs on $200bn of Chinese imports as early as September, taking the total affected by its tariffs to about $250bn, with room for twice that amount.


China’s threatened retaliation, announced on August 3rd, will be tariffs on $60bn of American imports.


This would take the total under its tariffs to $110bn, with little room for more.


China has other weapons at its disposal.


It can disrupt the lucrative Chinese operations of American businesses, from Apple to Starbucks.


Declaring bogus justifications (health violations, say) would reinforce foreign criticism of government meddling in China’s economy.


And the nature of such interference, unlike tariffs, is that it will not be announced in advance, meaning it can take longer to register the impact.


The timing of the trade war is most inconvenient for China.


Over the past two years the government has waged a campaign to rein in debt levels.


Finally this has started to bite, with credit growth slowing sharply.


Officials could opt to abandon their tightening stance in order to counteract the trade turmoil.


But that might erase the gains from the deleveraging.


At a meeting of the Politburo on July 31st, China’s leaders noted that it was a priority to support growth amid the “clear change” in the external environment, but also pledged to press on with their efforts to control debt.


Investors who had hoped for more easing were disappointed.


So there is cause for concern about China’s growth outlook.


One conclusion from the past few weeks is that policymakers now accept that the trade war is real, and are starting to cushion the economy.


The boost to exports from the falling yuan, down about 6% on a trade-weighted basis since mid-June, should be “roughly proportionate” to the blow from the first $50bn of American tariffs and some of the next $200bn, says Andrew Tilton, the chief Asia economist at Goldman Sachs.


At the margins, he adds, China is shifting to a more active fiscal policy.


Officials have made it easier for cities to get funding for infrastructure projects.


One government adviser says there is discussion of a bigger stimulus, likely to be focused on promoting consumption rather than investment.


The economic backdrop to the trade war could also change over the next year.


As China tiptoes towards easing, its credit growth should pick up.


Meanwhile, America may be near the top of its growth cycle, with gains from last year’s tax cut set to dissipate.


Louis Kuijs of Oxford Economics, a research firm, says the divergence in their stockmarkets might reflect overconfidence in America and an evaporation of confidence in China.


“Both reactions seem exaggerated,” he says.


With no resolution to the trade war in sight, there will be time enough to test this proposition.


|DETROIT, FLINT AND TRAVERSE CITY

Business | Rocky road ahead
How America’s car industry is coping with trade disputes
A tour of car country reveals anxiety across automotive supply chains

THE Ford F-150 pickup truck has been America’s bestselling vehicle for years.


In Dearborn, a city near Detroit, a factory that once produced Henry Ford’s Model A now cranks out one of these all-aluminium tributes to testosterone every 53 seconds.


The F-150 is so profitable—informed rumours suggest each adds nearly $13,000 to Ford’s bottom line—that it is known around town as “the bank”.


It is also assembled in America with more American parts than most vehicles, and so about as impregnable as they come to President Donald Trump’s trade policies.


Even so, over 15% of each pickup comes from Canada and Mexico and another 15% from outside North America.


“Tariffs on Canadian aluminium hit the F-150 hard,” confirms a top logistics manager.


The tariffs in question are Mr Trump’s duties of 10% on imported aluminium and 25% on imported steel, which took effect on June 1st.


They are not the only source of disruption to an industry responsible for $522bn of exports and imports a year, more than one-tenth of America’s trade.


Earlier this year Mr Trump levied tariffs on $34bn of Chinese goods, including one of 25% on cars (another $16bn of goods were hit this week).


China retaliated by raising its tariff on American cars from 25% to 40%.


Partly to put pressure on Canada and Mexico to renegotiate the North American Free-Trade Agreement (NAFTA), the president has also threatened a 25% tariff on all car imports, invoking a provision of an old law which allows him to restrict trade to safeguard national security.


That would immediately hit $208bn of car imports, not counting parts, according to the Peterson Institute of International Economics, a think-tank.


American marques would be hit, too: four in five Chryslers and Dodges are made abroad (see chart).


America’s car industry, then, is on the frontline of Mr Trump’s trade war—ostensibly its beneficiary, but also its victim.


A tour of factories and watering holes across Michigan’s car country reveals plenty of support for Mr Trump’s aims.


The UAW, a big union, recently endorsed his stance on trade.


Near the F-150 plant, a white-collar autoworker confides over a beer that she thinks Mr Trump’s policies are justified, even if they cause a bit of pain for her industry, because of Chinese protectionism and theft of intellectual property.


Ron Harbour of Oliver Wyman, a consultancy, believes that “the president will come out with fair and equitable agreements.


”

But even bosses sympathetic to Mr Trump’s stated goals remain perplexed by his tactics.


A survey conducted for this newspaper by the University of Michigan found that the metals tariffs are hurting the state’s car-parts firms.


“All prices are going up,” says a supplier of valves.


A steel-mill owner expects to charge customers more and urges those with cash to “carry some inventory”.


A machine builder who uses lots of steel fears that higher costs could make his clients less competitive, crimping their production and in turn demand for his product—a “downward spiral for us and our customers”.


Travel up Ford’s supply chain from the Dearborn plant, and the vulnerabilities become apparent.


Flex-n-Gate, a large maker of car parts, has invested $160m in gleaming plant in a depressed part of east Detroit specifically to serve Ford trucks.


“Costs have gone up dramatically,” complains its boss.


Get off the Edsel Ford Freeway, meander past boarded-up churches, burned-out warehouses and a Dollar Store, and you arrive at Goodwill Automotive, which has made simple parts for Ford and others for decades.


Its managers confirm that prices for steel inputs are up and its suppliers are scrambling to secure stock before they rise further.


A crew leader sounds baffled by Mr Trump’s actions: “Why fix something that’s not broken?


”
Drive a few hours to Grand Blanc, a suburb of Flint, and you find another Ford supplier with a story to tell.


MacArthur Corporation makes permanent labels “for almost every vehicle sold in America”.


Tom Barrett, a former Wall Street man, returned to his father’s firm and helped save it when the Lehman collapse pushed the auto industry to the brink a decade ago.


He discerns an inflationary pressure not seen since the 1970s.


Besides tools and hard dyes made of steel, the price of polypropylene film, which is derived from petroleum, is going up.


So is the cost of paper, adhesives and freight.


The firm has been unable to pass the increases on to big clients.


“They are in cost-cutting mode, delaying planned investments, imposing travel bans and offshoring large non-manufacturing departments,” he says.


“It’s like the early days of the Great Recession.


”
Carmakers are indeed feeling the squeeze.


General Motors (GM) confirmed recently that tariff-fuelled increases in commodity prices led to $300m in extra expenses last quarter, compared with the same period in 2017.


Ford has reported that tariffs cost it $145m in the second quarter and forecast that trade tensions may cost $500m-600m this year.


For consumers, Mr Trump’s trade policies could inflate the price of a typical small car by between $1,408 and $2,057, according to the Peterson Institute.


That is because the industry is a paean to globalisation.


Roughly half the cars sold in America today are imported.


Of those made at home, nearly half are made by foreign firms.


All American carmakers depend on imported parts and cars.


Only Chinese marques can afford to shrug about escalating tensions, ironic given Mr Trump’s China-bashing.


Besides a large factory in South Carolina which makes Volvos (owned by China’s Geely), Chinese firms neither export cars to America nor make them there.


The nightmare scenario for carmakers is Mr Trump’s threatened blanket tariff on cars, combined with the collapse of NAFTA.


Mexico and Canada account for roughly half of all American auto imports.


America’s trade in cars and parts with the two has risen fourfold under NAFTA.


GM depends on imports from Mexico and Canada especially for its highly profitable trucks and sports utility vehicles (SUVs).


Even Ford, which is moving out of low-margin saloons often made abroad in order to focus on SUVs and pickups like the F-150, has reason to worry.


Like GM, it has started bringing manufacturing and suppliers back from Asia to North America.


This might help in a global trade war—but not in the event of NAFTA’s collapse, because most relocated to Mexico or Canada.


NAFTA talks have made progress (see article).


If Mexico and Canada are slapped with the 25% tariff, a typical model assembled in America with 40% of its parts imported from those two countries would see supply-chain costs leap by over $1.1bn, to $19bn, according to LLamasoft, an analytics firm.


The ultimate cost could be higher still.


The supply-chain boss of a global carmaker says his firm has prepared for NAFTA’s demise.


It would quickly unwind its current cross-border supply chains, which give it leverage over competing suppliers across North America.


It would shift to local suppliers in Mexico for its Mexican plants, American suppliers for American plants and the same in Canada.


With fewer rivals, vendors would gain pricing power.


Every summer industry bigwigs and their families gather in Traverse City, a pleasant town on the shores of Lake Michigan.


The nominal theme of this year’s gathering, organised by the Centre for Automotive Research, an industry think-tank, was the future of mobility.


The skunk at the garden party was the trade war.


What’s good for GM
Some insiders remained upbeat.


Sales, especially of trucks and SUVs, are still strong in America; trade deals may yet be struck between the White House and other governments.


Others worried that a senseless trade war would tip the industry into recession and force a massive redirection of investment from driverless cars to a defensive rejigging of supply chains.


In a rare show of unity, industry associations representing domestic and foreign carmakers, parts suppliers and car dealers have jointly protested against Mr Trump’s trade policies.


One insider sums up the mood in Detroit with characteristic midwestern understatement: “Everyone is analysing exposure, everyone is concerned.


|WASHINGTON, DC

Finance & economics | Tit for tat
America and China are in a proper trade war
Donald Trump announces another wave of tariffs.


China retaliates

ANOTHER WEEK, a further ratcheting up of trade tensions between America and China.


On September 17th President Donald Trump announced that he had approved a further wave of tariffs on Chinese imports.


From September 24th, imports of products which in 2017 were worth as much as $189bn, including furniture, computers and car parts, will be hit with duties of 10%.


The Chinese have promised to retaliate on the same day with duties on $60bn of American exports.


Unless peace breaks out before the new year, the American rate will increase to 25% on January 1st.


Mr Trump frequently rants about how the Chinese have long taken advantage of Americans.


But American bureaucrats stress that the duties come after careful deliberation.


The Office of the United States Trade Representative (USTR) took seven months to write a report detailing China’s unfair trade practices.


Each tranche of tariffs has been consulted on and then revised.


The latest set came after the USTR’s office had received 6,000 written submissions and held six days of hearings.


Compared with an earlier proposal, the latest tariff list excludes products worth up to $30bn.


Child-safety seats and safety headgear were exempted.


Antiques more than a century old were spared, too.


(Some had pointed out that the Chinese government restricted their export anyway.


) Despite Mr Trump’s warning on September 8th that prices of products made by Apple may increase as a result of his tariffs, smartwatches and bluetooth devices were removed from the list.


The Trump administration claims that these deliberations have helped to minimise the impact on the American consumer.


The staggered tariff rate is supposed to give importers time to change their suppliers.


Wilbur Ross, the commerce secretary, was mocked online for claiming that, because the tariffs are spread over thousands of products, “nobody’s going to actually notice it at the end of the day”.


But in support of his claim, economists at Goldman Sachs, a bank, estimate that the 10% tariff rate will boost inflation by only around 0.03 percentage points, and the increase to 25% by a further 0.05 next year.


Still, this diligence was not welcomed by all.


More than three-quarters of the products that will be affected on September 24th are intermediate and capital goods, which means the most immediate impact will be to push up American businesses’ costs.


Mr Trump’s announcement triggered complaints from industry representatives including the US Chamber of Commerce, the American Chemistry Council and the American Apparel and Footwear Association, all of which warned that Americans would end up footing the tariff bill, and pleaded for a different approach.


Although it claims to be following due process, the Trump administration’s actions are far removed from the procedures of the rules-based global trading system.


Ordinarily, members of the World Trade Organisation (WTO) would take their complaints to the body’s judges.


If such accusation are upheld, then those judges allow limited retaliation.


In 2012, for example, the American government complained to the WTO that the Chinese government was breaking the rules by restricting the export of rare-earth elements.


China’s dominance in their global supply meant that this hurt American manufacturers by pushing up prices for their inputs.


After the WTO’s judges sided with the Americans, the Chinese government dropped the measures.


The Trump administration claims that the WTO’s incomplete rule book makes it incapable of dealing with China’s alleged misdemeanours, which include forcing foreign companies to hand over their technology.


But, even as it complains, America is simultaneously weakening the system by which the WTO’s rules are enforced, by blocking the appointment of judges to the body’s court of appeals.


From October, only three will be left—the minimum needed to rule on a case.


On September 18th Cecilia Malmström, the European Union’s trade commissioner, unveiled a “concept paper” outlining reforms that could plug some of the gaps in the WTO’s rules, as well as ways to reform dispute settlement.


But it is far from clear whether either Mr Trump or the Chinese government will take the bait.


And without the multilateral rules-based system to contain the conflict, the trade war between China and America could get much bloodier.


In his announcement on September 17th Mr Trump threatened to hit another $267bn-worth of Chinese imports if China retaliated against his latest tranche of tariffs.


For their part, the Chinese show little sign of backing down, and have promised to use fiscal policy to soften any domestic blow.


Although they are running out of American exports to target, they have other ways to fight.


On September 17th, for example, reports emerged of a Chinese official musing about China repeating its trick of imposing export restrictions on raw materials that American manufacturers depend on.


The next day, Craig Allen, president of the US-China Business Council, warned that the WTO had made clear its opinion that such restrictions were illegal.


But why, when America is acting outside the rule book, should others stick to it?


Correction (September 21st 2018): The original version of this article referred to Craig Allen as the chairman of the US-China Business Council.


Leaders | Hunker down
America’s tariffs on China are likely to last for some time
That is bad news for everyone

IN HIS trade war with China, President Donald Trump appears to have the upper hand.


The new tariffs his administration unveiled this week, which will raise the share of Chinese imports subject to levies to at least 44%, are unlikely to dampen America’s sizzling economy, or to boost inflation by much.


Though some firms will be disrupted, most Americans will not notice the damage (see article).


Its growth seems to be slowing and its stockmarket is down almost a quarter from its peak in January.


China’s government has announced retaliatory tariffs against American goods, but it is fast running out of imports to tax.


During conflict, an imbalance in strength should lead to a swift resolution.


Here the side with the advantage may prolong the war.


That is because America has several goals, some of them unachievable.


Unjust war
The official justification for the tariffs is rooted in anger about Chinese mercantilism—anger which is shared across the rich world.


China gives vast and opaque subsidies to its state-owned firms.


It requires exporters to hand over intellectual property as a condition of access to its market.


The world’s consumers benefit from the artificially cheap imports that result.


But trade of this sort is unsustainable, politically and economically.


America is right to demand that China play fair.


That is not the limit of Mr Trump’s ambition, however.


He also wants to eliminate America’s trade deficit with China, which he mistakenly sees as a transfer of wealth.


He has broadcast his desire to force manufacturing supply chains back to America.


And his administration has identified China as a strategic competitor.


Some of the president’s advisers seem to relish the chance to do it economic harm.


The White House may argue that China’s abuse of the rules, the trade deficit and the decline of American industry are one and the same.


Even without subsidies, China, like most other emerging markets, would enjoy a substantial cost advantage over America.


The trade deficit, meanwhile, is tied to the difference between domestic saving and investment.


Tariffs might cut the bilateral deficit with China, but America would find it nearly impossible to shrink its overall deficit without engineering a domestic recession.


The goal of rolling back decades of American deindustrialisation is a pipe-dream.


Should America succeed in forcing supply chains back onshore, it will find that many fewer jobs are attached, because of rapid automation and productivity growth.


American manufacturing’s share of GDP has fallen only by a fifth since 2000, while its share of employment is down by a third.


Besides, the lowest-skilled jobs would not go to America, but to low-wage Asian countries, like Vietnam.


There is a faint hope that Mr Trump’s advisers and allies will play good cop to his bad cop, using tariffs as a bargaining chip in rewriting global trading rules to constrain China’s mercantilism—a legitimate goal.


More probably, the bad cop—who is, after all, in charge—will refuse to be stood down, because of his obsession with trade deficits and jobs and because Chinese leaders seem unwilling or unable to contemplate reforms that would strengthen moderate voices in Team Trump.


The prospects for any truce with China look grim.


Recent history suggests that trade disputes are hard to settle.


Tariffs imposed on Chinese tyres in 2009 under President Barack Obama, a free-trader, lasted three years.


Mr Trump’s recent trade agreement with Mexico does not include an end to levies on its steel and aluminium.


America’s latest escalation against China is no more likely to be speedily reversed.


Finance & economics | No exception
A retreat in share prices finally reaches tech stocks
Anxieties about trade war and a slowing world economy take their toll

STOCKMARKET BOOMS tend to narrow with age, as investors double down on the shares that have served them well.


Throughout 2017 and into the early weeks of this year, a handful of favoured technology stocks, known as FAANG (Facebook, Amazon, Apple, Netflix and Google, part of Alphabet), were the motor for a rapid rise in the S&P 500 index of American stocks (see chart).


In this year’s choppier markets, they seemed like a refuge.


But this week FAANG and other tech stocks were at the centre of a broader sell-off in global stockmarkets.


Over two trading days, on November 19th and 20th, the FAANG stocks retreated further from the peaks they each achieved earlier this year.


At their lowest point all five were down by more than 20% from their pinnacle.


Billions of dollars in stockmarket value have evaporated.


Apple, which had reached an equity capitalisation of $1trn in early August, was valued at $840bn by the time New York’s stockmarket closed on November 20th.


The market capitalisation of Amazon, which fleetingly hit the $1trn mark a month later, had dwindled to $731bn.


The rout in technology stocks was part of a broader retreat in share prices.


The S&P index is now barely up over the year.


The world’s other big stockmarkets are deep in the red, with China’s worst-hit, down by a fifth since January 1st.


Specific factors weigh on the prices of tech shares, such as new concerns about rising capacity in chipmaking.


But it would be closer to the mark to say that the anxieties that have undermined the rest of the stockmarket, such as signs of weaker global GDP growth and the trade war between America and China, have caught up with tech.


There were early tremors last month when a clutch of semiconductor firms endured a rout in share prices.


The pattern was repeated when third-quarter results from Nvidia, which makes chips used in digital gaming, fell short of expectations.


That in turn gave form to latent doubts about the outlook for Apple.


Reports that its suppliers were cutting output were enough to send Apple’s share price down by 8.6% over two days.


As the economy slows, goes the reasoning, people will be slower to upgrade their handsets.


Similarly, businesses would delay non-essential spending, such as advertising, the source of revenue for Google and Facebook.


America’s trade dispute with China can only amplify such concerns.


A statement this week by China’s trustbusters that it had evidence of price-fixing by the three largest makers of DRAM chips, used in computers and smartphones, is a new focus for tech jitters.


The move was seen by some as a warning shot in the trade wars.


Two of the firms are South Korean, but one of them, Micron Technology, is American.


For the FAANG group of stocks, gravity is also at work.


So spectacular was their rise that they were bound to fall back sooner or later.


Nobody could be sure precisely when or why.


But the hopes of many investors that they would be invulnerable to worries about the economy have been dashed.


America’s GDP growth seems destined to slow next year as the impetus from tax cuts fades and the Fed’s rate rises bite harder.


If anxieties about the world economy are to be assuaged, signs of more solid growth in other parts of the world are needed.


A lot now depends on how the tug-of-war in China between policy stimulus and the drag from American tariffs plays out.


Leaders | Superpowers and technology
Chip wars: China, America and silicon supremacy
America cannot afford to ignore China’s semiconductor ambitions.


It cannot simply tame them, either

THE TRADE disputes President Donald Trump relishes have an old-fashioned feel.


Old-economy markets, from cars to steel, are the main battlefields.


Farmers and factories preoccupy the president.


And his personal chemistry with other powerful men can make or break deals.


Hence the focus on the meeting between Mr Trump and Xi Jinping at this week’s G20 summit, which takes place in Buenos Aires after The Economist has gone to press.


Yet the trade conflict that matters most between America and China is a 21st-century fight over technology.


It covers everything from artificial intelligence (AI) to network equipment.


The fundamental battleground is in semiconductors.


The chip industry is where America’s industrial leadership and China’s superpower ambitions clash most directly.


And whatever Messrs Trump and Xi say at the G20, this conflict will outlast them both.


That is because computer chips are the foundations of the digital economy and national security.


Armies fight with silicon as well as steel (see article).


Firms from America and its allies, such as South Korea and Taiwan, dominate the most advanced areas of the industry.


China, by contrast, remains reliant on the outside world for supplies of high-end chips.


It spends more on semiconductor imports than it does on oil.


The list of the top 15 semiconductor firms by sales does not contain a single Chinese name.


Well before Mr Trump arrived on the scene, China made plain its intention to catch up.


In 2014 the government in Beijing announced a 1trn yuan ($150bn) investment fund to improve its domestic industry.


Semiconductors feature prominently in “Made in China 2025”, a national development plan issued in 2015.


China’s ambitions to create a cutting-edge industry worried Mr Trump’s predecessor.


Barack Obama blocked Intel from selling some of its whizziest chips to China in 2015, and stymied the acquisition of a German chipmaker by a Chinese firm in 2016.


A White House report before he left office recommended taking action against Chinese subsidies and forced technology transfer.


Taiwan and South Korea have policies to stop purchases of domestic chip firms by Chinese ones and to dam flows of intellectual property.


Although the chip battle may have pre-dated Mr Trump, his presidency has intensified it.


He has made a national champion of Qualcomm, blocking a bid for it from a Singaporean firm for fear of Chinese competition.


Earlier this year an export ban on selling American chips and software to ZTE, a Chinese telecoms firm in breach of sanctions, brought it to the brink of bankruptcy within days.


Startled by the looming harm, and (he says) swayed by appeals from Mr Xi, Mr Trump swiftly backtracked.


First, America has realised that its edge in technology gives it power over China.


It has imposed export controls that affect on Fujian Jinhua, another Chinese firm accused of stealing secrets, and the White House is mulling broader bans on emerging technologies.


Second, China’s incentives to become self-reliant in semiconductors have rocketed.


After ZTE, Mr Xi talked up core technologies.


Its tech giants are on board: Alibaba, Baidu and Huawei are ploughing money into making chips.


And China has showed that it can hinder American firms.


Earlier this year Qualcomm abandoned a bid for NXP, a Dutch firm, after foot-dragging by Chinese regulators.


Neither country’s interests are about to change.


America has legitimate concerns about the national-security implications of being dependent on Chinese chips and vulnerable to Chinese hacking.


China’s pretensions to being a superpower will look hollow as long as America can throttle its firms at will.


China is destined to try to catch up; America is determined to stay ahead.


The hard question is over the lengths to which America should go.


Protectionists in the White House would doubtless like to move the semiconductor supply chain to America.


The industry is a hymn to globalisation.


One American firm has 16,000 suppliers, over half of them abroad.


Qualcomm makes two-thirds of its sales there.


Trying to cleave the industry into two would hurt producers and consumers in America.


And it would be a bluntly antagonistic act, which would make no distinction between unfair and genuine competition.


Today America has the edge over China in designing and making high-end chips.


But China’s progress will be hard to stop.


Just as Silicon Valley’s rise rested on the support of the American government, so China blends state and corporate resources in pursuit of its goals.


It has incentive programmes to attract engineering talent from elsewhere, notably Taiwan.


Firms like Huawei have a proven ability to innovate; blocking the flow of Intel chips in 2015 only spurred China on to develop its domestic supercomputing industry.


Moreover, China’s bid to become a global semiconductor powerhouse is propitiously timed.


For decades the chip industry has been driven forward by Moore’s law, under which the capabilities of a chip of a given size double every two years.


But Moore’s law is reaching its physical limits.


As everyone jumps to new technologies, from quantum computing to specialised AI chips, China has a rare chance to catch up.


The right approach for America, therefore, has three strands.


The first is to work with its allies in Europe and Asia to keep pushing back against unfair Chinese practices (such as forced tech transfer and intellectual-property theft) at the World Trade Organisation, and to screen out inward Chinese investments when security justifies it.


The second is to foster domestic innovation.


More government funding is already going into chip research; greater openness to talent is needed.


And the third is to prepare for a world in which Chinese chips are more powerful and pervasive.


That means, among other things, developing proper testing procedures to ensure the security of Chinese-made products; and tightening up on data-handling standards so that information is not being sprayed about so carelessly.


Measures such as these will not make the headlines at the G20.


But they will do more to shape the world in the years ahead.


Finance & economics | Trade
The US-China trade war is on hold
Donald Trump and Xi Jinping agree a fragile truce at the G20 summit

PERHAPS IT WAS the dessert of caramel-rolled pancakes, crispy chocolate and fresh cream.


Or perhaps President Donald Trump had already decided that, during a working dinner on December 1st, he wanted a deal with President Xi Jinping of China.


Whatever it was, after sounds of applause drifted out to assembled journalists, the two announced a “highly successful” negotiation.


“This was an amazing and productive meeting with unlimited possibilities for both the United States and China,” said Mr Trump.


A more realistic assessment would be that the meeting produced a truce based on two elements: some murky mercantilism, and a deal to talk about a deal.


China will increase its purchase of American farm produce, energy and some industrial goods.


In exchange America will delay an escalation in tariffs, from 10% to 25% on $200bn of goods planned for January 1st.


That is on hold until March 1st at the earliest.


But because the formal talks between the two countries could well fail, this truce is worryingly fragile.


The Chinese commitment to raise purchases of American goods is by an amount “not yet agreed upon, but very substantial”.


That is supposed to reduce America’s bilateral trade deficit with China.


Requiring the Chinese government to manage import flows is odd given how America’s government complains that China still behaves like a non-market economy.


Bilateral trade deficits do not mean much, especially in an age when supply chains are global.


In addition, the bilateral trade deficit is not only a function of Chinese imports, but also of Chinese exports to America.


Even if the Chinese state can find ways to boost the purchase of American goods, it cannot determine the behaviour of American consumers.


They may be eager to buy from China, if only to get hold of products before relations deteriorate again.


In the year to date America’s trade deficit in goods has increased by 10%.


The foundations of the deal’s second part are almost as shaky.


In theory negotiators now have until March 1st to agree to “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.


” That list is ambitious, particularly when levels of trust between the two sides are so low.


One of the fundamental problems in relations between America and China is the difficulty of enforcing a deal.


The World Trade Organisation (WTO) has a dispute-settlement process, but it has some gaps and can be slow.


In the past the Chinese authorities have promised to do things bilaterally, but then dragged their feet.


And it can be devilishly hard to prove that the Chinese state is culpable.


When the American authorities accuse it of overseeing forced technology transfer, for example, they are complaining about a practice that is not written into any Chinese law.


The demands are spoken and statistical evidence of an underlying policy is scant.


Given the number of times the Chinese have broken their pledges not to make transfer of technology a condition of access into their market, America is unlikely to settle for a simple promise backed by the threat of extended tariffs.


That means China will have to find mechanisms to demonstrate that, this time, it really has changed its ways.


A more stable solution to the US-China tensions would involve co-operation with other countries.


The European Union and Japan agree with many American complaints, and there has been some work to come up with new rules to resolve them.


In the longer term the WTO could even help to enforce those, though not if the Trump administration persists in undermining its dispute-settlement system.


However, although there was talk during the wider G20 meetings of reforming the organisation, the multilateral trading system did not seem to be much on Mr Trump’s mind.


Mr Xi’s offers will have shown that he can squeeze a lot out of China on his own.


Why should he act multilaterally when bilateral bullying works so well?


After the weekend’s G20 truce, businesses were quick to breathe sighs of relief.


Clarification (December 4th 2018): An earlier version of this article had been altered to reflect a statement made by the director of the United States National Economic Council, which would have extended the deadline for a deal to April 1st.


Subsequently the White House reverted to its original formulation; the deadline is in fact March 1st, as we had it in the original.


|SHANGHAI AND WASHINGTON, DC

Finance & economics | Peace in our time
A trade truce between America and China is over as soon as it began
The arrest of Meng Wanzhou of Huawei looks like a resumption of hostilities

AFTER A WORKING dinner between Presidents Donald Trump and Xi Jinping on December 1st, it seemed as if a truce had been called in their two countries’ rumbling trade war.


“This was an amazing and productive meeting,” said Mr Trump.


But the truce is already at risk of unravelling.


On December 5th Canada’s justice department said that, on the same day that the two presidents dined, it had arrested Meng Wanzhou, the chief financial officer of Huawei, a Chinese maker of telecoms equipment, at America’s behest.


For China, that looks like a political salvo.


Huawei is a pillar of the Chinese economy—and Ms Meng is the founder’s daughter.


The fate of the trade talks could hinge on her encounter with the law.


She was due to appear in a Canadian court on December 7th, after The Economist went to press.


Her arrest is thought to be related to an American probe into Huawei’s alleged violation of sanctions on selling technology to Iran.


The company said it was “not aware of any wrongdoing”.


A similar investigation led ZTE, a smaller Chinese peer, to be hit with a near-fatal ban that, until it was hastily reversed, prevented American firms from selling parts to it.


The implications of a comparable ban on Huawei would be greater by orders of magnitude.


America has also been pressing allies to end business ventures with Huawei over national-security concerns.


The trade truce had looked shaky enough anyway, based as it was on mercantilism and a promise to talk more.


Mr Xi pledged that China would buy more American goods and address deeper American concerns; Mr Trump promised to delay to March 1st a rise in tariffs, from 10% to 25% on $200bn of goods, that had been set for January 1st.


Even before news of Ms Meng’s arrest, global stocks see-sawed as investors wondered if hostilities might resume.


The two countries’ trade teams have been given until March 1st to agree on “structural changes” in China with respect to “forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture”.


American authorities have long accused China’s government of forcing foreign companies to give their proprietary technology to Chinese partners.


But such demands are not enshrined in Chinese legislation; they are not even written down.


Even if requirements on American companies to enter into joint ventures with Chinese ones were removed, the problem could continue in practice.


Larry Kudlow, Mr Trump’s economic adviser, says talks on these thorny issues are well advanced.


And on December 4th China did unveil tougher penalties for intellectual-property thieves, including restrictions on their access to finance.


But a cynic would point out that China has made such promises before, and broken them.


And the real sticking point is not the size of penalties, but how actively they will be imposed.


Moreover, there is a big gap between what the two countries say they are working towards.


America’s hawks want deep changes, including limits on China’s industrial subsidies.


China says that it wants to continue reforming its economy in line with existing plans.


This would surely be too little for America—even when garnished with some additional purchases of American soyabeans.


If the two tracks remain wide apart, the talks may collapse.


Mr Trump and his officials are giving the Chinese a chance to show that they are taking the negotiations seriously.


Reports are emerging that the Chinese are preparing to buy more American soyabeans and natural gas.


But that says little about China’s willingness to embrace deeper change.


For their part, with the arrest of Ms Meng, Chinese officials are questioning whether the Americans are negotiating in good faith.


To go after a Chinese commercial champion just as Mr Xi draws closer to Mr Trump plays badly in China.


If the timing is a coincidence, and Mr Trump was unaware of it, it is one more sign of a chaotic White House, which is not reassuring.


But many in China see it as a brazen show of American power.


To revive the already-fragile truce, Americans will now have to soothe jangled Chinese nerves at the same time as trying to extract concessions.


Leaders | Military misunderstandings
More worrying than a US-China trade war is the risk of a hot one
Better communication between their armed forces would help avoid one

IT IS A sobering thought that official military communication between America and China is still conducted by fax machine.


The use of this obsolete technology symbolises a worrying lack of effective dialogue between the two countries’ armed forces.


The giants jostle for space in the western Pacific; their ships and jets manoeuvre close to each other every day.


Neither side wants war, but China is intent on keeping America at bay.


It is easy to imagine how a collision in the air or at sea could escalate.


Casualties could fan nationalist flames on either side and cause twitchy officers, or political leaders, to respond in ways that lead rapidly to disaster.


So could a misunderstanding by either side of the other’s military movements.


Relations between China and America are already strained over trade and a host of other matters.


So it is only common sense to try to reduce the risk that their cold-war style sparring might turn hot.


American and Chinese officers are getting to know each other better.


Exchanges between their military academies, port calls and high-level visits to each other’s countries have multiplied over the years (see article).


American officers often describe the Chinese who talk to them as “barbarian handlers”: polished, English-speaking political appointees, usually intelligence officers, whose uniforms have never been crumpled or muddied.


The Americans are sometimes led around empty Potemkin bases and entertained with kung fu shows rather than genuine drills.


They wonder why they should waste their time on such junkets, which offer little insight into Chinese intentions or how the two sides might defuse a crisis.


When senior officers of the two sides meet, the Chinese tend to spend much of the time lambasting American foreign policy rather than discussing how to build trust.


In recent years China has forged ever-closer military ties with Russia.


In September China sent thousands of troops to join Russia’s largest manoeuvres since the cold war.


But when invited to take part in American exercises, China has behaved boorishly.


In 2014 America, to its credit, allowed the Chinese navy to join RIMPAC, the world’s largest multinational war games at sea.


Instead of responding with camaraderie, China demanded plum roles, sent spy ships to snoop on the manoeuvres and barred Japanese officers from the traditional shipboard cocktail party.


America excluded China from RIMPAC this year in protest against China’s deployment of missiles on artificial islands it has built in the South China Sea.


That upset the Chinese navy, but the Americans rightly felt no loss.


Even when given an opportunity to build bridges, Chinese officers have chosen to ignore it.


The two armed forces do not just use faxes to communicate.


A channel called the Defence Telephone Link was set up a decade ago.


A whizzier video link between the chairman of America’s joint chiefs of staff and his Chinese counterpart was established more recently.


American officials have made clear that if China were to call during a crisis, they would pick up the phone.


They are not sure whether China would do the same.


Part of the problem is the way that China’s armed forces work.


The Communist Party is present throughout the military hierarchy.


Its political commissars often wield as much power as commanders who are genuine soldiers.


Especially at higher levels, Chinese officers can move only at the speed of a committee.


But that is no excuse for China’s habit of unplugging the phone.


Swift communication may not end a crisis, but it can certainly reduce the danger of tensions flaring up over a misunderstanding.


Going ballistic
Mercifully, when Barack Obama was president, the two countries managed to establish some rules for managing close encounters between their ships and planes.


That has led to fewer near collisions in the air and at sea.


China’s relentless beefing up of its military forces has created an urgent need for wider-ranging agreements.


Pentagon officials say China is arming its air force with nuclear weapons.


That would give China a complete “triad” of nuclear weaponry, launchable from the air, land and sea.


Yet the two armed forces have not held nuclear talks in over ten years.


Even the Soviet Union agreed to give warnings about ballistic-missile tests.


The Chinese refuse to consider such a confidence-building measure, despite the growing importance of missiles to both countries.


On a visit to Washington, DC, in November China’s defence minister, Wei Fenghe, said that communication must be strengthened.


But all too often the country lets pique over unconnected business disrupt military contacts.


In 2018 it cancelled multiple high-level talks, including an embryonic dialogue between senior military officers.


Not since the cold war has it been so crucial for global peace for two defence establishments to talk.


Finance & economics | Buttonwood
The fate of the dollar will shape financial markets in 2019
After rising by 7% against a basket of currencies in 2018, where is it headed next?


OVER THE holidays those who like their Christmas films free of seasonal cheer may have fixed on “The Lion in Winter”, with Peter O’Toole as Henry II and Katharine Hepburn as Eleanor, his estranged wife.


Henry decides that none of his sons by Eleanor is a suitable heir and condemns them to death.


Locked in a cellar as his father approaches, Richard resolves not to cower.


“As if the way one falls down mattered,” mocks one of his brothers.


“When the fall is all that is,” replies Richard, “it matters”.


Back at work, investors might usefully apply this aphorism to the fate of the dollar.


In a volatile period for financial markets, it rose by 7% against a broad basket of currencies in 2018 and by 4% against a narrower group of rich-country currencies (see chart).


One of the more robust principles of foreign-exchange trading is that what goes up must eventually come down.


The dollar is over-valued on benchmarks, such as The Economist’s Big Mac Index (see Graphic Detail).


When that is all that is left, the manner of its falling will matter a great deal.


The bear case for the dollar is based on an expectation that GDP growth in America will slow markedly.


Interest-rate increases by the Federal Reserve will bite harder.


It hurts investment in America’s shale regions, but is a boon for oil-importing countries in Asia and Europe.


America’s stockmarket is relatively dear.


Its tech darlings no longer seem invulnerable.


In short, an exceptional period for America’s economy is coming to an end.


In November Mansoor Mohi-uddin of NatWest Markets set out three pre-conditions for a decisive turn in the dollar: a “pause” by the Fed, a deal to end America’s trade dispute with China and signs of a pickup in the euro-zone economy.


The Fed’s boss, Jerome Powell, hinted on January 4th that it might postpone further interest-rate increases.


But the economic data from Europe remain weak.


Interest rates in America may not rise much further, if at all, but they are nevertheless higher than in Japan or the euro zone.


In the first, trade-war clouds begin to disperse.


Tax cuts and looser monetary policy in China start to stimulate private-sector spending.


That stirs other Asian economies, which in turn bucks up activity in the euro zone, which relies heavily on emerging-market demand.


Bond yields rise in the expectation that interest rates will go up in Europe.


They fall in America, as traders start to price in rate cuts.


The dollar drifts down against the euro.


Capital is pushed into emerging markets, in search of better returns.


Stockmarkets rally, especially outside America.


In the second scenario, the gap between GDP growth in America and elsewhere also narrows.


But in this case, it does so solely because of a slowdown in America, rather than better news elsewhere.


The continued uncertainty means China’s tax cuts are saved, and not spent.


Further weakness in China causes other emerging markets to falter.


The soft spot in the euro-zone economy turns out to be not temporary, but a reflection of weak export demand.


The dollar falls sharply against the yen and the Swiss franc, habitual boltholes for the panicky.


A shortage of safe-harbour currencies leads to a rising price for gold.


How closely reality conforms to one or other of these scenarios depends a lot on what happens in China.


A trade deal with America would boost emerging-market currencies against the dollar, as would an effective fiscal stimulus.


The path the dollar takes against rich-country currencies depends on the slowdown in America, says Kit Juckes of Société Générale, a French bank.


If it is sudden, the dollar falls against the yen.


If it is gradual, it falls against the euro.


How the dollar falls will be shaped by events and in turn will shape them.


Investors who are wary of selling out of risk assets are advised by strategists at J.


Morgan to take out some insurance by buying the yen, Swiss franc and gold—the assets that are likely to go up should things get rough.


If a fall is all that is left, it matters that you have something to cushion it.


|ZHENGZHOU

China | Oh, for an assembly-line job
Worries about unemployment mount as China’s economy slows
The services sector will cushion the blow, but not provide much security

THE FACTORY town known as iPhone city used to pulse with life as workers got off their shifts.


These days the complex that churns out roughly half of all Apple smartphones is quieter.


A staff dormitory just beyond its gates is empty, its entrance sealed with barbed wire.


A barbecue restaurant, a noodle shop and, fittingly, a mobile-phone outlet have all closed.


At a karaoke bar where workers would croon into the wee hours on rest days, the owner was recently seen packing up his speakers.


The giant complex on the edge of the central city of Zhengzhou is run by Foxconn, Apple’s Taiwanese manufacturing partner.


It remains one of the world’s busiest factories.


But it is well off its peak, when as many as 350,000 people kept production humming around the clock.


Workers say they are down to eight hours a day, five days a week.


That means they are not doing the overtime that accounts for much of their pay.


“It feels like they’re forcing us to quit,” says a six-year veteran.


Cao Yingying, a woman at a nearby recruitment centre, says they stopped hiring for Foxconn in late October because of Apple’s disappointing sales.


They still have other electronics factories as clients, but they are all suffering.


“Washing machines, fridges, vacuum cleaners.


Everyone now has these, and they last longer,” she says.


”
A slowing economy is putting pressure on jobs in China (though Apple’s woes may involve other factors, too—see article).


The official unemployment rate is stable at around 5%, but as always this figure is a poor guide.


Surveys in the manufacturing and service sectors show that companies have been cutting staff since at least September.


Wage growth is tepid compared with the sizzling norm of a few years ago.


In November profits at industrial firms fell for the first time in nearly three years.


When China’s leaders met in December to map out economic policy for 2019, they said their priority would be to stabilise employment.


They are anxious about social stability in a year studded with sensitive anniversaries.


Among them will be the 30th of the Tiananmen protests, which involved economic grievances as well as political ones.


Suppression of labour unrest has become even harsher in recent months.


In one case, police detained more than 30 students and activists who had tried to help workers organise a union at a firm in the southern city of Shenzhen.


Worries about jobs are, so far, focused on the export sector.


Trade matters less to Chinese growth than it once did, but it still, directly and indirectly, supports as many as 180m jobs, nearly one-quarter of formal employment, the government estimates.


The trade spat with America has plunged firms into uncertainty.


Exporters cut their demand for new hires in the third quarter by 53% compared with a year earlier, say researchers at Renmin University in Beijing.


In December export orders fell at their sharpest rate in more than three years.


A second area of concern is the high-tech sector.


As investors turn cautious, jobs are coming under threat.


The starkest example is Ofo, a bike-sharing company previously feted as an innovator.


Search engines, online travel agencies and e-commerce websites have all reportedly trimmed staff.


This could be bad news for this year’s record number of university graduates (students in Zhengzhou are pictured at a job fair last year).


Wang Xing, head of Meituan Dianping, a company known for its food-delivery app, captured the gloom last month with this line on his micro-blog: “2019 might be the worst year of the past decade, but it might also be the best year of the coming decade.


”
Industries undergoing cyclical slumps are a final area of concern.


With the stockmarket down 30% in the past year, financial firms, especially brokerages, have cut staff.


A property slowdown has led several big developers to freeze hiring.


How would China cope with a big rise in unemployment?


In 2008 when the global financial crisis struck, millions of migrants left coastal factories and returned to the countryside.


They did not have to wait long for prospects to improve.


Half a year later the government revved up growth with a massive stimulus programme.


A similar exodus is less likely this time.


The economy is profoundly different, in ways that should cushion workers from the slowdown.


Services, from restaurants to couriers, now account for more of the economy than manufacturers, and they are more labour-intensive.


But service jobs are even less secure than those in factories.


Workers in China’s vast gig economy—driving cars for hire, delivering food or trucking packages between cities—rarely get overtime pay or unemployment insurance, says Geoffrey Crothall of China Labour Bulletin, an NGO.


On a street in Zhengzhou, a man in his late 40s glumly surveys a board plastered with job ads.


“They want young lads for the courier jobs.


Faster on their bikes, faster on their smartphones,” he says.


China’s economic situation differs from the financial tsunami of 2008 in another crucial way.


This time the troubles have built up gradually, giving the government time to ready its defences.


It has already started to help beleaguered companies.


In December the State Council announced that firms which refrain from firing staff can get 50% refunds on unemployment-insurance payments.


Officials have hinted that they will offer subsidies for those buying home appliances, a boost for manufacturers.


And after initially taking a hard line in its trade dispute with America, China has softened somewhat.


That helped pave the way to talks between the two countries this week in Beijing that augur well for a deal, however fragile.


The government is also boosting its own recruitment.


At a labour centre in northern Zhengzhou, once used for hiring Foxconn workers, the biggest ad is for jobs in Hami, a city in Xinjiang, the north-western region where officials have incarcerated vast numbers of ethnic-Uighur Muslims for “re-education”.


“Join us to realise your dreams”, says the poster, with a picture of officers brandishing machine guns.


Applicants, who must be between 18 and 35, are promised monthly salaries of at least 6,100 yuan ($890), roughly the wages at Foxconn when the going was good.


|SHANGHAI

Finance & economics | Trade jaw-jaw
Signs of progress in China-US trade talks, but gaps remain big
Negotiations hinge on how to enforce China’s pledges

LAST YEAR, when American officials visited Beijing for trade negotiations, they spent more time fighting among themselves than against China.


They could not agree on who should lead the talks or what their goal should be.


Seeing such amateurism, their Chinese interlocutors reckoned that they had little to worry about.


Many of the same Americans have been back in Beijing for more talks in recent days.


But this time they had an undisputed leader—Robert Lighthizer, the hard-nosed United States Trade Representative—and a clear set of demands.


Their Chinese counterparts, having seen President Donald Trump’s zeal for tariffs, knew that they had something to worry about after all.


America has set a deadline of March 1st for an agreement.


If it is missed, tariffs on $200bn-worth of imports from China are due to rise from 10% to 25%, inflicting more pain on a slowing Chinese economy.


That would invite a sharper backlash from China.


Its ability to direct firms to shift purchases to other countries has already hurt American exporters (see chart).


Chinese officials resent the deadline but it has focused minds.


The latest talks, which began on February 11th and were due to end on February 15th, are the third round this year.


All this has fed expectations that the two sides could soon make peace—or at least extend their truce.


Mr Trump told reporters that he might let the deadline slide if a good deal is within reach.


Another meeting between Mr Trump and Xi Jinping, China’s president, is under discussion.


American and Chinese stockmarkets have both risen by about 10% this year.


The outlines of a deal have been in view for a while.


China would probably promise to buy lots of goods from America, from soyabeans to natural gas, and allow foreign companies more access to its economy.


America would cut tariffs and perhaps promise to remain open to Chinese investors, as long as they are not part of a state-backed assault on sensitive technology.


Yet when negotiators get into the details, problems surface.


After many frustrating years waiting for China to open its markets, the Americans suspect that its pledges will be empty.


The Chinese suspect that America is motivated by a desire not for fair trade but for thwarting a new rival.


Two key outstanding questions are thus how to measure whether China lives up to its word, and what America can do if it fails.


Scott Kennedy of the Centre for Strategic and International Studies in Washington says changes should be measured by China’s economic outcomes, not by its stated policies.


The government has, for instance, agreed to scrap rules that foreign firms must find local partners to make cars in China.


The test, says Mr Kennedy, ought to be whether foreign carmakers actually do set up wholly owned firms in China and operate them successfully.


And if it is judged that China is not keeping its promises?


One option is to submit disputes to neutral arbitration.


Mr Lighthizer is said to dislike this idea.


Another is to give America the right to slap tariffs unilaterally on Chinese goods—which China is understandably loth to accept.


Even as the trade war seems to be cooling, a chasm still lies between the combatants.


Graphic detail | Daily chart
America’s spat with China is harming its quest for “energy dominance”
Chinese purchases of American oil and gas have fallen sharply in recent months

TRADE TALKS between America and China finally yielded some results.


Mr Trump had been scheduled to raise tariffs on Chinese goods on March 2nd, but on Sunday he announced that he would be delaying the increase because talks between the two sides had been “productive”.


He announced that a summit with Xi Jinping, China’s president, was in the works if “both sides make additional progress”.


The talks are being watched closely by American energy firms.


America’s energy exports are a priority for Mr Trump, who is set on the United States transforming itself from a net importer to a net exporter of energy products, and “achieving energy dominance”.


Cracking the Chinese market is a large part of this: China is the world’s largest importer of oil and second-biggest of natural gas.


American investment in liquefied natural gas (LNG) is underpinned in part by the assumption that demand from China will continue to rise.


In 2017 Mr Trump’s hope of turning America into an energy-exporting superpower seemed on track, at least by one measure.


The value of American oil and gas exports to China rose almost five-fold year-on-year.


Today, that looks more like a short-term spike.


No sooner did China increase its purchases of American energy than Mr Trump declared a trade war, levying tariffs on a wide range of Chinese goods.


China’s formal retaliation includes tariffs on LNG, although not crude.


Nonetheless, its imports of both fuels from America have dried up.


From July to November last year the value of American oil and gas exports to China plunged from $1bn to $100m.


Last autumn an Australian company delayed its decision to invest in a Louisiana gas-export terminal, citing problems securing Chinese buyers.


China has used imports of oil and gas as a bargaining tool, offering to increase purchases as part of any deal with America.


If a trade war is averted, energy exporters will rejoice.


The damage that they face is apparent from a report by BP, an oil company.


It compared the impact of a future with “less globalisation” with a base scenario (using pre-2017 trends, without trade disputes).


Continuing trade wars could cause the growth in global GDP and energy demand to slow somewhat, resulting in a cumulative loss of 6% and 4.5% respectively by 2040, relative to the base scenario.


More worrying for energy firms, BP reckons that concerns about energy security means countries would attach a 10% risk premium to imported energy, encouraging them to switch to domestic sources.


If global trade disputes intensify, BP thinks, America’s exports of oil and gas would grow much more slowly: by 2040 it would export a net 80 million tonnes of oil equivalent (MTOE) instead of 243 MTOE, up from net imports of 294 MTOE in 2017.


In other words, the longer a trade war drags on, the dimmer the prospects for American energy dominance.


Leaders | The big flip
China may soon run its first annual current-account deficit in decades
The implications will be profound

THAT CHINA sells more to the world than it buys from it can seem like an immutable feature of the economic landscape.


Every year for a quarter of a century China has run a current-account surplus (roughly speaking, the sum of its trade balance and net income from foreign investments).


This surplus has been blamed for various evils including the decline of Western manufacturing and the flooding of America’s bond market with the excess savings that fuelled the subprime housing bubble.


In 2019 China could well run its first annual current-account deficit since 1993.


The shift from lender to borrower will create a knock-on effect, gradually forcing it to attract more foreign capital and liberalise its financial system.


China’s government is only slowly waking up to this fact.


America’s trade negotiators, meanwhile, seem not to have noticed it at all.


Instead of focusing on urging China to free its financial system, they are more concerned that China keep the yuan from falling.


The result of this myopia is a missed opportunity for both sides.


China’s decades of surpluses reflected the fact that for years it saved more than it invested.


The rise of great coastal manufacturing clusters meant exporters earned more revenues than even China could reinvest.


Consumers are splashing out on cars, smartphones and designer clothes.


Chinese tourists are spending immense sums overseas (see article).


As the population grows older the national savings rate will fall further, because more people in retirement will draw down their savings.


Whether or not China actually slips into deficit this year will be determined mostly by commodities prices.


But the trend in saving and investment is clear: the country will soon need to adjust to a new reality in which deficits are the norm.


That in turn means that China will need to attract net capital inflows—the mirror image of a current-account deficit.


China has eased quotas for foreigners buying bonds and shares directly, and made it simpler for them to invest in mainland securities via schemes run by the Hong Kong Stock Exchange.


Pension funds and mutual funds all over the world are considering increasing their exposure to China.


Ordinary Chinese citizens face restrictions on how much money they can take out.


If many foreign investors tried to pull their money out of China at once it is not clear that they would be able to do so, an uncertainty that in turn may make them nervous about putting large sums in.


China is terrified of financial instability.


A botched currency reform in 2015 caused widespread volatility.


But the system the country is moving to, which treats locals and foreigners differently, promises to be leaky, corrupt and unstable.


Eventually, then, capital will need to flow freely in both directions across China’s borders.


People outside and inside China will benefit from being able to invest in more places.


The need for freer capital flows will have the welcome side-effect of forcing China to reform its state-dominated financial system, not least so that it commands confidence among international investors.


This in turn will mean that market forces play a bigger role in allocating capital in China.


You might expect America’s trade negotiators to welcome all of this, and urge China to free its financial system.


Unfortunately they seem stuck in the past.


Obsessed with the idea that China might depress its currency to boost exports, they are reportedly insisting it commit itself to a stable yuan.


That is wrong-headed and self-defeating.


Rather than fighting yesterday’s currency wars, America should urge China to prepare for the future.


|ASAN

Business | In need of a tune-up
Hyundai is falling behind its Japanese and Western rivals
The engine of South Korea’s car industry sputters

THE OFFICES of the Asan car suppliers’ union resemble a bygone era.


Walls are decorated with fading photographs of past protests.


Cigarette smoke wafts from the foyer, where workers in overalls lounge on battered sofas enjoying a break between shifts.


Do Sung-dae, the union’s boss—shock of grey hair, horn-rimmed glasses, waistcoat heavy with pins supporting various causes—is locked in a struggle with Yoosung Enterprise, a parts-maker that employs its members in Asan, an industrial city south of the capital, Seoul.


Korean parts-producers are being squeezed.


More have filed for bankruptcy protection since last autumn than at any time since the financial crisis in 2008.


Plenty, including Yoosung, claim they are fighting for survival.


Their troubles are a symptom of a deepening crisis in the industry.


At the industry’s centre is a single giant firm: Hyundai Motor.


In 20 years Hyundai Motor (which also controls Kia) went from being barely known to the world’s fifth-biggest carmaker by churning out decent if unexciting cars that were cheaper than similar ones produced by Japanese or Western competitors.


Like Asan’s union offices, however, it has failed to keep up with the times.


Hyundai’s global sales were stagnant at 96.8trn won ($85bn) last year.


Net profit declined in 2018 for the sixth year in a row.


Since 2014 its shares have underperformed major peers such as Toyota, General Motors and Ford, measured in dollars.


Some reasons for this lie beyond Hyundai’s control.


The trade dispute between America and China, as well as separate threats by President Donald Trump to impose additional tariffs on Korean cars, did not help.


Its business in China was hit by a year-long Chinese boycott of South Korean products that followed a dispute over South Korea’s new missile-defence system in 2017.


Hyundai’s move upmarket in the past few years exposed it to fiercer competition.


It missed the shift towards SUVs in Europe, America, and most recently China.


Its Genesis brand has lagged behind in the highest-margin premium segment.


Half of its production capacity in China currently sits idle—aggressive expansion may have more to do with this than the boycott, thinks James Lim of Dalton Investments, an asset manager.


Rising labour costs at home, where it produces 40% of output, have crimped Hyundai’s ability to compete on price.


“Customers still expect our cars to be cheaper than, say, a Volkswagen,” sighs Cho Won-hong, the firm’s chief strategist.


Mr Cho wants to convince them to pay more, by betting on future technologies such as hydrogen fuel cells and loosely defined “integrated mobility” (car-sharing, autonomous vehicles and the like).


Yet Hyundai channels 3% of sales to research and development, compared with 6% at Volkswagen or Toyota’s 4%, according to Bloomberg.


Mr Cho will not say if Hyundai plans to ramp up spending, only that it will be “investing in the new value chain”.


Some analysts blame the R&D shortfall on high labour costs.


Others point to the old habits of the chaebol, the South Korean conglomerates of which Hyundai’s parent company is one of the biggest.


In good times it ploughed spare cash from its carmaking arm on speculative property investments in Seoul’s glitzy Gangnam district and bought back a struggling construction company.


Hidebound corporate governance at the firm and its parent have recently come under fire from activist investors.


Last year Elliott, an American hedge fund, thwarted a restructuring plan that would have handed more power to Chung Eui-sun, son and heir apparent of Hyundai’s founder.


But Elliott’s demands for higher dividends would have left even less for investment in the sort of technologies Mr Cho envisages.


Last week Hyundai’s shareholders rejected Elliott’s proposal (and its candidates for board seats).


If the group invests the savings in automotive innovation instead, Hyundai’s prospects may brighten again.


Leaders | Triumph and disaster
The US-China trading relationship will be fraught for years to come
That matters more than trade deals today

OVER THE past two years investors and executives watching the trade tensions between America and China have veered between panic and nonchalance.


Hopes for a cathartic deal that would settle the countries’ differences have helped global stockmarkets rise by a bumper 13% this year.


But on May 5th that confidence was detonated by a renewed threat by President Donald Trump to impose more tariffs on Chinese imports.


As The Economist went to press negotiations rumbled on, but no one should be under any illusions.


Even if a provisional agreement is eventually struck, the deep differences in the two countries’ economic models mean their trading relations will be unstable for years to come.


Some trade spats are settled by landmark agreements.


In the 1980s tensions between Japan and America were resolved by the Plaza Accord.


In September Mr Trump agreed to replace NAFTA, which governs America’s trade with Canada and Mexico, with a renamed but otherwise rather similar accord (although the new treaty has yet to be ratified by Congress).


Even by those standards the China talks have been an epic undertaking involving armies of negotiators shuttling between Beijing and Washington, DC, for months on end.


Yet they have never looked capable of producing the decisive change in China’s economic model that many in Washington crave.


There is some common ground (see Finance section).


China is happy to buy more American goods, including soyabeans and shale gas, in an effort to cut the bilateral trade deficit, a goal which is economically pointless but close to Mr Trump’s heart.


It is willing to relax rules that prevent American firms from controlling their operations in China and to crack down on Chinese firms’ rampant theft of intellectual property.


Any deal will also include promises to limit the government’s role in the economy.


The trouble is that it is unlikely—whatever the Oval Office claims—that a signed piece of paper will do much to shift China’s model away from state capitalism.


Its vast subsidies for producers will survive.


Promises that state-owned companies will be curbed should be taken with a pinch of salt.


In any case the government will continue to allocate capital through a state-run banking system with $38trn of assets.


Attempts to bind China by requiring it to enact market-friendly legislation are unlikely to work given that the Communist Party is above the law.


Almost all companies, including the privately owned tech stars, will continue to have party cells that wield back-room influence.


And as China Inc becomes even more technologically sophisticated and expands abroad, tensions over its motives will intensify.


This fundamental clash of economic systems has been made more combustible by politics.


In an atmosphere of mistrust, both sides have sidelined the World Trade Organisation, the global framework for handling trade disputes, opting instead for a transactional approach to the talks replete with gimmicks and threats.


Strikingly, many Democrats now accuse Mr Trump of being too soft on China.


Earning less than 5% of their combined profits in China, and enjoying a boom in their home market, America’s big firms support a tough line, too.


In Beijing, meanwhile, the call for economic self-reliance is gaining steam (see Chaguan).


At some point this year Mr Trump and Xi Jinping, his Chinese counterpart, could well proclaim a new era in superpower relations from the White House lawn.


The lesson of the past decade is that stable trade relations between countries require them to have much in common—including a shared sense of how commerce should work and a commitment to enforcing rules.


The world now features two superpowers with opposing economic visions, growing geopolitical rivalry and deep mutual suspicion.


Regardless of whether today’s trade war is settled, that is not about to change.


Special report | Trade
The trouble with putting tariffs on Chinese goods
They rarely work as intended

DONALD TRUMP is not the first American president to promise a tougher line on China, but he is the first to make a trade war sound like a rent renegotiation.


“I am a Tariff Man,” he tweeted last December, boasting that America is “taking in $billions” thanks to tariffs he has imposed (never mind that tariffs are a tax, mostly paid by American consumers).


Mr Trump makes America’s markets sound like a valuable piece of real estate which foreigners should pay more to access.


Or as he puts it: “When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so.


”
As China grew, politicians typically accused it of not “playing by the same rules”.


He says that he does not blame China for putting its interests first and for stealing American jobs.


He blames his predecessors who allowed that theft to take place.


When China’s business and policy elite ponders the trade war, it is not uncommon to hear Mr Trump described as a pragmatic businessman under the control of a cabal of crazed economic nationalists.


In fact, trade is one of the few policy issues on which Mr Trump came into office with fixed beliefs, forged in the 1980s at a time of trade tensions with Japan and Germany.


In contrast, his inner circle has spent a lot of time squabbling over trade policy, occasionally in full hearing of stunned Chinese negotiators.


Officials in China are slightly obsessed with the president’s chief trade adviser, Peter Navarro, an abrasive academic who would like to decouple the Chinese and American economies.


In truth, Mr Navarro’s influence is limited.


His main strength is that he represents the world view of trade-union Democrats whose votes Mr Trump needs to be re-elected.


The United States Trade Representative, Robert Lighthizer, was raised in a rustbelt railway town and sees fighting to protect manufacturing workers as the proper work of government.


He cut his teeth negotiating with Japan for the Reagan administration.


What unites this odd bunch is a shared narrative: that China schemed and cheated its way to stealing American jobs and that those jobs could be dragged home by using enough force, just as it happened with Japan two generations ago.


Back then Japan and Germany placated America by agreeing to strengthen the yen and the D-mark against the dollar, making American goods a bit more competitive.


Japan was bullied into voluntarily restricting exports of everything from textiles to cars.


More constructively, Japanese firms opened car factories in America, bringing Japanese quality management with them.


Alas for the odd bunch, the solutions imposed on Japan are inapplicable to China, and history will not repeat itself.


For one thing China is not about to let its currency strengthen by 50% or more against the dollar.


For another, Chinese carmakers or telecommunications giants like Huawei are not very welcome to invest in America, where they stand accused of stealing technology and threatening national security.


Team Trump’s narrative also refuses to acknowledge the logic of global supply chains.


The popular history of how American jobs migrated to China overplays the cunning of Chinese officials and underplays the role of multinational companies from Asia and beyond.


In many low-end manufacturing industries, the forces of globalisation sent jobs to China when it offered low wages, cheap land and tax breaks.


Foreign firms trained Chinese managers to run export-quality plants.


Now, as Chinese wages are rising and Mr Trump’s tariffs are creating unmanageable political risks, manufacturing jobs are leaving after a 30-year sojourn, heading for South-East Asia and beyond.


Getting history right matters because Mr Trump’s trade rhetoric is so steeped in nostalgia.


Douglas Paal, who held top Asia posts in the Reagan and first Bush White Houses, sees a defect in every fight based on trade law: “The structure doesn’t allow for the voices of the industries of the future.


”
Sometimes a single industry’s fate sums up an era.


In the 1970s American factories produced over 15m bicycles a year.


Today over 95% of bikes sold in America are imported, overwhelmingly from China.


They use decades-old technology, but the Trump administration wielded special “section 301” powers, meant to safeguard the most precious intellectual property, to slap a 10% tariff on Chinese bicycles last September, raised to 25% on May 10th.


I want to ride it where I like
For anyone seeking evidence that trade wars are good for American workers, the bicycle aisle of the Walmart Supercentre in Moline, Illinois, looks promising.


Alongside Chinese-made cycles from brands like Huffy or Kent, the racks hold stirringly patriotic machines: mountain bikes carrying the shield-shaped logo of the Bicycle Corporation of America (BCA) and tags in the colours of the American flag, bearing the slogan “Bringing Jobs Back to America!


” and giving a factory address in South Carolina.


Arnold Kamler is chief executive of Kent International, a family firm based in New Jersey that sells about 3m bicycles a year to Walmart, Target and other shops.


He remembers how, in the late 1980s, Chinese-made bikes sold in America at prices that made no sense and then kept falling by a further 5-10% each year.


Kent closed its New Jersey plant in 1991.


A few years later the remaining American bikemakers applied to have anti-dumping tariffs slapped on Chinese imports.


Government trade regulators declined to help.


“The United States was trying to endear itself to China back then,” Mr Kamler charges.


It sounds like one of Mr Trump’s sagas of Chinese cheating and American passivity.


Yet real life is less tidy, as a trip to the Yangzi delta shows.


Most Kent bicycles are made in Kunshan, near Shanghai, by a contractor called Shanghai General Sports.


It is run by Ge Lei, an amiable 43-year-old.


The company patriarch is his father, Ge Yali, who ran a state-owned bicycle plant in the 1980s.


In the elder Mr Ge’s telling, Kunshan owes its rise to Taiwanese and Japanese manufacturers who transformed production standards.


If followers of Mr Trump were to find themselves in the Ge family boardroom in Kunshan, decorated with Kent children’s bikes already bearing Walmart labels, they might yearn for BCA machines from South Carolina to wipe them out.


Except that BCA is a subsidiary of Kent.


The firm was opened by Mr Kamler in 2014 after Walmart launched a buy-American drive.


And rather than making bicycles from scratch, BCA assembles and paints imported frames and parts, many from Kunshan.


A few years ago the Ge family bought 49% of Kent.


In other words, those patriotic BCA bikes are half-Chinese.


There is worse news for America Firsters.


Because Mr Trump’s tariffs apply to finished bikes and components, they have raised Kent’s and BCA’s costs by $20m a year.


Meanwhile, a separate series of Trump tariffs on steel and aluminium have so disrupted markets that plans to expand BCA are on hold, costing American jobs.


In 2015 South Carolina’s then governor, Nikki Haley, hosted Chinese and Taiwanese parts-makers at the BCA plant, urging them to open branches in her state to create a bike-making cluster.


Mr Kamler urged Chinese suppliers to see that low-technology manufacturing is profitable in America.


“Candidly, it was not successful,” he sighs.


BCA assembled 310,000 bikes last year, and Mr Kamler believes that low production volumes put Chinese investors off.


Even ignoring labour costs, he thinks that America has forgotten how to run labour-intensive factories.


He is too tactful to call American workers lazy, saying only that they move “slower.


”
Instead Mr Ge is building a plant in Cambodia, seeking lower wage bills.


Bicycles made there will escape Mr Trump’s anti-China levies as they ship to Moline and other Walmarts.


Every one of his new Cambodian workers will learn something that Mr Trump refuses to accept: tariffs rarely work as intended.


|SHANGHAI

Finance & economics | Clash of economic giants
America raises tariffs on China, and the stakes in a trade war
Last week a deal seemed close.


Now the fear is of full-blown commercial conflict

MEETING IN WASHINGTON, Chinese and American trade negotiators made it through dinner without hurling the plates at each other.


One minute after midnight in Washington on May 10th, America carried through on its threat to ratchet up tariffs on Chinese goods.


Two minutes later, China vowed to hit back.


And so the world’s two biggest economies staggered a couple of steps closer to all-out trade war.


Such an outcome is still far from certain: talks are continuing and, until recently, had been making progress.


But the risks are rising of economic damage in both countries, and of a rupture in their already strained relationship.


The increased tariffs apply to a $200bn tranche of imports from China, including a wide range of industrial inputs such as car parts and circuit boards.


Last September, in an early salvo, America hit this tranche with 10% tariffs (a further $50bn-worth had already been struck by tariffs of 25%).


Now that 10% has been raised to 25% too, meaning the rate applies to almost half of Chinese exports of goods to America.


China has yet to detail its retaliation plans, though it is likely to apply proportionate tariffs: aiming at fewer goods (since it imports less from America than America does from it) but also raising duties to 25%.


Liquefied natural gas, meat and fruit are expected to be on its list.


With this escalation the cost from their trade brawl will soon become more visible.


The new tariffs will shave as much as half a percentage point off China’s growth rate this year, according to most estimates.


When tariffs were 10%, companies could generally digest the higher prices for Chinese imports, which were offset in part by a weaker yuan.


At 25% they will struggle to do that, forcing them to pass more pain on to consumers.


Inflation in America could increase by about half a percentage point as a result, according to economists at Société Générale, a French bank.


President Donald Trump said that America was starting the paperwork to impose 25% tariffs on the remaining $300bn or so of imports from China not yet affected.


Just a week ago the mood regarding the talks was upbeat.


Chinese and American officials had met multiple times since the start of the year.


The outlines of a deal were becoming visible.


China would go at least partway to addressing American demands that it enhance protection of intellectual property, stop coerced technology transfers and open its market more widely to foreign investors.


It would also throw in pledges to buy large volumes of American goods, notably farm products, in order to narrow its bilateral trade surplus, a long-standing gripe of Mr Trump’s.


America, in turn, would agree to remove at least some tariffs on Chinese products.


On April 28th Steven Mnuchin, America’s treasury secretary, said talks were in their “final laps”.


Then, on May 5th, Mr Trump fired off a pair of tweets that shattered the optimism.


China, he said, had been attempting to renegotiate the deal.


The nature of the dispute is itself a matter of dispute.


According to Reuters, citing American government sources, Chinese officials had asked for sweeping edits to a 150-page draft agreement.


Robert Lighthizer, the United States Trade Representative, wanted China’s commitments to be enshrined in legislation; Chinese negotiators countered that regulatory changes would be sufficient.


But according to Chinese government advisers, the disagreements may run even deeper.


They say that American negotiators have, in effect, asked China to undermine its own economic model in demanding that it eliminate subsidies to favoured industries and state-owned firms.


Given the prospect of a breakdown in negotiations, it was heartening that Liu He, China’s lead trade envoy, still went to Washington for talks that began on May 9th.


Some had speculated that China might call off the meetings entirely.


But the scope for progress seems limited for now.


Chinese officials have long said that they will not make deals in the face of threats.


Comments by Mr Liu on his arrival at the talks suggested that he was there more to reinforce that message than to make any big concessions.


“I have come with sincerity,” he told Chinese state media, speaking in measured tones.


The two delegations met and had dinner on May 9th and were due to resume their talks on May 10th, albeit with higher tariffs in place.


The big worry is the potential political fallout from failed talks.


Allegations that China reneged on its commitments are catnip for American critics of engagement with it.


Trade is, after all, just one aspect of a spiralling mistrust that encompasses politics, technology and armed forces.


In China, hawks have always suspected that America’s ultimate goal is to stop it from rising—a belief that has been reinforced by the trade dispute.


Left-wing scholars argue that it would amount to treachery for China to give in to America’s demands.


Their commercial relationship used to help bind China and America together; now it is driving a wedge between them.


Most economists still think that the two countries will eventually reach a deal.


As the downsides from tariffs become clearer, the reasons to strike an agreement, however tenuous, will prevail.


But that is another way of saying that things may have to get worse before they get better.


Finance & economics | Free exchange
As the trade war heats up, China looks to Japan’s past for lessons
Japan’s problems stemmed more from its own miscues than from American pressure

HISTORY IS NEVER far from China’s mind in its trade dispute with America.


A few months ago, when negotiations looked on track, staunch nationalists warned of echoes with the “unequal treaties” that foreign powers had forced upon China in the 19th century.


In recent weeks the breakdown in talks has led state propagandists to draw comparisons with the Korean war of the 1950s, a bloody struggle between China and America (see Chaguan).


But the analogy that haunts Chinese economists does not involve China itself.


They fear a replay of the Plaza accord of 1985, when Japan, under American pressure, tried to resolve trade tensions by pushing the yen higher.


That calmed the tensions but, most Chinese economists think, at an intolerable price: stagnant Japanese growth for two-plus decades.


Dependent on America for security, Japan was constrained in its pushback.


The Plaza accord also involved Britain, France and West Germany.


Jeffrey Frankel of Harvard University has called it “a high-water mark of international policy co-ordination”, which is not President Donald Trump’s trademark.


The five countries announced that they wanted the dollar to depreciate and intervened in currency markets to make it happen.


Within a year the yen soared by nearly 50% against the dollar.


By contrast, currencies are just one part of today’s tussle between China and America.


Over the past decade China worked to address complaints that the yuan was too low.


So there are no calls for appreciation, only demands that China does not weaken it to help its exporters.


Looked at more generally, though, there are similarities.


The Plaza accord is best understood not as a one-off event but as a critical stage in a multi-year dispute, which ranged from agriculture to electronics.


America accused Japan of stealing intellectual property and plotting to control future industries.


Robert Lighthizer, America’s lead negotiator against China today, earned his spurs in these earlier battles.


In 1990 the two countries agreed to a “Structural Impediments Initiative”, which bears a striking resemblance to the crux of the debate today.


America wanted Japan then—and wants China now—to improve its competition laws, open more widely to foreign investors and weaken its giant conglomerates (keiretsu groups in Japan, state-owned firms in China).


The case against the Plaza accord is that it set Japan on a path to doom.


To counter the effect of a strong yen, an obvious drag on exports, Japan slashed interest rates and unleashed fiscal stimulus.


These moves brought about an economic rebound.


But they also generated asset bubbles: stock and land prices tripled within five years.


In 1990 these bubbles burst and the economy slumped, never to recover its former mojo.


In nominal terms Japanese stocks are still 40% below their peak on the final trading day of 1989.


The Plaza accord, in this view, did succeed in defusing tensions between Japan and America, but only because it neutered Japan as a challenger.


This has percolated into official thinking in China.


As Cui Tiankai, China’s ambassador to America, said last year: “Give up the illusion that another Plaza accord could be imposed on China.


”
The sequence of Japan’s woes does seem to make for a damning indictment.