Unintended consequences of a trade war

Liu He, China’s chief troubleshooter, trying to douse the flames of a possible trade war with the U.S., has his reputation on line. So far, he has not done badly. After recent tough talks in Washington with Steven Mnuchin, the U.S. Treasury Secretary, he has successfully salvaged a truce, halting the spiral towards a full-blown trade war with the U.S. Both sides have agreed to put off imposition of high tariffs on each other’s products.

The U.S. had earlier announced that it would slap stiff duties on Chinese hi-tech products, worth over $50 billion, accusing Beijing of “stealing” U.S. technology. China, in retaliation, said it would target U.S. agricultural products with high tariffs. In doing so, they waded into President Donald Trump’s support base of farmers.

But with neither side blinking, the stage was set in April for a prickly dialogue. That brought Mr. Liu, China’s Vice-Prime Minister, forcefully into the fray. Mr. Liu has impressive credentials to meet the requirements of a seasoned trade negotiator. He was part of the Leading Group on Financial and Economic Affairs, during President Xi Jinping’s first term in office. Leading Groups are “inner circle” cells embedded into the Communist Party of China. Mr. Liu’s academic qualifications are no less impressive. He studied economics from China’s elite Renmin University, following Mao’s Cultural Revolution, during which he served in the Army for three years, as well in a factory in Beijing.

He is comfortable in interacting with foreigners, having studied at Seton Hall University in New Jersey and, Kennedy School of Government in Harvard. His English language skills are also impeccable.

Ideologically, like many from his generation, who came into their own during the post-Mao era, Mr. Liu is an affirmed supporter of economic reforms. During a speech at this year’s World Economic Forum in Davos, Mr. Liu was emphatic when he said that in his second term in office, President Xi would drive reforms which would surpass “the international community’s expectations”.

The Iran factor

Yet, when it comes to politics, Mr. Liu digs into his country’s political roots, convinced about the pre-eminence of the CPC in guiding China’s destiny. But Mr. Liu’s well-earned reputation as a thinker, firefighter and President Xi’s right-hand man has, unexpectedly, got linked up with the fate of the Chinese telecom giant, ZTE. In April, the U.S. Department of Commerce blocked transfer of any American technology to the company, including chips and other equipment, citing ZTE’s repeated violations of U.S. sanctions law on Iran.

For the Chinese, salvaging the fate of ZTE is urgent and essential. ZTE is a major cog in the wheel of the Made-in-China 2025 project for transitioning the Chinese economy to the next level. Thousands of employees would be out of work if ZTE went bust. So far, there is some good news for Mr. Liu. President Trump has tweeted that ZTE may not go under if it revamps its board and pays a hefty $1.3 billion fine for its alleged misconduct. But plenty could still go wrong. U.S. lawmakers are up in arms against Mr. Trump’s intent to bail out the company. The Chinese also know that the mercurial Mr. Trump may change his mind, in case something goes wrong in talks with North Korea.

To be fair to Mr. Liu, these are factors that are well beyond his control. But the Vice-Premier could inadvertently suffer some reputational damage, in case negotiations on the ZTE affair go seriously off-script.

Atul Aneja works for The Hindu and is based in Beijing