CEO DailyCFO DailyBroadsheetData SheetTerm Sheet

Can Trump ‘Order’ US Firms Out of China? Should He? — CEO Daily

August 24, 2019, 11:15 AM UTC
fortune logo icon (black)

In Hong Kong this week, local business leaders have been falling all over themselves to affirm obeisance to Beijing.

Cathay Pacific, the city’s flagship air carrier, sacked the head of a flight attendants’ association—she claims because managers found images on her Facebook account urging friends to join anti-government demonstrations. Hong Kong offices of the Big Four accounting firms scrambled to distance themselves from an ad in a local tabloid supporting the protests. HSBC, Standard Chartered, and Bank of East Asia placed ads of their own deploring violence and urging a peaceful resolution to the conflict between pro- and anti-government forces that has roiled this city for the last three months.

The alacrity with which Hong Kong’s private firms sought to prostrate themselves before the state drew scorn in the global business press. “China’s Demands for Loyalty are Bad for Business,” blared a Bloomberg headline. “Businesses have collective strength,” wrote Financial Times columnist John Gapper. “Those with a big stake in Hong Kong’s future need to do more than fall meekly in line with China and become Beijing’s enforcers.”

And yet one Western leader seems quite taken with the idea of forcing private firms to kowtow. President Trump, in a furious tweetstorm Friday, lashed out against China for threatening new tariffs on $75 billion of U.S. imports, vowed to retaliate by raising existing U.S. tariffs on $250 billion of Chinese imports to 30%—and “ordered” U.S. firms out of China “immediately”:

“Our great American companies are hereby ordered to immediately start looking for an alternative to China,” Trump decreed, “including bringing your companies HOME and making your products in the USA.”

Does Trump, who earlier this week proclaimed himself “the Chosen One” anointed to lead America to victory in a trade war with China, have the power to enforce such a command? Jennifer Hillman, law professor at Georgetown University, assures the Washington Post that Trump does not have the authority to “duly order” companies to leave China.

But, as Reuters explains, Trump can discourage American firms from investing there by raising tariffs even higher. Or he could declare a national emergency and invoke the International Emergency Economic Powers Act granting the presidency broad authority to block the activities of individual companies or even entire economic sectors. In the most extreme scenario, Trump could invoke the 1917 Trading with the Enemy Act allowing the president to ban companies from doing business with countries with which the U.S. is at war.

Tariffs already are taking a toll on the U.S. economy, and the latter two measures would risk severe damage to U.S. firms, many of which are struggling even to shift supply chains to low-wage countries like Vietnam, let alone back to America. Trump’s edict provoked backlash on Twitter and in the press from U.S. business executives.

But the most insidious aspect of Trump’s diktat was highlighted by Brookings Institution China expert David Dollar in the New York Times: “It’s definitely outside the realm of a free-market economy…. It’s typical of the kind of thing we complain about from China and other economies where a government intervenes outside the rule of law.”

Even as he rails against Xi Jinping’s iron grip over China’s economy, Trump seems also to envy it.

Clay Chandler
– @claychandler

Trade and Economy

Our savior. President Trump declared he was “the chosen one” to tackle China on trade. “And you know what? We’re winning,” he added, admitting that the trade war could cause some harm on the U.S. economy but used the opportunity to pressure the Fed to cut interest rates further. The White House is still planning to hold face-to-face negotiations with China next month, even as tensions rise. Reuters

Tariff ticker. China promised to put tariffs on $75 billion worth of U.S. imports if President Trump proceeds with his own threat of new levies. China’s tariffs would target auto and agricultural products primarily and be imposed at 5% starting September 1 then raise to 10% in December. New York Times

Market jitters. Trump's tweets ordering U.S. companies to “immediately start looking for an alternative to China” sent stocks into a tailspin. The Dow plummeted, closing down 623 points, or 2.4%. The S&P 500 closed 2.6% down and the Nasdaq Composite finished 3% lower. CNBC

There may be trouble ahead. A survey of 14 economists concluded that President Trump’s next round of tariffs on Chinese imports — that’s 10% on $300 billion worth of goods ­— would push China’s GDP growth below 6%, which would be the slowest annual expansion since 1990. The economists divined the extra tariffs would cut 0.5 percentage points from China’s growth, which is already tipped to slow to 6% next year. Bloomberg

Money down. The yuan fell to its lowest rate in 11 years on Thursday, closing at 7.0875 against the U.S. dollar on Thursday. On Friday it closed at 7.10. The yuan dipped below the psychologically meaningful 7:1 mark in June, although some economists say there is no real danger of letting the yuan weaken that far. The head of China’s central bank agreed and has been allowing the yuan to trade around the mark as the trade war intensifies. Reuters

Innovation and Tech

Unfollow. Twitter, Facebook and YouTube all suspended or deleted hundreds of accounts that the platforms believe are part of a coordinated effort by China to spread government propaganda. Twitter has gone a step further and announced it will stop allowing state media, from any country, to pay for promoted content. Fortune 

Smart move. The Department of Commerce issued another 90-day reprieve for Huawei, which was placed on a trade blacklist in May. Rotating Chairman Eric Xu said the company is used to working under that Sword of Damocles. Yesterday Huawei unveiled what it calls the world’s most powerful A.I. processor which will, amongst other things, help it take a bigger share of the cloud computing market. Fortune

In Case You Missed It

What Trump Doesn't Get About the Chinese Economy Politico

Electric Car Gold Rush: The Auto Industry Charges Into China Fortune 

Alibaba Mines for Oscar Gold at the Chinese Box Office Wall Street Journal

A Year After IPO, Meituan Works to Unify Its Message Caixin Global

How Hong Kong’s Protests Are Roiling the World’s Booming Bubble Tea Market Fortune

China’s central bank releases 3-year fintech development plan TechNode

Politics and Policy

Cathay turbulence. Staff at Cathay Pacific, Hong Kong’s de facto flag carrier airline, have complained of a “white terror”—or political persecution—raging at the company. Cathay CEO Rupert Hogg resigned last week after Beijing pressured the company to deliver a list of staff that participated in protests in Hong Kong. This week, one of Cathay’s subsidiary airlines, Cathay Dragon, fired the leader of its air steward union, Rebecca Sy, due to pro-protest posts Sy made on her personal Facebook page. Hong Kong Free Press

Confucius says... Australia’s New South Wales state cut ties between its public schools and the Confucius Institute—an educational outreach organization funded by the Chinese government. The Confucius Institute has been accused of using funding to promote pro-Beijing curricula overseas. New South Wales did not find proof of “actual political influence” but admitted the institute was pretty shady. Fortune

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

Hong Kong

Shattered calm: Protesters in helmets and gas masks squared off against riot police in Hong Kong Saturday, as the city's protests returned to violent again after nearly two weeks of relative calm. Demonstrators in the industrial neighborhood of Kwun Tong blocked roads and surrounding the police station, sawing down a video-surveillance pole. Police responded with tear gas. Wall Street Journal

He's back: Simon Cheng, a Hong Kong citizen employed as a trade and investment officer of the British consulate in Hong Kong, has been freed after being detained in the southern Chinese city of Shenzhen for 15 days. Shenzhen police posted on an official Weibo account that Cheng had been released, after admitting to committing an offense. On Thursday, police said Cheng been punished for soliciting a prostitute. But they have offered no evidence for the charge, which has been met with skepticism in Hong Kong. Wall Street Journal