Washington Expects China to Back Down in the Trade War. But with Presidents Xi and Putin Meeting Next Week at SPIEF, What Happens if They Don’t?

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Op/Ed by Chris Devonshire-Ellis 

This coming week’s annual St. Petersburg International Economic Forum (SPIEF) takes on a rather greater significance given that Chinese President Xi Jinping and Russian President Vladimir Putin will be meeting and hosting dialogue at the event.

It thus becomes a forum at which future US-China trade talks could be defined – not least because a strategy China could adopt with the US is to tough out their trade war and seek supply chain development from non-US sources. Russia is a key player in determining whether or not that could happen.

This year’s SPIEF theme is telling: ‘Creating a Sustainable Development Agenda’. The SPIEF 2019 program agenda can be seen here.

Like last year, I will also be attending, this time with the Head of Dezan Shira & Associates’ Russia Desk, Maria Kotova. She is based in Shanghai, and a large part of our time will be taken up to better understand the China-Russia trade dynamics as well as gain an overview of global investment trends, and especially in Eurasia.

That is possible because SPIEF has always been an international trade event, and this year’s includes a number of country business dialogues that will be held to discuss bilateral economic cooperation between Russia and participants from Austria, China, Finland, France, Germany, India, Italy, Switzerland, Sweden, and African nations.

The agenda also includes a BRICS conference, EAEU–ASEAN business dialogues, and events dedicated to Russian-European cooperation and innovative cooperation within the CIS, European, and Asian countries.

Should readers wish us to ask, or listen out for specific business and trade issues, you may let us know in advance here and we will get back to you either during or immediately after the event with our comments.

What can be expected, however, is more of a push-back against current US trade policies. That manifested itself last year when the underlying attitude was the global betrayal of trust.

While part of that last year was based upon Russia’s own recent experiences with the US, not purely limited to sanctions but also over issues concerning conflicts in Syria and elsewhere, it was also seen to be supported by similar views from other regions, including within the Middle East, Africa, as well as other countries, such as Turkey.

That attitude has now developed further, and is reaching out more vigorously to China, who this week accused the US as promoting trade disputes in the manner of “naked economic terrorism“. Those are pretty harsh words, even for China, long given to inventive insults when it chooses to verbally defend its interests.

They are words that the Mexican President, Andrés Manuel López Obrador, will also be reflecting on, as yesterday President Trump suddenly announced tariffs on all goods imported into Mexico “Unless illegal immigration stops”. Those commence on June 10 and are at an initial five percent, rising to 25 percent by October 1 if Trump isn’t satisfied.

This has taken place just when discussions of the US-Mexico-Canada Free Trade deal (USMCA) is still in the process of being ratified, and brings home the fact that, yet again, in the eyes of an increasing number of countries, the United States cannot be relied upon as a sustainable, predictable trade partner – the very qualities that global supply chains depend upon.

One of the questions SPIEF might answer, then, is how widespread is this view and what can be done about it?

A question for Washington-focused China hands is whether or not the current administration views such vernacular as being pure bluff. The danger is that China means it and will take steps, in the words of the SPIEF agenda this year, to “create a sustainable development agenda”.

In St. Petersburg, that will undoubtedly mean reducing exposure to the US in terms of trade, supplies, and infrastructure. It will also pose the question as to whether China can rally other significant nations alongside Russia to develop non-US alternatives.

This is partially happening.

The US, for example, is in effective control of the existing global financial transaction system and has introduced the system of using US intermediary banks and the SWIFT payments system to process all international transactions. That was originally introduced to combat money-laundering and terrorism.

However, in the eyes of China, Russia, and countries such as Iran and Turkey, among others, it is now being subverted and used as a creature of punishment – being a mechanism used for cutting off global economies from international trade based upon whatever the current US trade policy is.

SWIFT has become a switch that can be turned on and off with no warning. New trade policies can be introduced overnight. This is why the “sustainable” aspect of this year’s SPIEF is going to be important – sustainable as in non-interventionist.

China and Russia have been leading the way in terms of developing an alternative to SWIFT, by introducing Union Pay as an alternative.

The BRICS nations of Brazil, India, and South Africa along with Russia and China are developing a cloud based “BRICS Pay” system specifically to avoid US dollar trade.

Other nations are following; the desire to avoid the US dollar is fast becoming a trend. Will these new payment structures become alternative, non-US dollar global networks?

China has also been busy developing a global trading network of its own. Over the past 20 years it has been extremely active in signing off trade agreements.

These include bilateral trade agreements with over 100 countries and economies, which typically cover expropriation of funds, arbitration, most-favored-nation treatment, and repatriation of investment proceeds.

In addition, China has 14 full blown free trade agreements (FTAs), and is negotiating or implementing an additional eight. China’s FTA partners are ASEAN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macau, and Taiwan. China has also recently signed FTAs with Korea and Australia, both of which include a chapter on investment, as well as a non-preferential FTA with Russia’s Eurasian Economic Union.

These FTAs deal with trade and service specifics and are immensely advantageous to those savvy enough to realize China needs to both consume as well as export.

This is in contrast to the US, which has been tardy in updating its own trade agreements, many of which date back to the early 1990s, and are in urgent need of rewriting to include new technologies and IT.

The US also currently has FTAs with 20 countries but none with any major blocs such as ASEAN. In terms of trade deal volume, it lags behind China, and both recently pulled out of the TPP deal while threatening to withdraw from the WTO.

Again, that issue of trade sustainability will come to the fore. It is not an agenda President Trump has shown much interest in.

China, however, is and has just announced it will set up an ‘unreliable entities’ list to combat foreign firms that cut supplies to China and that details will be announced shortly.

That will amount to an essential blacklist of businesses that follow US trade policy and cease supplying to China – another example of what SPIEF is terming “sustainability” and another indication that China is fully prepared to develop non-US based supply chains.

SPIEF 2019 therefore will further build on last year’s underlying theme of excluding the US from building future global infrastructure due to its perceived and continuing political and trade unreliability.

China, for example, already appears to have won the race to install a global 5G network, an issue that was largely behind the recent Huawei spat and that I wrote about here. China is ready to invest in and develop supply chains for semi-conductors for the global 5G network from non-US sources.

How far this trend develops and how fast it will take shape are issues to be determined. But SPIEF 2019 and the meetings being held between Presidents Xi and Putin will go a long way to working out how building alternative global systems not reliant upon the US can be realized.

China, meanwhile, is preparing to become a major technical and economic global architect. With Asia and Africa largely on board, and the EU in the balance, SPIEF will go some way to answering who its trusted participants are likely to be.


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China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in DalianBeijingShanghaiGuangzhouShenzhen, and Hong Kong. Readers may write to china@dezshira.com for more support on doing business in China.

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