Xi's Warmed-Up Trade Leftovers Aren't So Unpalatable

(Bloomberg Gadfly) -- U.S. trade hawks will have been hoping to find some red meat in President Xi Jinping's speech at the Boao Forum Tuesday.

Instead, they're mostly getting a plate of warmed-up leftovers.

All of Xi's four major proposals -- plans to open up financial services and automotive joint ventures, reduce restrictions on foreign investment, strengthen intellectual property protections, and expand imports -- were already in train well before President Donald Trump started imposing trade tariffs. The general conciliatory tone and some vague specifics suggest a demarche from the current level of tensions -- but the devil will be in the detail.

The headline offer is a reduction of tariffs on imported vehicles, a move that appears to respond directly to an overnight Trump tweet:

Still, that's unlikely to be a decisive boon for Detroit.

China imports just over 1 million cars into its 20 million-a-year-plus auto market. Of that amount, most are German-branded luxury SUVs. Nomura Holdings Inc. analysts estimate General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV exported around 50,000 to 60,000 cars from the U.S. to China last year worth around $2 billion, versus the more than 150,000 luxury SUVs that BMW AG and Daimler AG sent from their U.S. factories.

It's simply cheaper to build cars in China than in North America, so the only major beneficiaries of lower import tariffs are likely to be makers of prestige vehicles whose volumes aren't large enough to justify a local plant -- think Toyota Motor Corp.'s Lexus, Honda Motor Co.'s Acura and Hyundai Motor Co.'s new Genesis marque.

GM's Cadillac is already turning out fancy cars from a Shanghai joint-venture factory, with sales up 51 percent last year. Along with its Chinese partners, GM is expected to produce 15 new or refreshed models in China this year. Ford, meanwhile, has pushed ahead with its luxury Lincoln brand, as it rehashes its business in the nation.

Cost aside, China is becoming a bigger priority for U.S. automakers' earnings. To operate in the world's largest car market and reap the juicy margins that aren't on offer elsewhere, they'll have to dance to Beijing's tune. Already, firms are beginning to follow suit on policies dear to Xi's heart, such as electric cars.

What of the proposed reduction of ownership caps on automotive manufacturing joint ventures? Changes to that policy have been under consideration for almost five years and were enshrined in an economic planning document 12 months ago.

The same goes for Xi's statement about opening up the financial services sector, which is largely in line with a policy announced last November.

Likewise for Xi's pledge to reduce the number of industries where foreign investment is restricted. These sorts of revisions have been carried out periodically ever since Beijing established its current foreign investment regime in 1995, and tend to be tweaked as soon as domestic companies reach the scale and sophistication to effectively compete with offshore rivals. (Last year's update included a Trumpy move to loosen rules on golf course building.)

The third plank, consisting of proposals to strengthen intellectual property rules, could have been cribbed from a speech Xi gave last July to a financial conference, while the fourth (a drive to reduce China's current account surplus by increasing imports), is another long-established project.

China's transformation from an industrial to a consumer economy, with a concomitant increase in purchases of foreign goods, is close to the core of the long-term vision of a "moderately prosperous society" laid out in Xi's speech at the Communist Party congress last year. The import expo that -- along with tariff reduction on cars and unspecified other goods -- formed the center of that plank Tuesday was first announced last May.

To be sure, some details appear to break newer ground.

There were gestures toward removing foreign-ownership caps in aerospace and shipbuilding, and joining the World Trade Organization's government-procurement agreement, a process that's been stalled for about 16 years. Given the history, though, it's probably best to believe those moves only when you see them.

Is that lack of substantive change reason to despair? Perhaps not.

For all its recycled nature, there were enough goodies in Xi's speech that Washington might be tempted to declare victory and go home -- the best possible outcome from the current trade tensions.

China's transformation to a middle-income economy is making it more open to free markets by a natural process of evolution, just as the rise of the consumer society in the middle of the 20th century helped the U.S. shake off a century of protectionism and become a cornerstone of the multilateral economic system.

If Xi has offered enough for both sides to save face, who cares whether the meal is fresh or not?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Anjani Trivedi is a Bloomberg Gadfly columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

To contact the authors of this story: David Fickling in Sydney at dfickling@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.

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