US rejects China's bid for 'market economy' status

Trump administration's decision gives the US wider discretion to impose higher duties on Chinese exports
By Jacob M Schlesinger

The Trump administration has formally rejected China’s demand that it be treated as a “market economy” under global trading rules, a move likely to heighten tensions between the world’s two largest economies.
The U.S. submitted its decision to the World Trade Organization in Geneva in mid-November and made it public on Thursday.
Trump aides have long signaled their stance on the issue, but the filing marks the first time the U.S. government has publicly declared its position and explained its reasoning.
The fight’s stakes are high.
The trading partners of a country branded a “nonmarket economy” have wider discretion to impose higher duties on its exports on the theory that distortions from state intervention give its producers unfair advantages.
Economists have estimated that the decisions by the U.S. and European Union to treat China as a nonmarket economy have cost Chinese producers billions of dollars in exports, with some of their goods facing tariffs well above 100%.
In a recent speech, Wang Hejun from China’s Ministry of Commerce said the continuing refusal by the U.S. to grant China market-economy status “undermines the seriousness and authority of multilateral rules.”
He said Beijing “will take necessary measures to protect legitimate benefits of Chinese enterprises.”
The disputes pitting China against both the U.S. and the EU date to December.
Beijing argued at the WTO that the 2001 agreement granting its WTO membership required other members automatically treat China as a market economy by the 15th anniversary of its joining the organization.
The U.S., Europe, and others say their promise to grant China that status was contingent on Beijing implementing market liberalization measures that have yet to be carried out.
China filed complaints late last year against both the U.S. and the EU with the WTO trade court demanding that the U.S. and EU grant it market status.
The U.S. case has since stalled, but the complaint against Europe is moving forward toward hearings. What the U.S. revealed on Thursday was a brief supporting Europe in its case. 
That, officials say, shows that Washington will take a similar stance when its own case proceeds.
“The evidence is overwhelming that WTO members have not surrendered their longstanding rights…to reject prices or costs that are not determined under market economy conditions,” the U.S. brief concludes.
Under President Donald Trump’s “America First” economic policy, tensions have risen between the U.S. and various American trading partners over Mr. Trump’s vows to cancel existing trade accords and take more aggressive action to curb imports from all over the world, including from allies like Europe.
But in the battle over China at the WTO, the U.S., Europe, and others appear to be coordinating closely to present a united front against Beijing.
“We’ve been talking to the Europeans…there is a common understanding that we’ve reached,” said a senior U.S. official involved in preparing the filing. Such cooperation, he added “is really quite unusual, to have us all on the same side of this issue.”
Mr. Trump and his aides have over the past year been openly skeptical about the WTO and their views about its ability to govern the global trading system, particularly China.
And they have said they see the market-economy cases as a litmus test for how they judge the body.
“This is without question the most serious litigation matter we have at the WTO right now,” Robert Lighthizer, Mr. Trump’s U.S. trade representative, told Congress in June.
A China victory, he added, “would be cataclysmic for the WTO.”

President Trump Accuses Chinese of Being Grand Champions of Currency Manipulation

President Trump frequently accused China of keeping its currency artificially low against the dollar to make Chinese exports cheaper, stealing American manufacturing jobs.
By Reuters

President Donald Trump declared China the "grand champions" of currency manipulation on Thursday, just hours after his new Treasury secretary pledged a more methodical approach to analyzing Beijing's foreign exchange practices.
In an exclusive interview with Reuters, Trump said he has not "held back" in his assessment that China manipulates its yuan currency, despite not acting on a campaign promise to declare it a currency manipulator on his first day in office.
"Well they, I think they're grand champions at manipulation of currency. So I haven't held back," Trump said. 

"We'll see what happens."
During his presidential campaign Trump frequently accused China of keeping its currency artificially low against the dollar to make Chinese exports cheaper, stealing American manufacturing jobs.
But Treasury Secretary Stephen Mnuchin told CNBC on Thursday he was not ready to pass judgment on China's currency practices.
Asked if the U.S. Treasury was planning to name China a currency manipulator any time soon, Mnuchin said he would follow its normal process of analyzing the currency practices of major U.S. trading partners.
The Treasury is required to publish a report on these practices on April 15 and Oct. 15 each year.
"We have a process within Treasury where we go through and look at currency manipulation across the board. We'll go through that process. We'll do that as we have in the past," Mnuchin said in his first televised interview since formally taking over the department last week. "We're not making any judgments until we go continue that process."
A formal declaration that China or any other country manipulates its currency requires the U.S. Treasury to seek negotiations to resolve the situation, a process that could end in punitive tariffs on the offender's goods.
The U.S. Treasury designated Taiwan and South Korea as currency manipulators in 1988, the year that Congress enacted the currency review law. 

China was the last country to get the designation, in 1994.
The current situation is complicated because China's central bank has spent billions of dollars in foreign exchange reserves in the past year to prop up the yuan to counter capital outflows.

Trump's pronouncements about the yuan could also complicate matters for Mnuchin as he prepares for his first meeting next month with his Group of 20 finance minister counterparts in Baden Baden, Germany.

Sina Delenda Est

The Necessary U.S.-China War
By George Friedman 

A report last week stated that Chinese anti-ship missile systems locked onto a U.S. aircraft carrier in the South China Sea. 

It is not good manners to lock radar on a ship, as it means you could, if you chose, suddenly launch a missile. 

If the target gets nervous, it could launch first to take out the missiles. 

I cite this because there is much chatter about the possibility of conflict in the South China Sea. 

Here is a cursory strategic analysis of how such a war might be fought.
There are two scenarios. 

1. In the first, China invades Taiwan. 
2. In the second, the U.S. decides to block the exits of the South and East China seas, in order to cut China’s global maritime access. 

I want to emphasize that these will be extremely high-level analyses, with vital details excluded.

The Chinese strategic motive for seizing Taiwan would be to open a wide gap in the archipelago running from Okinawa to the Strait of Malacca. 

The seizure of Taiwan, plus a few minor islands to the north and south, would open a substantial passage into the Pacific. 

As important, it would create a platform for Chinese land-based aircraft and missiles, which would force the border of the contested area in the Pacific east about 1,300 miles, bringing Chinese cruise missiles close to, or in operational range of, Guam and Anderson Air Force Base, a critical U.S. air base.
The oft-discussed Chinese strategy of placing underwater mines around Taiwan would not help for what the Chinese must assume would be an extended war. 

That strategy might cut trade, but Taiwanese and American aircraft could still use the island to stage operations against Chinese air, missile and naval targets. 

In addition, the U.S. response to mining might be to mine the areas around Chinese ports. 

It is a strategy in which the risks outweigh the benefits. 

Seizing Taiwan has higher risks, but a very substantial payoff in that it could solve China’s strategic problem of guaranteed access to the Pacific, as well as enhance its deep strike capacity in the Pacific.
Taiwan has about 130,000 battle-ready troops, with a reserve of about 1.5 million troops. 

They are equipped with about 2,000 armored fighting vehicles and substantial self-propelled artillery. Taiwan is a small country, and even taken by surprise, it would be able to amass its forces, if not to defeat the enemy on the beach then to engage them in mobile warfare to impose attrition on them. According to the 3-to-1 rule of combat, the Chinese would need to deploy at least 390,000 troops to defeat this force.

An invasion of Taiwan would mean amphibious warfare, in which the Chinese have no experience. 

It requires extraordinarily complex coordination between air, land and sea forces, and especially with logistics. 

As the U.S. learned in World War II, amphibious operations face this problem. 

No matter how lavish the supply of amphibious ships and landing craft, the number of forces landed initially is entirely incapable of defeating the defenders. 

The number of sea-to-land vessels and time of loading and unloading limit the buildup of forces. 

In other words, the landing area remains extremely vulnerable, particularly against a large, concentrated defense force.
Assuming that the landing area is secure and a large force could be built up, going on the offensive depends on supplies, and supplies depend not so much on ships as on offloading capabilities and the ability to move supplies to the troops. 

Forces in offensive operations against a peer enemy consume supplies at a staggering rate, and the Chinese would have to supply extremely large forces. 

During the battle for France in 1944, a lack of supplies could have defeated the Allies. 

The Germans were not the problem. 

We are very advanced these days, but we haven’t solved the problem of soldiers eating, artillery shells weighing hundreds of pounds or the need for more missiles. 

The Taiwanese would be operating on very short supply lines on well-practiced terrain. 

The Chinese would be operating at a distance.
Long before landing, the Chinese would be concerned with protecting ships in transit through achieving air superiority over the Taiwan Strait. 

This poses the classic problem of amphibious warfare. 

A battle for air superiority and attacking enemy bases would lose the element of strategic surprise. 

Undertaking air superiority operations after the initial assault could leave the landing force and their support vessels helpless. 

The Chinese don’t know what the U.S. would do, but they have to assume the worst case. 

And the worst case is a pile on by American aircraft and ship- and land-based missiles.
If the Chinese decide to attack Taiwan, they must protect the amphibious force and the logistical follow-on. 

They can only do that by achieving air superiority, and they can only do that by annihilating the enemy air and naval forces in a stroke. 

This is where surprise comes in. 

The first attack must follow the Israeli model in 1967. 

Israel executed a tactical surprise that annihilated the Egyptian air force in the first hour of the war. 

This gave Israel the ability to maneuver at will in the Sinai Peninsula. 

If the embarkation ports and amphibious and supply vessels sink, the war is lost.
For China to invade Taiwan it must open the war with an annihilating strike both against Taiwan and against U.S. naval forces in the region. 

The key would be the destruction of U.S. aircraft carriers. 

Assuming surprise, it is unlikely that more than two carrier battle groups would be in the Western Pacific. 

We must assume that the Chinese have already acquired long-range missiles sufficiently sized to significantly damage any warship and with terminal target acquisition systems that would recognize an enemy ship and hit it.
China must, in the first strike, destroy Taiwanese air bases and missile launchers, attack the two carrier battle groups that pose an immediate threat, and also attack both Guam and Diego Garcia – an island in the Indian Ocean where U.S. strategic bombers have been based. 

They must do all of these things nearly simultaneously to prevent warning. 

The Chinese know they can’t achieve this for two reasons. 

First, hiding an invasion is hard. 

The allies managed to confuse the Germans about where the invasion was going to happen, but there was no way they could hide the buildup. 

The Chinese might manage to confuse U.S. intelligence about the meaning of the buildup, as the Egyptians did with Israel in 1973, but there is no way to keep the United States from going on alert. That means air defense systems on the carriers and at Guam and Diego Garcia would be on extreme alert. 

In that case everyone, including the Americans and Chinese, would discover whether these systems actually work. 

China must also attempt to destroy American satellites and engage in complex electronic warfare to blind the U.S.
The Chinese do not expect such a strike to annihilate the enemy. 

The U.S. would expect losses. 

The crucial question will be whether U.S. forces have at least temporarily weakened enough so that Chinese air defense can protect the embarkation ports, the invasion force and the beachhead – as well as systematically cripple the Taiwanese army with intense airstrikes.
Assuming a crippling attack on all targets that reduces U.S. capabilities by 80 percent, the most extreme likely, the U.S. would now rush reinforcements to the region, repairing airfields and sending all available carrier battle groups to redeploy at flank speed. 

In addition, U.S. submarines would flood the regions north and south of the Taiwan Strait, with Chinese destroyers trying to destroy them.
The Chinese goal would be to defeat the Taiwanese army in less than two weeks. 

The U.S. goal would be to use submarines to impose severe attrition on follow-on Chinese forces and supplies and prevent the defeat of the Taiwanese until the balance of forces shifts. 

During this time, the U.S. would be working to blind the Chinese in space and other areas.
The problem that China has with an invasion of Taiwan is that too many things have to must go right. 

• China must keep its intentions secret in spite of a prolonged buildup of forces in multiple ports. 
• It must strike multiple heavily defended targets with aircraft and missiles, simultaneously and without being detected. 
• It must execute an amphibious assault against a superior force and hold the landing area until reinforcements arrive. 
• It must control the sea lanes across the strait in the face of submarine attacks, potential air attacks and mine laying. 
• Finally, it has to complete the operation before the U.S. commits significant reserves to the battle. 

If any of these strategic components fails, the invasion fails.

Obviously, this is barely a sketch of the battle problem. 

Nevertheless, the strategic point is valid. 

The Chinese cannot take Taiwan without a Pearl Harbor scenario several orders more ambitious than the Japanese operation in 1941. 

The Japanese had a reason to risk Pearl Harbor. 

Their oil was running out and their supplies were running low due to U.S. embargoes and interference. 

They had to act. 

China is not in that position. 

Therefore, risking such a complex operation is not a rational option.

***

China has a key geopolitical imperative. 

It depends on exports to sustain its economy. 

Most of those exports are shipped by sea, and therefore access to the world market begins at its eastern coastal ports. 

Geography poses a problem for the Chinese. 

Shipments from the country’s east coast ports, both south and north of the Taiwan Straits, must transit through a string of islands. 

Some are large islands, while others are extremely small. 

But they form a string of choke points through which Chinese maritime trade must pass.
Choke points are normally geographic realities important to navigators but no one else. 

But they also create a potential vulnerability for China. 

The existence of choke points, however many, makes the movement of Chinese vessels predictable. More importantly, given a sufficient air-sea force, blocking those points can block Chinese exports and cripple the Chinese economy.

A Jan. 2, 2017 photo shows a Chinese navy formation, including the aircraft carrier Liaoning, center, during military drills in the South China Sea.

The Chinese see the United States in three ways. 

1. First, the U.S. has an extremely powerful Navy. 
2. Second, the U.S. is highly unpredictable in how it responds to challenges. The Chinese saw this unpredictability in Korea, Vietnam, Kosovo, Operation Desert Storm, Iraq and so on. At times, the U.S. does not respond. Other times it over-reacts, from the Chinese point of view. 
3. Third, the U.S. prefers economic sanctions that at times include physically blocking the trade of a given country.

Given these three facts about China’s potential adversary, China finds itself in an extremely difficult position. 

It cannot match American naval power. 

It cannot predict what the U.S. will do. 

To the extent that the U.S. might choose, sanctions that include interference with Chinese trade are the most likely opening move. 

Therefore, the geography of the Western Pacific archipelago poses a potential threat to core Chinese national interests.
There are many passages from China’s east coast into the Pacific. 

The American task would be to create sustained interdiction of all passages without exposing U.S. vessels to excessive risk. 

The likely strategy would be to place about five carrier battle groups east and south of the archipelago. 

The vessels would be located as far east as possible to assure interception before the maritime vessels reach high seas. 

They would be close enough to be within reach of air and sea anti-ship missiles, and close enough that carrier-based aircraft could have overlapping patrol zones without having to refuel. 

Submarines would also be used.
The Chinese counter to this deployment would be primarily land-based anti-ship missiles. 

With so much American sea power backed by land-based strategic aircraft from Guam, Chinese ships would find it dangerous to sortie. 

Having anticipated this, the Chinese would try to strike at the blockade with anti-ship missiles. 

The problem with using anti-ship missiles is that while they have terminal guidance systems, they require some general targeting information. 

That would come from signal intelligence, satellites or longer-range drones. 

Chinese aircraft patrolling east of the archipelago would face both fighters and American missiles. The U.S. likely has anti-satellite capability. 

But I would assume that both American and Chinese satellites have defensive systems, from the ability to maneuver to deploying ball bearings in an attacker’s path. 

While it would be useful for the Chinese to blind American satellites, it would be essential for the Americans to do so. 

That would be difficult, but the real threat would be Chinese high-altitude drones locating American carrier battle groups. 

The Chinese would then deliver saturation attacks to overwhelm U.S. fleet anti-missile defenses. 

The U.S. would try to shoot down the drones or render them mute through electronic warfare.


The Chinese have been pushing toward this point. 

They cannot tolerate a blockade and cannot engage in full-fleet action against the Americans. 

The construction of extensive anti-ship systems coupled with multiple types of sensors is the key. Therefore, if the U.S. wants to carry out a blockade, it would need an extensive air operation to destroy Chinese anti-missile capabilities. 

And that must be preceded by massive suppression of air defense.
Note that as with the Chinese invasion of Taiwan, what appears to be a simple problem spins out of control. 

The U.S. can’t be certain it would not be detected and would have to attack the Chinese mainland. Even then it would be unlikely to destroy all Chinese missiles, and Chinese command and control is undoubtedly redundant. 

The possibility of significant U.S. losses can’t be discounted. 

That would mean that the use of sanctions and blockades as an alternative to armed conflict would lead to armed conflict.
The Chinese have not, however, fully solved their problem. 

Even if they drive everyone out of the East and South China seas, which isn’t likely, they are still enclosed by the archipelago. 

They know the U.S. is unpredictable and therefore can’t assume that the U.S. is reading the battle problem as they are. 

The Chinese are not facing imminent crisis, but they must have a long-term goal of taking control of the choke points and basing in such a way as to push the U.S. Navy back into the central Pacific.
Attack by main force is not an option. 

There are too many choke points, and the American response is too unpredictable. 

The ideal solution is political. 

This works one of two ways. 

The first is to reach an agreement with a major country that controls key choke points to allow passage and a Chinese naval presence. 

Aside from Taiwan, the country that would be valuable in this regard is the Philippines. 

As long as the Taiwan Straits are open, the Philippines could serve as an exit point. 

You might note the behavior of the Filipino president of late.
The second option would be to create insurgencies to destabilize one or more countries. 

This is far less efficient than a political shift, but the Chinese have been quite good in the past with supporting insurgencies, while the U.S. is not at all good at counterinsurgency. 

It would not provide a satisfactory solution to the Chinese in any reasonable time frame.
The point I am making here is that any discussion of war between the U.S. and China overestimates either the Chinese capability or the American capability. 

The Chinese would not be able to take Taiwan. 

There are too many failure points. 

The U.S. could blockade China if it was prepared to accept losses. 

The U.S. is risk averse, and minimizing threats would mean a far larger war than merely a naval picket line.
Each action by either side faces a counter that opens the door not only to failure but also to losing forces neither side can afford to lose. 

The only practical way to force a change in the balance of power in the region is a shift in alliances by one of the countries, and the Philippines is the one to watch.

Yuan Falls to Six-Year Low Amid Concern Trump Will Target China

A man of his word: Trump could hurt China exports, favor higher U.S. rates
Bloomberg News

The yuan slipped to a six-year low as concern about China’s trade relationship with a more protectionist U.S. provided a new reason to sell the currency that’s heading for a third annual loss.
The exchange rate fell 0.21 percent to 6.7923 per dollar at 5:13 p.m. in Shanghai, heading for its lowest closing level since September 2010, and extending its drop this year to 4.4 percent. 

China’s central bank barely weakened its yuan fixing even after a 1.4 percent surge by the Bloomberg Dollar Spot Index on Wednesday, helping the Asian currency rally against a basket of peers.
Trump has called China a "grand master" at currency manipulation and has threatened tariffs of up to 45 percent on the country’s imports, a step that Commonwealth Bank of Australia estimated would cut China’s shipments to the U.S. by 25 percent in the first year. 

Speculation Trump would unleash a wave of spending, triggering a surge in inflation, is prompting traders to boost bets on higher U.S. borrowing costs.
"The yuan may be pressured by Trump’s win," said Nathan Chow, an economist at DBS Group Holdings Ltd. in Hong Kong. 

"There’s speculation that he could add punitive measures that hurt China’s exports, and also he may favor higher U.S. interest rates."
The yuan jumped the most against a basket of peers since July after the People’s Bank of China cut its daily reference rate by just 0.08 percent. 

The fixing was stronger than expected, suggesting China wants to curb declines in the yuan, said Ken Cheung, a Hong Kong-based Asia currency strategist at Mizuho Bank Ltd.

Trump will probably follow through with his pledge to declare China a currency manipulator on his first day in office, according to Lewis Alexander, a former Federal Reserve and U.S. Treasury official. 

Trump, who staged a stunning upset in the Nov. 8 U.S. vote, said since the beginning of his campaign that China keeps the yuan artificially weak against the dollar to make its exports more competitive, at the expense of manufacturing jobs in the U.S.
"Trump has made his stance quite clear about China and it is definitely not a friendly outcome in terms of bilateral trade relations," said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd.
China Central Television on Wednesday cited Xi Jinping as saying that he "hopes" to work with Trump to expand bilateral cooperation. 

He also said he hoped the two stick to the principles of avoiding any conflicts or confrontations.
The gap between the onshore yuan and the freely traded yuan in Hong Kong widened to more than 0.5 percent overnight, the biggest since the start of the year. 

The offshore rate gained 0.21 percent on Thursday after tumbling as much as 0.6 percent on Wednesday following Trump’s victory.