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Three priorities for the US to de-escalate the China conflict



A top priority for the incoming US administration of president-elect Joe Biden will be deciding how to handle the conflict with China. What started as a trade fight morphed into a tech war and is now at an impasse. A new approach is urgently needed. It should have three major elements.

First, dialogue. The Twitter-driven policy bluster of the past four years of Donald Trump’s administration has no place in problem-solving between the world’s two largest economies. At the same time, it is fair to say that the periodic summits favoured by his predecessors — whether biannual (George W Bush) or annual (Barack Obama) — were not exactly successful either.

A better approach would be to establish a permanent secretariat that has full-time responsibility for all aspects of the US-China relationship — from trade and technology, to cyber security and people (including educational exchanges, visas and human rights). 

Housed in a neutral jurisdiction and staffed by senior professionals from both countries, such a secretariat would be charged with data-sharing, joint research and joint policy white papers to support regular meetings between leaders of both nations. Under its auspices, implementation and monitoring of existing agreements would be jointly conducted, complete with transparent dispute adjudication.

Second, trade. Trade imbalances between nations do not occur in a vacuum. They are an outgrowth of macroeconomic saving problems. The US, with its chronic shortfall of domestic saving, ran merchandise trade deficits with 102 nations in 2019. China, with its chronic saving surplus, ran merchandise trade surpluses with 159 nations in 2018. For that reason alone the current approach to the US-China trade dispute is flawed, as are the tariffs that underpin it. There can be no bilateral fix for a multilateral problem. That has only led to trade diversion among trading partners — imposing higher costs on consumers and producers on both sides.

This approach — tariffs as well as the so-called Phase 1 deal on Chinese purchases of American-made goods — should be abandoned in favour of a saving agenda. The US should increase saving while China should reduce it. That will be harder for Washington than for Beijing, as US saving is now under acute pressure with huge Covid-19-related budget deficits.

That will require a polarised US Congress to commit to medium-term deficit reduction. Conversely, China needs to continue reducing its surplus savings — essential to fund a porous social safety net, temper fear-driven household saving and boost discretionary consumption. Saving rebalancing is essential to reduce trade imbalances between both nations and their trading partners.

Third, the Trump administration deserves credit for bringing the structural debate to a head. While the allegations it raised in 2018 about China’s intellectual property regime and forced transfer of technology by US companies were based on weak evidence, they underscored serious concerns about practices that were counter to the terms of China’s 2001 accession to the World Trade Organization. Unfortunately, none of these thorny issues has been addressed in the current approach.

There is a better way: to start by recognising that the so-called structural agenda is a stalking horse for far bigger aspirations shared by both the US and China — namely, improved access to each other’s markets in order to promote long-term growth. A bilateral investment treaty is a time-tested approach that both nations have long embraced as a means toward that end. The US has signed 42 such treaties, China has more than 100 in force. A decade of negotiations on a US-China treaty were abandoned by the Trump administration just when the finishing line was in sight. Going back to the table should now be an urgent priority.

An agreement of this kind would eliminate ownership caps on direct investments by multinational corporations in each market. That single provision would eliminate the joint-venture structure of cross-border investments, taking the thorny issue of forced technology transfer off the table. No JVs, no transfer of anything from one partner to another. A broad, enforceable treaty (its implementation falling under the purview of the secretariat outlined above) could also be used to address contentious disputes over IP rights, state-supported industrial subsidies and cyber security.

It won’t be easy for either nation to stand down. At first, small steps will be required to rebuild trust. But these are far preferable to staying the current destructive course.

The writer, a faculty member at Yale University and former Morgan Stanley Asia chair, is the author of ‘Unbalanced’

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Emerging Markets

China lands spacecraft on Mars




China has landed a spacecraft containing a rover on Mars, according to state media, in a further sign of its bold ambitions in the sphere.

The rover was part of the Tianwen-1 unmanned mission launched in July last year. Tianwen means “questions to heaven” and was named after a poem by Chinese poet Qu Yuan.

The mission, which was described by Chinese media as a “new major milestone” and the “first step in China’s planetary exploration of the solar system”, was intended to match the US by successfully landing on the red planet.

The Global Times reported that the lander and the rover from the Tianwen-1 probe reached a plain on Mars called Utopia Planitia on early Saturday morning local time, citing information from the China National Space Administration.

The Tianwen-1 probe’s lander and rover separated with the orbiter at about 4am, after which it had a three hour flight before entering Mars’ atmosphere, according to the newspaper.

The spacecraft then “spent around nine minutes decelerating, hovering for obstacle avoidance and cushioning, before its soft landing”. The rover is named Zhurong after a Chinese god of fire, and is 1.85m and weighs 240kg. It is expected to transverse the planet for about 92 days.

The probe was launched into space on July 23 by the Long March 5 rocket from the Wenchang launch pad in Hainan province, in the south of the country.

The achievement of the Mars landing is part of a wider expansion of China’s space programme. The country’s engineers launched the first part of its permanent space station into the Earth’s orbit late last month.

In 2018, China for the first time launched more vessels into orbit than any other nation.

The US views China’s efforts in space in strategic terms. “Beijing is working to match or exceed US capabilities in space to gain the military, economic and prestige benefits that Washington has accrued from space leadership,” according to the annual threat assessment published by the office of the US director of national intelligence.

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Iron ore sinks from record high on concerns over China crackdown




The scorching rally that propelled the price of steel-making commodity iron ore to a record high came to a shuddering halt on Friday on concerns China will crack down on speculative activity.

The main iron ore futures contract in Singapore fell as much as 14 per cent to $190 a tonne before recovering to $209, while there were also big drops in China where the most active contract on the Dalian Commodity Exchange slumped almost 8 per cent.

The sell-off came as the local government in Tangshan, China’s main steel-making city, said it would examine illegal behaviour and suspend production at mills found to be manipulating market prices by spreading rumours and hoarding material, according to reports from Reuters and Bloomberg.

“China’s central government seems to be very concerned about this major input for its steel-intensive economy,” said Tom Price, head of commodities strategy at Liberum. “I think what the pullback reflects is the government trying to rein in prices.”

Line chart of $ per tonne showing Iron ore prices have fallen after a strong rally

Authorities in China have sought to cool hot commodity markets, with Premier Li Keqiang calling this week for stable prices. Iron was trading at $90 a tonne a year ago and hit a record high of $230 this week. Tangshan, which accounts for 14 per cent of China’s steel output, has introduced production curbs as part of a crackdown on pollution.

However, these measures have been slow to take effect as mills in the rest of the country have rushed to crank up output to take advantage of reduced capacity in Tangshan and cash in on record domestic steel prices. A decision to remove the export tax rebate for some steel products on June 1 has also led to other mills increasing production.

As a result, China’s steel production hit a record level in March, with output up 19 per cent year on year to 94m tonnes, according to financial group ANZ. The firm said production was even higher in April, with exports up 20 per cent year on year. That in turn boosted iron ore, which climbed 35 per cent over the past month.

“What the Chinese government is trying to do is incrementally contain the steel market, mindful of the fact they have spent a fortune resurrecting their economy over the past 12 months and they don’t want to kill the recovery,” said Price. “The measures are quite clever.”

Iron ore has led a broad advance in commodity markets over the past year, fanning talk that another “supercycle” — a long period of high prices — has arrived.

That has been a boon for big iron producers such as Anglo-Australian company BHP and its Brazilian rival Vale, which require a price of just $50 a tonne to break even.

However, most analysts think the iron ore market will remain tight and prices elevated for the rest of the year. That view is based on rising steel demand outside China as big economies accelerate and while important producers in Australia are operating at full capacity.

“While the price has been thumped in the past couple of days, demand remains robust, helped by the fantastic margins the steel industry is enjoying,” said Andrew Glass, Singapore-based founder of Avatar Commodities.

Elsewhere, copper was set for its first weekly loss in more than a month amid worries that a tightening of credit in China could hit demand for the metal, used in everything from household goods to electric vehicles. Copper, which started the week at $10,412 a tonne, was trading at $10,245 on Friday.

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Biden says ‘strong reason’ to believe pipeline hackers are in Russia




Joe Biden said the US government has “strong reason” to believe the hackers behind a massive cyber attack that shut the Colonial petroleum pipeline were based in Russia, as he urged Americans to not panic over temporary fuel shortages.

“We do not believe the Russian government was involved in this attack. But we do have strong reason to believe that the criminals who did the attack are living in Russia. That is where it came from,” the US president said in a speech on Thursday afternoon at the White House.

“We have been in direct communication with Moscow about the imperative for responsible countries to take decisive action against these ransomware networks,” he added, noting he hoped to discuss the issue with Russia’s president Vladimir Putin.

The 5,500-mile pipeline system has capacity for 2.5m barrels a day of liquid fuels such as petrol diesel and jet fuel, which it carries from Gulf Coast refineries to major hubs in the north-east. The FBI has indicated that the shutdown was caused by a ransomware attack by hacking group DarkSide.

Cyber experts claim Russia tacitly allows ransomware gangs to operate in the country and will not prosecute them. In return, those criminals do not attack Russian companies and can be called upon to share their access to victims’ systems, experts say.

Last month, the US Treasury accused one of Russia’s intelligence services, the FSB, of “cultivating and co-opting” the notorious ransomware group Evil Corp, which has been sanctioned.

The Colonial pipeline — responsible for carrying almost half of the motor fuel used on the US east coast — began the process of fully reopening on Wednesday evening, five days after it was hit by a cyber attack that triggered a spate of panic-buying by motorists across the US south-east.

Biden said the US government expected a “region by region return to normalcy beginning this weekend and continuing into next week”. He urged Americans to avoid panic-buying petrol, and said he had called on state governors and local authorities to keep a lookout for any illegal price gouging by businesses.

“Don’t panic, number one. I know seeing lines at the pumps or gas stations with no gas can be extremely stressful, but this is a temporary situation,” Biden said. “Do not get more gas than you need in the next few days.”

Shortages at filling stations triggered by panic-buying continued on Thursday, with 70 per cent of stations in North Carolina running dry and about half in Virginia, Georgia and South Carolina, according to GasBuddy, a data provider.

The situation in some major urban hubs was beginning to improve, however. The amount of stations without fuel in Atlanta fell from a peak of 73 per cent overnight to 68 per cent by Thursday afternoon.

Colonial on Thursday morning said it had made “substantial progress” in bringing its operations back online and that all of its markets would begin receiving product by the afternoon.

Prices at the pump have continued to rise. National average petrol prices rose to $3.03 on Thursday, according to the AAA, an automobile association. They crossed the $3 a gallon threshold on Wednesday for the first time since 2014.

Gasoline futures retreated on the news of Colonial’s reopening, as traders anticipated supplies returning to normal. Contracts for June delivery slipped 7 cents to $2.08, their lowest level since April in Thursday afternoon trading.

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