Part 3 - Understanding a Trade War Between Australia's Biggest Investor and Australia's Biggest Trade Partner

This is the third in a series of articles that will ultimately look to explore the potential impact, both short and long term, of a trade spat between Australia’s largest investor and Australia’s largest trade partner. This installment looks at the two key individuals in this conflict; Xi and Trump are important to understand in order to truly examine the impact of a trade war on Australia and the broader global economy.

Read Part 1 here.
​Read Part 2 here.

When assessing policy objectives and the likely outcomes of any negotiation, one of the hardest things to do is remain objective. Too often we are only open to a finite set of outcomes that we derive based on preconceived notions and what we, as rational actors, might do if presented with the same set of circumstances. So, by extension, when we take an issue like trade negotiations we can only see what seems completely rational to us with a given set of information. For example, if I believed that the current way things are done are blatantly unfair to one particular party or the other, I am likely to rationalise how I might behave and what the outcome might be based on that. However, while this behaviour makes our daily routines somewhat easier, it might not be the most effective way to see things as they are. As Brexit, the election of Trump or even closer to home the recent elections showed us, common sense is often anything other than sensible. 

A more fruitful way to think is to understand that things do not occur in a vacuum, the trade negotiations are carried out by individuals with their own motives and with their own particular ways of seeing things. The trick then, is to understand the individual players themselves and then try and grapple with how they might react given a certain set of conditions or parameters. In this, the two key players we would like to examine closer are Xi Jinping and Donald Trump as well as, by extension their teams and motives (again sticking to the Munger way which we quoted in Part 1). 

The Patient Strategist

When the scene was set for Xi Jinping to take the reins in 2012, he remained an enigma to most foreign observers and even domestic audiences. This seemingly understated figure had climbed through the ranks of the party by towing the line and keeping a low-profile to say the least. We would even say that most saw him as a highly effective technocrat whose greatest asset up to that point was that he was perceived as someone who ‘might not rock the boat too much’. Seven years later - with the elimination of term limits, one of the largest anti-corruption campaigns in party history and increasingly nationalistic rhetoric - we can definitively say we were vastly misguided. 

Born in 1953 to a a high-ranking member of the Party, Xi’s childhood and early life was tumultuous. When his father was purged after falling afoul of the leadership, Xi along with the rest of the family was packed off to rural Hanan during the years of the ill-fated cultural revolution. It was here that the young Xi probably gained his view of the world. He saw his father further humiliated and paraded in front of crowds as an enemy of the state and his mother forced to denounce him before being incarcerated in Beijing. The young Xi Jinping was not to see his father again until a decade and a half later. It was also during those years that he saw his family home ransacked by student militants, his younger sister killed in the process. When he ran away to Beijing, he was captured and sent back to the countryside to dig ditches. 

​The above beginnings are hardly what one would expect of a man destined to become the leader of the nation. His break came in 1973 when he applied for membership of the very same party that alienated his father and sent him to work in the countryside as a labourer. He applied ten times before finally being accepted. He rose from these rather humble beginnings through party functions, from Deputy Secretary of Zhengdong county through to provincial government and then finally having his shot as Party Chief of Zhejiang where he presided over an economy that averaged around 14% per annum. How did he achieve this?

We would say that one of the key things that Xi learnt very early on in life has been to hold his cards close to his chest and that perception was everything in his mind. One of the most telling examples was during his time as Party Chief for Shanghai when he cited loosely enforced party regulations to not travel on a special train to shuttle him between Shanghai and Hangzhou (special trains were reserved for national leadership). Junior officials had arranged the transport to curry favour. While on one level this might be the actions of an exceptionally honest man, on another more cynical basis these are also the actions of a man who realises that one cannot afford even slight mistakes especially when one has had to rise through the ranks despite the odds being stacked against you. The image one sees is not the image of the man himself but rather one that has been curated with great effort. Xi refused to indulge in many of the traps that other officials tended to fall into, especially within the context of an increasingly ostentatious Crown Prince Party (derogatory term used to describe the powerful descendants of first generation party members), he stood apart from the scandals.

​Indeed, after coming to power, even his early childhood hardships were used to curate another larger than life public image with every word meticulously scripted. One can almost draw parallels to his counterpart up north in Russia, Vladimir Putin, who similarly was a non-entity/enigma during his rise to the top. Biding their time patiently, being given opportunities precisely because of their very low-profile nature and seeming acceptance of status quo. And just like Putin, the first few years of Xi Jinping’s presidency were characterized by that same momentum, initially with the anti-corruption drive (to Putin’s Chechen War), reigning in the factions and a centralisation of power. In a series of events almost analogous to Putin’s initial prosecution of the Russian oligarchs, President Xi immediately went to work putting his stamp by even going so far as to prosecute a member of Politburo (i.e. Zhou Yongkang who previously oversaw China’s vast security apparatus) effectively also getting rid of potential rivals.

All this is not to say that President Xi Jinping is exactly like Putin or even that he is motivated by wanting to become a Mao-like character, though many have drawn the parallels. What we want to convey is the image of a man who is exceedingly patient and has learnt to be that way by necessity. A man willing to tolerate a level of short term pain that may not seem rational in the immediate future but is usually focused on a longer term outcome. A man whose consolidation of power does not incentivise him to negotiate for a quick outcome, even if it seems the more rational path. In policy, some of the more telling signs are perhaps not the official statements that are put out but, in this case, two quotes that are now largely censored in the country:

​“Some foreigners with full bellies and nothing better to do engage in finger-pointing at us. First, China does not export revolution; second, it does not export famine and poverty; and third, it does not mess around with you. So what else is there to say?” - Xi Jinping

“Why did the Soviet Union disintegrate? Why did the Soviet Communist Party collapse? An important reason was that their ideals and beliefs had been shaken.” - Xi Jinping

​The above quotes, tell of a man who despite the nationalistic rhetoric is not motivated by expansionist strategies but is alert to signs of disunity. His fundamental motivation is not necessarily trying to negotiate a trade deal but, as mentioned in Part 2, a motivation for national revival. He leads a nation that has a keen sense of the past, of injustices, both perceived and true, inflicted upon it by external forces. The comment on the Soviet Union is also telling within the context of certain aspects of trade which look to open China’s commercial system up to be independent of the state. Xi is a man motivated to go in the very opposite direction, the reference to the Soviet Union is also poignant in the sense that he does not see the issue as purely economic. 

In one sense, the nationalist rhetoric is potentially a precursor to a series of escalations (though we are hoping for this not to be the case) while seeming composed. The issue for China is not expansionism but the protection of the protein and energy supply chains. Given that it is a country of very little arable land and a still largely middle-income population, it will be poverty reduction and national pride whatever the cost and not, as we  or his counterpart in the White House might hope, whether the markets are up or down in a given week.

The Trump Card

It is probably inconceivable to see another person more different from Xi Jinping than Donald J Trump. Controversial and colourful are probably the two (tactful) words that first come to mind when it comes to the 45th President of the United States. Born in 1946 and the son of a self-made real estate millionaire, Trump led the privileged life that came with it. However, we can still get some glimpses into the motivations behind his behaviour, however erratic he might seem on the surface, by understanding his motivations both as President and Trump the individual. 

One of the most telling stories about Trump is his cutting out of a check for one Lawrence Herbert, a delivery driver whose home Trump prevented from foreclosure as a result. The reason was that Lawrence helped identify the 16 year old assailant who mugged his 88 year old mother in the same year. For Trump, everything comes down to reciprocity and his own sense of fairness. His mother who grew up in Tong, Isle of Lewis, a place that was often described by local historians at the time to be indescribably filthy, was an indomitable woman who never quite was able to rid herself of her humbler beginnings. She spent most of her life trying to gain access to the upper echelons of New York society, she was a mix of housewife, volunteer and socialite. It is this strange mix of real estate tycoon from his father and showmanship and desire to be a part of the upper classes from his mother that we would say formed Trump. Indeed, Trump himself wrote in later life that ‘looking back, I get my sense of showmanship from my mother.’

In a sense we accept, along with Dr Pippa Malmgren (adviser to President Bush), that Trump was the accidental President whom circumstances propelled to the top job more than intention. There is a certain logic to the argument. She posits that Trump’s real intention for the presidential run was commercial and the building up of TNN (Trump News Network to compete with CNN). While we don’t accept Dr Malmgren’s premise that he will refuse to run in 2020 , her point remains valid. However, now that he is President and assuming that a 2020 run is still on the cards, it is still important to understand how Trump might behave with regards to the ongoing negotiations. And given his experience, we believe that the keys to the answer lie not with Trump but rather the two people that have his ear the most when it comes foreign policy, Secretary of State Mike Pompeo and National Security Advisor John Bolton. 

This is because while Trump is President, the administration itself is run for Trump the showman. So while the President wants results, experience within New York real estate unfortunately does not translate to experience in negotiating complex trade agreements with his counterparts. We believe this also might be the reason for the mixed messages coming out of the White House. Given the President’s relative inexperience within this context, he is having to rely on a close circle of advisers and, depending on who has his ear that particular day, will be the newsflow that evening. This was brought home to us recently when considering Iran, another important topic for the White House. While the President took an increasingly hostile tone to Iran, all it took was a trip to Japan and a meeting with Shinzo Abe (who happens to be a neutral third party) for him to change his rhetoric completely within the space of a few weeks. We do not think the President is doing this intentionally but parroting. Similarly when it comes to trade, the increasingly hostile rhetoric coming from Congress pertaining to the ongoing investigations into his finances and the historic amount of turnover in his cabinet means that the only people who now have the ear of the President are the hawks who want an increasingly aggressive stance with regards to China. The one moderating exception is of course the Treasury Secretary. Secondly if a re-election is on the table a clear outcome of quick escalation will either mobilize the base and moderates enough to forget any adverse findings in the investigations or a quick deal which has the same affect. This is something we believe to be in sharp contrast to President Xi who, with no term constraints, is probably more incentivised to elongate the process and play the long game (at the very worst case scenario he is dealing with this President another five years).

In terms of the motivations of Pompeo and Bolton, it seems strange to us that a US President with a nativist philosophy should choose candidates who happen to be proponents of US exceptionalism. One thing they do seem convinced about has been the Munro doctrine which is an expansionary policy when it comes to South America and developing zones of influence. Their push has been to stop the expansion of China even if it means substantial cost in the short-run. Again, it is quite telling that, going back to Iran example, the national security adviser rather than the President asked the Pentagon to create contingency plans to deploy troops in the straits of Hormuz and Bolton was seemingly well underway in pulling the President towards a war he clearly didn’t want. 

And so the Trump card, pardon the pun, remains the wild one. The advisers who surround him, and whom he has to rely on given his inexperience, within this space would appear to be at odds with what he wants. Trump meanwhile, we would suggest, might be woefully under-prepared to fight battles internally and has created a fractious relationship with his allies. His advisers want a clear escalation from here which Trump the showman might be incentivised to do or he might push for a quick deal which is just as sell-able to the public in the run-up to elections. Either way he needs outcomes quickly which, to reiterate, is the exact opposite of the Chinese.

The short-run conclusion might be a quick fix deal (that is really a non-deal) where the Chinese give empty promises (since Xi is adept at keeping the cards close to his chest and folding when necessary) and Trump takes this to an election year which, post-election, a new or the same President will again have to open up once again.