Trump has found a way to cut out China

Telegraph

2 days ago

Donald Trump is opening up a new frontier in his trade war.
Despite striking a pact with China last month, the US president is threatening to reignite tensions with Beijing by entangling the entirety of Asia in a sprawling web of tariff deals.
Even with fresh levies imposed on Japan and South Korea, Trump is racing to land a string of agreements across the continent, including with Indonesia, Thailand and Cambodia.
If he pulls that off, he will build a cage around Xi Jinping's ability to use Asian markets to prop up Beijing's strained export-driven economy.
'What we are witnessing is no passing trade war,' says Neil Shearing, an economist at Capital Economics. 'Rather, it is the manifestation of a deeper, more durable superpower rivalry between the world's two largest economies.'
Already, Trump's trade pacts with Britain and Vietnam have set a template for his plan to weaken Beijing's trading power.
The UK deal revealed tools for the White House to 'veto' Chinese investment in Britain, while the Vietnam agreement aims to stop Beijing from relying on a loophole to avoid US tariffs.
Trump has achieved the latter by putting a 40pc levy on 'transshipments' – that is goods imported into Vietnam, mostly from China, and then re-exported to America.
This new tariff is double the 20pc levy on Vietnamese-made goods, thereby sending a clear message to Hanoi.
While Vietnam is welcome to export to the US if it can cope with a 20pc levy, Trump will come down on the country like a tonne of bricks if it replaces 'Made in Vietnam' stickers with 'Made in China'.
The president has also since threatened other South East Asian countries with more aggressive tariffs unless they make a deal in the next three weeks.
This includes a potential 25pc levy on Malaysia, 32pc on Indonesia and 36pc on Thailand and Cambodia.
Trump's demands will certainly include Vietnam-style measures to increase the squeeze on China.
Export-driven economy
Trading figures clearly show why Vietnam has emerged as an early candidate for this strategy.
Since Trump first came to power in 2017, China's machinery and electrical goods shipments to Vietnam have risen from about 17pc of its total exports to almost half.
And since he returned to the White House this year, Vietnam's imports of these goods from China have jumped by almost a quarter.
In the year to May, Vietnam imported $174bn (£129bn) of goods from China and exported $132bn to the US. The ebb and flow of these two figures tend to track each other remarkably closely.
Exports to Asia are integral to Xi's attempt to keep China's economy expanding by at least 5pc a year.
Beijing juices up GDP by pumping subsidies and investments into manufacturing. This is because Chinese households simply don't spend enough to allow consumption to power the economy.
'Whenever Chinese domestic spending growth sags, export growth accelerates,' says David Lubin, a senior research fellow at the think tank Chatham House.
'And that's simply because Chinese companies can't sell stuff domestically, so they sell it abroad.'
At home, this economic model has led to overcapacity and oversupply, forcing businesses into damaging price wars.
If these companies can't export their surplus to Asia, supply gluts appear inevitable.
Yet, the escape valve remains open.
Even though China's exports to the US have dropped more than 40pc from a year ago, its total exports worldwide have climbed by almost 5pc.
That has included a 15pc increase in shipments to 10 countries in the Association of Southeast Asian Nations.
But the pressure is building on China, as revealed in Beijing's strident reaction to the US-Vietnam trade deal.
He Yongqian, the commerce ministry spokesman, branded it 'a typical act of unilateral bullying' and vowed that hostile deals would prompt China to 'take resolute countermeasures to safeguard its legitimate rights and interests'.
This demonstrates the unenviable position that Vietnam finds itself in, particularly as the US and China are its two largest trading partners.
Picking sides
Soon, other Asian economies might face an equally painful choice between the battling behemoths.
Trump this week has shown he is unafraid to wield a big stick, wherever he thinks it might work.
On Monday, he posted on his Truth Social platform that he would slap a new 10pc tariff on 'any country aligning themselves with the Anti-American policies of Brics' – the ever-expanding group of countries led by Brazil, Russia, India, China and South Africa.
This came in response to a Brics summit in Brazil, which included not only the wider membership of Egypt, Ethiopia, Indonesia, Iran and the UAE, but also a new set of 'partners' from Latin America, Africa and central Asia – as well as Malaysia, Thailand and Vietnam.
In a statement issued after the summit, the participating countries attacked 'the proliferation of trade-restrictive actions'. They didn't name the US, but said 'unilateral' measures could 'reduce global trade, disrupt global supply chains and introduce uncertainty into international economic and trade activities'.
Speaking after Trump's post, Mao Ning, the Chinese foreign ministry spokesman, said Brics was 'not a bloc for confrontation, nor does it target any country'.
'Tariffs should not be used as a tool for coercion and pressuring,' she said. 'Arbitrary tariff hikes serve no one's interest.'
Beijing's approach is more carrot than stick.
China presents itself, accurately or otherwise, as the friend of poorer countries and a defender of multilateral bodies such as the United Nations and the World Trade Organisation.
'As a developing country and a member of the Global South, China breathes the same breath with other developing countries and pursues a shared future with them,' China's state news agency Xinhua recently quoted President Xi as saying.
The incentives for developing countries to take China's side in the trade war include the $1 trillion-plus Belt and Road Initiative, which bankrolls global infrastructure projects, and more recently the Shanghai-headquartered New Development Bank, also known as 'the Brics Bank'.
In Indonesia, which is scrambling to secure a trade deal with Trump, Beijing has also been in love-bomb mode.
Last week, President Prabowo Subianto was on hand for the groundbreaking ceremony on a $6bn Chinese-Indonesian joint venture project to mine nickel and make batteries for electric vehicles. He called it 'colossal, an extraordinary breakthrough', which was no doubt music to Xi's ears.
Beijing's response
But the Chinese also seem ready to play hard-ball.
With India potentially lining up to replace China as the main supplier of iPhones to America, reports surfaced in recent weeks that hundreds of mission-critical Chinese engineers and technicians at Taiwanese firm Foxconn's iPhone plants in India had been recalled to China.
Bloomberg has reported that this is part of a broader move: Beijing has informally told companies and regulators to stop exporting key equipment, personnel and know-how to India and Southeast Asia – seemingly to stop multinationals such as Apple being able to shift operations out of China quickly.
The Foxconn gambit was less blustery than a Trump tariff, but it shows that Xi is playing the game.
And he has a huge head-start, says Chatham House's Lubin. China has been building almost unassailable positions in industries such as solar panels, electric vehicles, batteries and, most importantly, rare earths and magnets.
This already shored up Beijing's hand in the trade talks with Trump, forcing him to back down from his most aggressive tariff threats. And it might help mitigate the impact of Trump's iron cage of trade deals.
Lubin describes Xi's strategy as an 'asymmetric decoupling' from the US.
'The result of establishing China as a manufacturing powerhouse is to make the world more dependent on China,' he says. 'And that gives China leverage.'
The question now is whether Xi's leverage – monopolies in key sectors, plus a shower of money for his Asian partners – is enough to combat Trump's ever-toughening tariff threats.
That's the call Asian countries will now have to make.