In this week’s episode of China Insider, Miles Yu examines the latest round of United States tariffs on imported goods from China, Mexico, and Canada, and why China remains the focus of US trade policy. Next, Miles responds to comments from China’s Ministry of Foreign Affairs regarding Beijing’s readiness for any conflict, trade or otherwise. Lastly, Miles peels back the curtain on the Two Sessions of the National People’s Congress held last week in Beijing, and the impact of China’s current economic challenges on the Chinese Communist Party’s domestic legitimacy.
China Insider is a weekly podcast project from , hosted by China Center Director and Senior Fellow, , who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Episode Transcript
This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.
Miles Yu:
Welcome to China Insider, a podcast from the »ªÌå»á's China Center. I am Miles Yu, Senior Fellow and Director of the China Center. Join me each week for our analysis of the major events concerning China, China threat and their implications to the US and beyond.
Colin Tessier-Kay:
It is Tuesday, March 11th and we have three topics this week. First, we revisit the ongoing trade and tariff developments this time involving China, Mexico, and Canada, and what the calculus is behind these new efforts. Second, Miles examines a growing trend in CCP rhetoric in response to increased US tariffs and the ideology behind Beijing’s strategy. Lastly, Miles unpacks the latest news coming from China's annual legislative gathering, the Two Sessions and the significance of the conference on potential policy outcomes. Miles, how are you doing today?
Miles Yu:
Very good, Colin. Glad to be with you again.
Colin Tessier-Kay:
Likewise. So we start things off this week with the latest from the ongoing universal and reciprocal tariff exchange, with particular attention this week to China, Mexico, and Canada. At least as far as Mexico and Canada were concerned, it was unclear whether the latest tariffs would actually take effect. But just to catch everyone up to where we are, the latest round of US tariffs, levies 25% on most Canadian imports, including a 10% rate for energy or energy resources, 25% for all imports from Mexico and for China, President Trump issued an amendment to the standing executive order raising the 10% tariff on Chinese imports now to 20%. Miles, what can we make of the latest tariff developments here and what is the impetus behind them?
Miles Yu:
Well, Colin, that's a very good question and I think a lot of things we have observed the Trump administration is in this very young administration. It touches on many parts of the world, Europe, Middle East, Greenland, Panama, now Canada and Mexico. Sounds like it's all over the place, but there is one central theme, tie all this together. It's about China. So let me just say, we have said enough about War in Ukraine and the Middle East chaos, Mexico and other parts of the world, and why is that related to China in the previous episode. But on the tariffs per se, that 25% tariffs on Canada and Mexico, the US argue. But I think it's pretty valid argument.
Number one, it is to prevent China's tariff evasion through Mexico and Canada. US is concerned that the Chinese manufacturer have routed goods through Canada and Mexico to avoid American tariffs. This practice is properly known as transshipment. That allows Chinese firms to export products to North America, modify them slightly, and then ship them to the United States under more favorable trade terms. So by imposing tariffs on Canadian and Mexican imports, the US aims to close this loophole and prevent Chinese products from entering the US indirectly. Second part of the argument I think also is more nuanced. That is, the US tried to reinforce the USMCA agreement. During the Trump's first term US, Mexico, and Canada signed agreement known as USMCA. It's a trade agreement to replace the old obsolete NAFTA agreement. That USMCA includes provisions meant to discourage non-North American content in goods traded within the block. Canada and Mexico, however, allow way too many China sourced components in their exports in the United States. It undermines USMCA's goal of regionalizing supply chains, and this US government, and 25% tariffs on Canada and Mexico could be the warning to Mexico and Canada to tighten trade controls on Chinese imports. One of the immediate action taken by the Mexican government after President Trump announced that he intended to levy heavy tariffs on Mexican imports from the United States, was to close down some of the illegal, very large Chinese manufacturing bases inside Mexico. So that's basically indirectly validated President Trump's argument.
And I think also this 25% tariff on Canada and Mexico also serves to enhance domestic manufacturing in the United States. The US wants to ensure that American industries, especially in steel, aluminum, and the critical technologies aren’t undercut by cheaper imports from North American partners that rely on Chinese imports. Tariffs in my view, serve as an incentive for companies to source materials from within the US rather than using Canada and Mexico as a middleman. So all in all, I think you already see this is China related. Of course, United States has a direct economic sanction on China by imposing tariffs on Chinese imports and this is all really trying to close China's supply chain workarounds. The US has heavily sanctioned Chinese goods in key industries, particularly you can see EV batteries, semiconductors, steel, and solar panels. So, and of course, as I mentioned before, Chinese firms normally responded by setting up factories and partnerships in Mexico and Canada to sidestep those restrictions. And I see in particular in Mexico, the Chinese set up automobile manufacturing plants, electronics plants over there, and then raising Americans concern about the effectiveness of its China trade restrictions. And China basically has an enormous inference in the Western hemisphere already right now. So all in all, I think this has served as a warning and also as a specific step to close the loopholes in the trade relationship between US and China.
Colin Tessier-Kay:
Yeah, speaking of those loopholes and those transshipment strategies that you mentioned, the White House updated their International Emergency Economic Powers Act fact sheet last week following the tariff announcements to increase priority focus on stemming the unchecked fentanyl related drug trafficking and also to enhance the US national security, particularly at the border. With that priority and the other priorities you mentioned here Miles, I want to ask you, do you think that these tariffs will be successful in achieving these outcomes?
Miles Yu:
I think it will be successful, otherwise the failure will be catastrophic to the United States. It must succeed. I mean, tariffs are not about punishing Canada and Mexico directly. They're about blocking China from exploiting international global trade loopholes. And so the move, these tariffs on Canada, Mexico fits into the US broader strategy of de-risking American economy from Chinese interference while reinforcing the North American manufacturing base. So it all serves as a warning to Canada and Mexico to tighten their own trade policies on Chinese imports.
Colin Tessier-Kay:
And I think that's actually a great segue into our next topic today, which could really be an extension of our first in many regards. In response to the latest US tariffs last week, China's embassy last Tuesday issued a statement saying, “If war is what the US wants, be it a tariff war, a trade war or any other type of war, we are ready to fight till the end�. For those familiar with China's wolf warrior tactics, this comment may seem rather consistent, but there is concern that China seems to be the one escalating an otherwise purely economic conflict to a broader scope that could include potential for kinetic conflict. Miles, what can we make of this rhetorical strategy from Beijing and should we be concerned about the perceived escalation here?
Miles Yu:
So China's response of course is predictable. Number one, they counter America’s tariffs with 10 to 20% tariffs on mostly American agriculture products, because they look at the election, the most vulnerable, most likely place that's going to suffer most from Chinese tariffs are the agriculture states, the Midwest, the grain growing area. So that's why China includes 50% tariff on US agricultural products including chicken, wheat, corn, cotton, and 10% tariffs on sorghum, soybeans, pork, beef, and fish. So having said that, China's overall reaction is very bellicose and warlike. You quoted the Chinese government spokesperson saying this is the war, the US and China, if US wants to fight, we're going to fight it to the end. And this has been going on for over seven decades. The Chinese government treats everything as a war and literally they weaponize every aspect of US-China relationship. Because this is all about the much larger epic struggle of life or death between the two systems, US system and Chinese system.
And I think the militancy, the bellicosity of Chinese government rhetoric is also another way to, buttress its political legitimacy. Because the Chinese government, being communist, has to justify its legitimacy to rule through constant rule of conquest and aggression. I mean, that's why China has fought more wars than any other country in modern world. I mean I listed in my recent post on my Twitter account, at least the 15 major wars going on and against their neighbors, the Vietnam, India, the Philippines, and Taiwan of course. So you have all this constant, constant escalation of tension so that China can keep telling its people, you see, I'm actually fighting for you and I'm going hype up this nationalism. And this is one way to sort of support its legitimate rule. Well, in reality, political legitimacy only comes from the consent of the people. So it's not through the Chinese communist way. That basically also is the reason why George Kennan in 1947 explained the ideological source of the Soviet expansion. It is not about securing national security and establishing the buffer zone. It's about the regime in the Soviet Union, as it is doing in today's China, must have constant excitement, and thrill and myth illusion of invincibility and the conquest.
Colin Tessier-Kay:
And I actually want to build on that for a bit here if we can. You mentioned in the latest article, like you mentioned just now, the CCP’s need to demonstrate strength through its foreign policy to maintain that grasp on its domestic legitimacy. I was wondering if you could expand a bit more on this analysis and maybe shed light on why the CCP might feel the need to enhance its domestic legitimacy at this time, and if there are any more concerns for the CCP to maintain that kind of domestic control.
Miles Yu:
Chairman Mao Zedong had a very famous saying, that is, we are going to constantly fight a foreign war in order to enhance domestic unity. In other words, to create tension abroad, or at least in China's neighborhood, is a very important survival instinct of the Chinese Communist Party. They want to create a national crisis, they want to create this xenophobic view that everybody outside China is trying to suppress the rise of China as a nation. And that's why they try to sort of hype up this so-called the myth of a 100 years of humiliation. It's all blamed on foreigners. Everything China has failed in the past hundred years is caused by foreigners. While the real hundred year humiliation of China is the Chinese Communist Party itself, that has killed more than 75 million Chinese citizens in peace time since the establishment in 1949. So their way of doing this is to try to sort of scapegoat outside world for the communist party’s crimes and incredible incompetence.
Colin Tessier-Kay:
And I think that's a really great insight that kind of transitions us well into our final topic today and kind of been the focus of headlines at least for the last week. And we're going to visit the latest now from Beijing's Two Sessions. Briefly for our listeners, the Two Sessions stands for China's National People's Congress, the NPC, and the Chinese People's Political Consultative Conference, the CPPCC. The former principally being China's legislature and the latter China's top advisory body. The Congress started last Tuesday, concluding today, and marks the 13th Two Sessions that Xi Jinping has presided over. Miles, maybe you could take us through what has been going on over the past week here and if there's really anything significant to report from this conference.
Miles Yu:
I think there is a popular saying inside China that both NPC and the CPPCC are basically laughing-stocks among the Chinese folks. They said those two organizations were very good at using their hands. That is for NPC members, numbering about 3000, they use their hand for two weeks to raise their hand to approve whatever the CCP has already decided for them. And then for CPPCC members, they use their hands to applaud vigorously whatever the communist party has decided for them. And so these are two mostly useless bodies and they give people the facade of so-called the Chinese Communist Party whole process democracy. And they normally come here to solve two issues. One is to approve personnel appointments decided by the Chinese Communist Party. Number two, to announce major economic policies.
So on personnel issue this year there's very little going on because Xi Jinping has already purged everybody he didn't like. There's no major personnel announcement. On economic front however, because Chinese economy is doing so badly, so the Premier Li Qiang gave a very long and boring report on the economic policy and economic accomplishment. Of course, the Chinese Communist Party has always accomplished enormous stuff each year. In this report, Premier Li Qiang announced that the Chinese GDP growth for this coming year is going to be 5%. It's always 5%, 8%. So no matter how bad the economy going, Chinese GDP growth target is never going down and it will reach that by the end of the year anyway. So on fiscal deficit, China local government is broke. So the government plans to raise the fiscal deficit rate to about 4% GDP up from 3% the previous year. That's a lot of money. Now the issue of course in China is domestic consumption. That's why China is going through deflection period because people do not want to spend anymore because of lack of confidence in the economy.
So the premier announced this to have a tax reform, he is going to reduce tax for low income workers to enhance their spending power. And low income workers don't have money in the first place, so you cannot really tax on something they don't have. Another thing that I think he is going to have a major announcement which is billed as something monumental, but in reality it's kind of silly. Because you have a growing number of aging people in China and medical insurance is a major concern. So Premier Li Qiang announced that this year the government is going to give everybody a medical insurance benefit of 30 yuan. Now to put that into perspective, that's under $4 each year. On pension he's going to give everybody a pension rise raised by about 20 yuan. That's less than $3. And of course he's going to have to face this issue about the low birth rate in China. Nobody wants to give birth to babies. People are so discouraged, not spirited to have a family. So the government announced he's going to encourage birth and provision of childcare subsidies and he's going to urge people, women, to freeze their eggs so that future time when they change their mind, they can come back to have the babies again. So this is all very minor and minuscule and of course everything's passed by unanimous votes.
Colin Tessier-Kay:
Yeah, and I think as you mentioned, that's a very comprehensive overview of what the Two Sessions here historically deals with, almost exclusively with economic issues like you mentioned. Typically very little focus is given if any, to foreign policy and security concerns, and this year again, it seems the bulk of the discussions has been on that issue of economic growth reform. And just to add some context to the numbers that you were providing there, Chinese consumption right now is roughly at 39% I believe of its GDP, relative to 50 to 60% of most developed nations. And you mentioned the declining consumer confidence that's kind of been snowballing over the past few years among other critical economic issues. So maybe I'll just kind of ask here with regard to this year's Two Sessions conference, do you think that there's going to be any substantial policy initiatives or outcomes for economic reform and is there going to be any kind of success in those cases?
Miles Yu:
Okay, I think we must use the word reform very cautiously in relation to China because the Chinese political and economic system basically is unreformable. Everything that could be reformed already tried and failed because the Chinese system is a one party monopoly with the unitary control by the central party and headed by the party Secretary General who is the chairman of everything. So all major economic decisions were made by that politburo not by the market. So Chinese economy is fundamentally anti-market. So if we talk about reform from Chinese party perspective, its only about how to make that anti-market economic system more effective for the benefits of Chinese Communist Party at the expense of the international global trading system. Sometimes the more Chinese companies party reform its system, the worse off the global economy.
Colin Tessier-Kay:
And I think that's a really great way to wrap this up today. And we've unfortunately reached our time for this week. But Miles as always, thank you for another enlightening conversation lending us your analysis and insight into these critical issues and look forward to checking back in with you next time.
Miles Yu:
You bet. Thank you. See you next week.