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CEO Daily: Trump’s ‘Stop, Or I’ll Shoot Myself in the Foot’ Trade Strategy with China

May 11, 2019, 9:11 AM UTC
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Good morning.

Last week, it seemed like a trade deal between China and the U.S. was close to completion. Just two tweets later, months of negotiations were brought to naught.

President Donald Trump tweeted on Sunday that tariffs on $200 billion worth of Chinese imports would leap from 10% to 25% if a deal wasn’t negotiated by Friday. Markets freaked, with the S&P 500 experiencing the worst week of the year. When Thursday passed with no deal reached, the tariffs kicked in at midnight and China promised retaliation with “necessary countermeasures.”

The president said his decision to hike tariffs was punishment for Beijing backtracking on agreements both sides had made during negotiations. According to Reuters, China made retractions to all seven chapters of the 150-page draft agreement, rolling back promises to change Chinese law to satisfy U.S. concerns regarding theft of intellectual property, currency manipulation, and forced tech transfers.

If I was writing a newsletter on the subject, I’d say Trump was 100% right to rebuff China’s bid to scratch out its earlier commitments. However, the president showed he still doesn’t understand how tariffs—his weapon of choice—work.

Trump insists the duties will force China to pay billions in taxes, but it’s U.S. importers and, ultimately, consumers who will be saddled with the cost. The Trump administration is readying tariffs to hit the remaining $325 billion of Chinese imports as yet untouched by the trade war too.

Of course, higher consumer costs will diminish U.S. spending and eventually impact Chinese exports, but it’s a roundabout way to do it. China state-owned People’s Daily asserts the economy is resilient enough to endure a limping U.S., but economists aren’t so sure. China is targeting 6.5% growth this year; the trade war could knock the rate down to nearly 5%.

Trump thinks China wants to hold out until the next U.S. election, when they might get to deal with “Biden or one of the very weak Democrats, and thereby continue to rip off the United States.” That may be. If there’s one thing to know about China’s state planners it’s that they play a long game, which is why many of the U.S. demands that require China to fundamentally alter its economic model are not going to stick.

The People’s Daily said this morning that a key sticking point is the “balance” of the trade deal, which China currently feels is weighted in favor of the U.S. As talks continue that imbalance will prove hard to redress. President Xi Jinping needs an outcome he can present as a “win-win” while President Trump is just looking for a solid “win.”

Now, enjoy the weekend!

Eamon Barrett

Innovation and Tech

Shipping overseas. Alibaba is restructuring its AliExpress service to create a platform that rivals Amazon. Originally, AliExpress connected Chinese merchants with foreign buyers across 150 countries. Now AliExpress is trialing letting sellers from Spain, Turkey, Italy and Russia on the platform too, with plans to include more countries next year. The expansion plan comes as growth at home slows and Amazon shuts its China offering. Financial Times

Gaining recognition. Megvii, the firm behind facial recognition tech Face++, raised $750 million in series E funding ahead of a rumored IPO in Hong Kong. The Alibaba-backed AI company is now valued at over $4 billion. Of course, there’s a dark side to this tech. Human Rights Watch recently named Megvii as one of the numerous companies providing tech for the Chinese government’s oppressive surveillance program in Xinjiang. TechCrunch  

Patriot games. Tencent has pulled the mobile version of PlayerUnknown’s Battlegrounds (PUBG) from the China market, after waiting over a year to receive permission to monetize the title. Permission never came. Tencent has launched a new game, Game for Peace, in place of PUBG. The gameplay is virtually the same, but the new game has two distinguishing features: one, it’s endorsed by China’s Air Force; two, Tencent can actually make money off of it. Fortune

Huawei loses another. Huawei’s Director of Corporate Affairs in Canada, Jake Enwright, resigned less than a year after joining the company. Enwright stepped into the role just a few months ago and is the second high-profile Huawei Canada exec to quit this year, following the senior vice president of corporate affairs’ exit in January. Enwright didn’t give an official reason for his exit, but representing Huawei in Canada must be a hard sell under the current climate. Reuters

Economy and Trade

Prices up. Consumer inflation hit a six-month high, pushed by a spike in pork prices caused by the nation’s African swine fever epidemic. The consumer price index rose 2.5% YoY in April, accelerating from March’s 2.3% rise. Pork prices, heavy weight in the consumer goods basket, surged 14.4% from last year. Financial Times

Exports down. China’s trade surplus slumped in April, coming in at $13.84 billion—far below the $35 billion predicted by a Reuters poll. China’s surplus was $32.65 billion in March. Exports declined 2.7% over last year while imports rose 4%, baffling economists who had predicted a decline. CNBC

Healthy fried chicken. Yum China is starting to recover after years of poor health. Yum Brands, which owns fast-food names like KFC and Pizza Hut, spun out its China unit in 2016. Yum China manages over 8,600 restaurants and reported 4% revenue growth in the first quarter, earning $2.3 billion. A refocus on delivery and digital payments helped turn Yum China’s luck. Deliveries are now nearly 20% of sales and 90% of KFC orders are paid for digitally, up from 18% in 2016. Financial Times

In Case You Missed It

How Chinese spies got the N.S.A.’s hacking tools, and used them for attacks NYT

‘China’s Silicon Valley’ plans to house millions priced out by tech bros Inkstone

Could caped dinosaur found in China glide like Batman? SCMP

A mysterious account in China seems to have an inside track on trade talks Bloomberg

Politics and Policy

This Meng goes to trial. The former chief of Interpol, Meng Hongwei, who disappeared in September and eventually showed up in Chinese custody, will face trial in the port city of Tianjin. China accuses Meng of taking bribes; Meng’s wife denies the allegations and claims Chinese agents are harassing her. South China Morning Post

This Meng stays at home. Lawyers for Huawei CFO Meng Wanzhou, who is under house arrest in her $10 million mansion, revealed they plan to cite Trump’s tweets as evidence against Meng’s extradition to the U.S. President Trump has twice said that he might intervene in Meng’s case if he felt it could lead to a good trade deal with China. Meng’s lawyers argue the comments show the CFO’s arrest was politically motivated. South China Morning Post

This edition of CEO Daily was edited by Claire Zillman. Find previous editions here, and sign up for other Fortune newsletters here.