Reaction to tariffs; TikTok deal chatter; Fitch downgrades PRC; Alleged Filipino spies arrested

There were only rhetorical reactions to the new tariffs on Thursday. It is certainly possible that the three-day Tomb Sweeping Holiday (清明节) that runs from Friday through Sunday means there may be no substantive response at least until Monday.

Summary of today’s top items:

1. Reaction to tariffs - The Ministry of Commerce said:

China firmly opposes this and will resolutely take countermeasures to protect its own interests…The so-called "reciprocal tariffs" drawn by the US on the basis of subjective, unilateral assessment do not conform to international trade rules, seriously damage the legitimate rights and interests of relevant parties, and are a typical act of unilateral bullying. Many trading partners have already expressed strong dissatisfaction and clear opposition to this. History has proven that raising tariffs cannot solve the US's own problems, harms US interests, and endangers global economic development and supply chain stability. There are no winners in trade wars, and protectionism leads nowhere. China urges the US to immediately cancel unilateral tariff measures and properly resolve differences with trading partners through equal dialogue.

The US also officially ended the de minimis exemption that allowed packages with a value under $800 to enter the US duty-free. Collection of duties on those packages will start on May 2nd. The US had announced this before but had to pull back because it did not have the systems to manage the collection. Now it does.

2. Some propaganda reactions - The Ministry of Foreign Affairs released the short video “What kind of world do you want to live in” that contrasts the turmoil, injustice, greed and chaos of the US-led order with China’s vision for the world.

3. ISEAS – Yusof Ishak Institute survey has US back as the preferred superpower - 53.3% of respondents to the annual survey, conducted from Jan 3 to Feb 15, chose the US as the prevailing choice is the region had to align with either the US or China. Last year 50.5% picked China, but this year only 47.7% did, perhaps because more than half of the respondents ranked aggressive behavior in the South China Sea as the top geopolitical concern. Had the survey occurred after the latest round of US tariffs on every country in the region perhaps views of the US would be much less positive.

The Trump Administration had an opportunity to craft tariffs on many of these countries to primarily apply to Chinese origin goods/goods from Chinese owned factories, but apparently that was too nuanced for Trump and his team.

4. More TikTok deal chatter - The Financial Times reports that the White House is close to approving the sale of TikTok’s US unit to investors. An announcement may come Friday; the deadline for this first deal extension is Saturday. The FT writes that:

one point of contention remained over who would control TikTok’s highly sought-after algorithm, several people said. One option under discussion is that ByteDance would continue to develop and operate the algorithm, which has been a central demand of the Chinese government, while the new US group would access it through a licensing agreement and have oversight over any changes, one person said.

Some analysts have argued that the algorithm needs to be fully operated by the US entity to meet the requirements of the legislation.

It is not just “analysts”. The language in the law does not allow for ByteDance to "continue to develop and operate the algorithm...while the new US group would access it through a licensing agreement and have oversight over any changes":

(6)Qualified divestiture

The term qualified divestiture means a divestiture or similar transaction that—

(A)the President determines, through an interagency process, would result in the relevant foreign adversary controlled application no longer being controlled by a foreign adversary; and

(B)the President determines, through an interagency process, precludes the establishment or maintenance of any operational relationship between the United States operations of the relevant foreign adversary controlled application and any formerly affiliated entities that are controlled by a foreign adversary, including any cooperation with respect to the operation of a content recommendation algorithm or an agreement with respect to data sharing.

In his January 17th opinion even Supreme Court Justice Gorsuch seems to call B.S. on the idea that licensing of the algorithm from ByteDance while ByteDance continues to develop and operate the algorithm would be acceptable:

The record also indicates that the “size” and “complexity” of TikTok’s “underlying software” may make it impossible for law enforcement to detect violations. Id., at 688–689; see also id., at 662. Even setting all these challenges aside, any new compliance regime could raise separate constitutional concerns—for instance, by requiring the government to surveil Americans’ data to ensure that it isn’t illicitly flowing overseas. Id., at 687 (suggesting that effective enforcement of a data-export ban might involve ​“direct U. S. government monitoring” of the “flow of U. S. user data”).

I hear the TikTok deal may not happen if the investors can’t get language about indemnification inserted into the budget reconciliation bill or another piece of legislation, as they know what is being proposed violates the law and opens them up to massive potential future liability.

A bipartisan letter from a dozen or so members on Congress saying that can’t happen would probably scare some of those investors off, as indemnification in an Executive Order will not be enough. It is not at all clear however that even the most fervent GOP supporters of the original law have enough courage of their convictions to defy Trump.

Fox Business reporter Charles Gasparino is also hearing about the indemnification concerns over the possible deal:

It is also not obvious why Xi would approve any deal for TikTok given the recent tariffs, and even if as Trump suggested he could reduce them a bit to get the TikTok deal, would he cut the rate meaningfully enough for Xi Jinping to care? Going from somewhere around 70% to 50% or so is still probably far too high for Xi.

It is ironic that the apparent deal the Trump team will bless does nothing to address the issue of reciprocity with China, something his administration makes a big deal about in other areas, as no US Internet company would ever be allowed de facto control through an algorithm of a dominant social media app in the PRC.

It looks more like in this deal “donor equities” trump national security and principles of fairness and reciprocity.

5. Fitch cuts PRC’s sovereign rating from A+ to A - In explaining the downgrade Fitch said it

reflects our expectations of a continued weakening of China's public finances and a rapidly rising public debt trajectory during the country's economic transition. In our view, sustained fiscal stimulus will be deployed to support growth, amid subdued domestic demand, rising tariffs and deflationary pressures. This support, along with a structural erosion in the revenue base, will likely keep fiscal deficits high. We expect the government debt/GDP to continue its sharp upward trend over the next few years, driven by these high deficits, ongoing crystallisation of contingent liabilities and subdued nominal GDP growth

The Ministry of Finance said “the downgrade is biased and does not fully and objectively reflect the actual situation in China”.

6. Three Filipinos officially arrested for spying - Since the beginning of the year the Philippines has arrested at least seven PRC nationals on suspicion of espionage. The PRC then found three Filipinos in China it says were spies.