By Simon Watkins
Given China’s burgeoning role in the Middle East - with Iran and Iraq, in particular, irreplaceable staging posts for Beijing’s multi-layered, multi-generational ‘Belt and Road Initiative’ (BRI) – how U.S. President-elect, Joe Biden, deals with the country is a key question for the oil industry. According to a range of senior sources in Washington close to the new administration and to sources close to the governing administrations in Tehran and Baghdad spoke to exclusively by OilPrice.com last week, the approach of the Biden team to China will be very close to the very trade-centric policies of predecessor Donald Trump to ensure that Beijing continues to move in the direction of an equitable trade policy with the U.S. Three major differences, though, will be first that Biden will never “give up security considerations for trade” as Trump frequently did, according to Trump’s former National Security Adviser, John Bolton. Second, a new trade metric will be introduced that will reduce and then strictly limit trade imbalances. And third, a narrower co-operative framework will be mandatory between U.S. and Chinese companies.
For China’s leadership – much like that of Iran – the idea of a Biden presidency has long been anticipated as offering a much easier ride than that of former President Trump. Iran, according to various sources (including Bolton), was reportedly even advised by former Secretary of State, John Kerry - when the U.S. withdrew from the Joint Comprehensive Plan of Action in May 2018 - to stay in the JCPOA deal and ‘just wait it out’ until Trump was no longer president. China, meanwhile, decided to do very little except the bare minimum to keep Trump from increasing sanctions in the final few months of his presidency for the very same reason. “China was very aware that Trump was absolutely concerned with only the optics of the [U.S.-China] Trade War and not with the substance of how those negotiations were progressing so Beijing tailored all of its so-called concessions to being the sort of stuff that in practice were meaningless but which would allow Trump to make victory-sounding Tweets,” a senior lawyer who worked closely with the Trump White House told OilPrice.com last week. Attesting to Trump’s focus on the optics only of the Trade War was an oft-repeated comment by the then-President: “Every time there’s a little bad [Trade War] news the [stock] market would go down incredibly…Every time there was a little bit of good news the market would go up incredibly... And yet, other news that was also very big, the market just didn’t really care.”
All the way through Trump’s presidency, though, China did benefit both from Trump’s neo-crushes on China President, Xi Jinping, along with similar infatuations with other ‘strongmen’ leaders, notably including Russian President, Vladimir Putin, and from Trump’s - virtually unheard-of for U.S. presidents - a conflation of two completely distinct sets of policies: security and trade. An early case in point was the almost complete reversal of initially hard-hitting U.S. sanctions imposed on Chinese telecommunications company, ZTE, for committing major and repeated violations of the U.S.’s sanctions on Iran and North Korea. According to Bolton, after a private telephone call to President Xi - in which it later transpired that Xi told Trump that he would “owe [Trump] a favor” if he reduced the sanctions against ZTE – Trump did exactly what Xi had asked for – trading security considerations for commercial considerations. Related: Has Asia Lost Interest In North Sea Oil?Trump Tweeted: “President Xi of China and I are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!” As Bolton put it: “Since when had we started to worry about jobs in China?” Exactly the same methodology of personally flattering Trump and then offering him some vague commitment on China’s part to buy more of some product or another from the U.S. was used again by Xi to hold Trump off from imposing quick, full, and irreversible sanctions on another Chinese intelligence operation working under the guise of telecoms giant Huawei.
The new Biden government will be taking a similarly strong initial approach to China but without any opportunity for Xi to parlay such vague commercial considerations on China’s part into concrete security roll-backs on the U.S.’s part. “Trade – and by far most importantly, addressing the trade imbalance between the U.S. and China – will be front and center of all Biden’s dealings with China but security considerations will operate separately and so will foreign policy, none will be allowed to interfere with the other,” Mehrdad Emadi, head of global risk analysis company, Betamatrix, in London, told OilPrice.com exclusively last week.
In addition, OilPrice.com understands from the sources in Washington, London, and the Middle East, that from when Biden is formally inaugurated as president, U.S. companies will no longer be allowed to sign any contracts with Chinese companies that include any element of sharing technology. “For decades, the Chinese insistence that any U.S. company that wanted to do business with China must share its technology with its Chinese partner – and this has included the likes of General Electric, Westinghouse, and Ford, among many others - has allowed China to systematically reverse engineer everything that was shared and then re-sell China-made versions back to the U.S. and the rest of the world at much lower prices, given the much lower unit cost of labor in China, so creating huge trade surpluses for China and deficits for everyone else,” said Emadi.
The key item on Biden’s agenda that will redress this very imbalance is a new metric that will create a ‘long-term steady-state equilibrium in trade’, as there was with Japan when it operated basically the same economic model in the 1960s and 1970s that China is now doing. “This new approach will be focused on correcting the long-term bilateral structural balance of trade imbalance that has existed between the U.S. and China for decades and which can only be the product of any and all of the following - Chinese export dumping, ongoing manipulation to keep the Chinese renminbi [RMB] currency undervalued, and the construction of implicit import barriers by China,” underlined Emadi.
Instead, according to the sources spoken to by OilPrice.com last week, the Biden team will impose a strict percentage ratio between the five-year rolling mean average of the U.S.-China goods trade number (deficit for the U.S.) to the U.S.’s GDP number. Currently, OilPrice.com understands, the specific metric under consideration is that the sum of the goods trade deficit for five years must stay under 4.85 percent of the U.S.’s GDP for any single year in the business cycle. As it currently stands, the sum of these deficits over the past five years is around US$1.39 trillion, which is 6.48 percent of 2019’s GDP, 6.76 percent of 2018’s GDP, 7.13 percent of 2017’s GDP, and so on. If the 4.85 percent-based formula had been used then the five-year sum would have been under US$1 trillion, or around US$70 billion less per year for each year of the five-year cycle. “Whatever exact metric is taken, this five-year rolling mean average would be looking for a reduction in that percentage ratio by at least half within the first term of the Biden presidency,” Emadi told OilPrice.com.
This policy could be sold by the Biden team as beneficial to China for a number of reasons. “What this policy would mean in practice is that China would have to allow the renminbi greater flexibility, as a market-determined FEER [fundamental effective exchange rate] would have ensured a correction of the trade imbalance between the two economies over time by now,” said Emadi. “Consequently, by putting into place such a metric for trade and GDP there would also be, by implication, a similar metric come into play for the movement of the US$RMB FEER, and this over time would allow China to reduce its inflationary pressures from imported goods, benefit Chinese investment abroad as it would facilitate greater transfer pricing to be done, and would also take the strain off the under-strain shadow banking system,” he added.
“All of this would be compartmentalized away from matters of national security – so there would be no concessions, for example, on Huawei – and also away from foreign policy, the discussions over which would not be traded off for commerce as they were occasionally under Trump,” he underlined. This more usual compartmentalization of trade away from the potential for ‘trade-offs’ with other policy areas will also mean that the Presidency of Joe Biden will not consider softening its likely stance on Iran in exchange for China offering to reduce its increasingly vice-like grip over the country.
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