China-USA: Prospects for Ending the Trade War none

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Journal Title: International Affairs

Issue Edition: Vol. 66, No. 3

Author: A. Petrov


China-USA: Prospects for Ending the Trade War

Author: Andrey Petrov, Second Secretary, Embassy of the Russian Federation in the Federal Republic of Germany; Petrov_china@mail.ru

Source: International Affairs, Vol. 66, No. 3, pp. 71-80

DOI: http://dx.doi.org/10.21557/IAF.60072918

Key words: China, USA, trade war, “Wolfowitz Doctrine.”

The U.S.-initiated disruption of the status quo in trade with China has laid the foundation for fundamental changes in relations between Washington and Beijing, and established a confrontational track for their development in the coming years and possibly even decades. A significant increase in trade barriers between the two largest economies in the world has left its mark on global trade and economic ties. At the height of the tariff war in late 2019, the U.S. levied duties on $375 billion worth of Chinese imports, and China imposed duties on $110 billion in supplies from the U.S. According to the IMF, this led to a 0.8% decline in global GDP by 2020.1 In January 2020, Beijing and Washington signed the “first phase” of a trade agreement that was supposed to iron out the disagreements between the countries. But the truce has so far raised more questions than answers.

The outbreak of the trade war is associated with the election in 2016 of U.S. President Donald Trump, who in large part built his campaign on criticizing China and promising to put an end to its “unfair” trade practices that “rob America” and deprive its citizens of jobs. The fixation on anti-Chinese rhetoric was made in part on the basis of electoral considerations. Public opinion in the U.S. was becoming less and less favorable to Beijing following the strengthening of China’s economic and military might.

According to Pew Research, in 2006, 52% of Americans held a positive view of China and only 29% a negative view. In 2019, the situation changed dramatically: 60% of Americans viewed China negatively and only 26% positively. Since 2013, the percentage of respondents with a negative attitude has held steadily at around 50% and higher. China joined Russia and North Korea as the top three countries that Americans perceive as the main threat. The trade war only worsened China’s image: After the beginning of the open phase, China’s negative rating, which was 47% when Trump was elected, jumped to 60%.2

Anti-Chinese sentiment was not unique to the general public. The topic of the clash with China became firmly rooted in American political discourse. Back in 2001, John Mearsheimer wrote in his book “The Tragedy of Great Power Politics” that in the future, China would pose a more tangible threat to the U.S. than the USSR, Germany or Japan.3 In 2017, Graham Allison’s book “Destined for War: Can America and China Escape Thucydides's Trap?” was published and quickly gained popularity.4 The ancient Greek historian argued that the main cause of the Peloponnesian War was the rapid rise of Athens and the fear of Sparta, the leading Greek state at that time, of the rise of the other Greek states. Allison extrapolated that situation to modern relations between the U.S. and China. These theoretical studies complemented the notorious Wolfowitz Doctrine, formulated by U.S. Deputy Secretary of Defense Paul Wolfowitz after the collapse of the USSR – namely, that the U.S. must prevent the emergence of a new superpower that could compete with the Americans.

Nevertheless, a trade war was seemingly not a foregone conclusion. Neither the George W. Bush administration nor the Barack Obama administration initiated a heated economic conflict. Their restraint was due in part to concerns about what abrupt steps might do to the American economy. 

The Rand Corporation, in its 2011 study Conflict with China, used the new term “guaranteed mutual economic destruction,” noting that the interdependence of the U.S. and Chinese economies is at an unprecedented level.5 Similar conclusions were drawn by the historian Niall Ferguson, who coined the term “Chimerica” to refer to the merger of China and America into a single economic entity.6 Discussing Trump’s further actions in early 2017, Nicholas Hope, former director of the Stanford Center for International Development, commented that “I have to believe his suggestions about imposing punitive tariffs on Chinese goods … have to be bluster.”7

After Trump’s election, relations between the two states initially began to seem to be returning to normal. As the online publication The Diplomat noted, most candidates resort to the tactic of China-bashing during the election campaign in order to garner media attention and votes. But after the elected president moves into the White House, he gradually departs from the campaign policy and continues to guide U.S.-Chinese relations along the right path.”8 It was expected that Trump, too, would return to the “right path.”

In November 2017, Trump traveled to Beijing on a state visit. “I don’t blame China,” the American leader said: “Who can blame a country for taking advantage of another country for the benefit of its citizens?” Those words were perceived as a signal that campaign promises to “punish” China would be tactfully forgotten.

After the visit, commercial contracts worth $253 billion were signed (most of this amount was for projects at the planning stage). Chinese Minister of Commerce Zhong Shan called the agreements “a real miracle.” The American media, critical of the president, maliciously accused the supposedly diplomatically inexperienced Trump of easily succumbing to the charm of an evening tour of the Forbidden City that had been organized for the presidential couple and a salute in their honor. But the main factor, in their opinion, was the unexpected business success of Ivanka Trump, the president’s daughter: Several of her trademark applications were approved by the Chinese authorities, providing her the opportunity to start selling bags and jewelry in China under her own brand.9

Why did Trump veer off the “right path”? The American president, as usual, used Twitter to relay his trade warfare credo: “Trade wars are good, and easy to win. When we are down $100 billion with a certain country and they get cute, don’t trade anymore – we win big.” Needless to say, the only country with a similar trade surplus with the U.S. was China ($375 billion).

In March 2018, the U.S. imposed additional tariffs on foreign shipments of steel and aluminum under Section 232 of the Trade Expansion Act of 1962, which allows restricting imports for national security reasons. These measures did not target China exclusively, but it turned out to be one of the most affected countries. In turn, China raised duties on the import of 128 goods worth about $3 billion.

Actions targeting Beijing soon followed. On April 4, 2018, the Americans published a list of 1,300 Chinese imports worth $50 billion on which they planned to introduce an additional 25% tariff in connection with China’s “violation” of intellectual property rights. Conclusions about the Chinese “violations” were made in a report of the U.S. Trade Mission following an investigation based on Article 301 of the Trade Act of 1974, which gives the president broad powers to combat discriminatory trade practices in other countries.

On the same day, the Chinese side responded by announcing that it would impose a 25% duty on imports of 106 goods worth about $50 billion from the U.S. On April 5, Washington announced that, in connection with Beijing’s “unfair reaction,” Trump ordered to explore raising tariffs on another $100 billion in Chinese imports.

Along with the sharp escalation of the conflict, a search for a political solution began. As subsequent events showed, the path to reconciliation proved extremely difficult and convoluted. Prior to the signing of the “first phase” of the trade agreement in 2020, China and the U.S. came close to concluding a “peace” at least three times, but every time, instead of a long-awaited reconciliation, an even more fierce flare-up ensued.

The parties first tried to reach a compromise in May 2018, during a visit to the U.S. by Vice Premier of the State Council of the PRC Liu He. Following the talks, a joint statement was released that largely resembled a summary of the “first phase” that would be concluded almost two years later. For example, China pledged to “significantly increase purchases of United States goods and services. This will help support growth and employment in the United States.” Beijing declared its willingness to increase purchases of U.S. agricultural and energy products. The statement included an agreement to “substantially reduce the United States trade deficit in goods with China.” In addition, China promised to amend its intellectual property laws.

To Beijing’s surprise, the Americans were not satisfied with these seemingly beneficial arrangements. A month later, Trump approved plans to introduce tariffs on $50 billion in imports from China. The Chinese press accused Washington of being irreconcilable and irresponsible. People’s Daily wrote that “America is brandishing the cudgel of a trade war.”10 Xinhua News Agency, sarcastically alluding to Trump’s “Mexican border wall,” said that “wise people build bridges, fools build walls.”11

The next wave of optimistic expectations was generated by Xi Jinping’s and Trump’s meeting in Buenos Aires, on the sidelines of the G-20 summit. Following the meeting, the leaders of the two countries agreed to step up dialogue and postpone a planned increase in tariffs. The summit consultations were followed by a series of productive meetings of a team of negotiators who began real shuttle diplomacy, moving weekly between Beijing and Washington. The media were teeming with news of fast progress in negotiations and the imminent signing of a “peace agreement.”

But those plans were not destined to materialize. The Americans’ sudden decision to break off contacts with Beijing during the final stage of consultations was an unpleasant surprise for the international press, which was already accustomed to good news, and, apparently, also for the Chinese side. Moreover, the Americans blamed Beijing for the collapse of the negotiations. They said that the Chinese at the last moment “rewrote” most of the already approved text of the agreement, backing away from their obligations. According to Liu He, the parties were merely continuing to discuss future agreements, since making changes and proposals is part of the standard negotiating process. As a result of the collapse of negotiations, Trump hastily made good on his threats and raised tariffs on $200 billion in Chinese imports from 10% to 25%.

The detention in December 2018 in Canada of Meng Wanzhou, a top manager at Huawei and daughter of the founder of the corporation, at the request of the American authorities cast a dark shadow on Chinese-American relations. She was charged with violating sanctions against Iran, and later with industrial espionage. Huawei has become a kind of symbol of China’s technological modernization, which the Chinese are rightly proud of. In 2019, the company overtook Apple in the number of smartphones sold, coming in second after Samsung.12 In addition, the company has taken the lead in developing next-generation 5G communications. Many countries in Europe and Asia were aiming to contract with Huawei to install 5G networks. It is not surprising that in China, Meng Wanzhou’s detention was perceived as an overt attempt to eliminate a competitor, restrain the country’s technological development and strike a blow to its national pride.

The next attempt to ease disagreements was a meeting between Xi Jinping and Trump in June 2019, at the G-20 summit in Osaka. Skeptical Chinese and foreign media outlets reacted more reservedly to the agreements on resuming negotiations, the “freezing” of new tariffs and statements by the American leader about his willingness to ease sanctions against Huawei. The skepticism proved justified: in August, Trump announced the continuation of the tariff “race” and tariffs on another $300 billion in imports from China. The U.S. Treasury included China on the list of currency manipulators. China increased the tariff rate on $75 billion in supplies from the U.S.

Thus, the “first phase” signed in January 2020 was the parties’ fourth “approach” to the insurmountable trade conflict. The signing of the “first phase” of the trade agreement was a landmark achievement in the negotiations; it was the first time that the obligations of the parties were spelled out in such detail. At the same time, the trade war is still not over. As S&P noted, the first phase is more the end of the beginning than the beginning of the end of the Chinese-American disagreements.13 China committed itself to increasing its purchases of U.S. products by $200 billion over 2017 levels in the next two years, and to increase them until 2025. By the end of 2021, Beijing promised to buy $77.7 billion in manufactured goods (machine tools, electronics, cars, planes), $32 billion in agricultural goods (grain, meat, seafood), $52.4 billion in energy (LNG, crude oil, coal) and $37.9 billion in services (intellectual property rights, tourism, financial services, cloud programming). 

The “first phase” significantly expands American companies’ access to China’s financial sector. In 2020, American financial institutions will get the right to provide services for clearing bank cards and electronic payments, and to provide services for life insurance, health insurance and pension insurance, as well as to set credit ratings for Chinese bonds and receive Chinese securities licenses. Beijing also signed a clear commitment to meet specific deadlines for considering and approving relevant requests from U.S. firms.

The parties agreed to refrain from artificially lowering the exchange rate. In addition, China promised to take enhanced measures to combat piracy, protect patents and prevent the forced transfer of technology.

Trump’s widely touted “deal” has raised doubts among analysts. Some described it as a triumph for America and the president personally, who, thanks to his business acumen, was able to achieve something that his indecisive predecessors could not. Others said that first we need to see how the "first phase" will be implemented. In their view, on issues such as intellectual property, China made nothing more than vague promises in the agreement.

The main question remains whether China can meet its commitments to increase imports from the US by $200 billion in two years, and if so, how. Even taking into account the size and might of the Chinese economy, which ranks second in nominal GDP and first in terms of purchasing power in the world, this is an unprecedented and extremely ambitious task. Of course, China has large state corporations capable of making purchases at the request of the government, but even they may not be able to assimilate such astronomical amounts.

Statements by the Chinese side emphasizing that all purchases will be based on market principles of supply and demand and that the state does not intend to force anyone to import from the U.S. raise even more doubts.

Given the parties’ shaken confidence in each other, after three unsuccessful attempts at reconciliation, the “first phase” leaves a wide scope for biased interpretation. Will the U.S. be able to confront Beijing if imports increase not by $200 billion but by $180 billion? Will Beijing deem the agreement null and void if, in accordance with market principles, no one in China wants to buy the goods the U.S. wants to sell? But the repeal of the tariffs (the de facto rather than the official end of the trade war) is hardly possible unless the “first phase” is successfully implemented.

Before the ink had dried on the agreement, the coronavirus epidemic that erupted just before the Spring Festival began to have a negative effect on it. China’s economy will inevitably suffer losses from the widespread quarantine and reduced consumption during the fight against the disease. It is still premature to judge their scale; however, alarming signs of a slowdown have compelled Chinese media to talk about the possibility of invoking the paragraph of the trade agreement regarding the suspension of obligations of the parties in connection with a natural disaster or unforeseen circumstances. At the same time, during a telephone conversation between Xi Jinping and Donald Trump in February, the Chinese president promised to support purchasing American products at the specified level “despite delays.”

China is taking steps to make it easier for Chinese importers to access American goods. In February 2020, the Chinese side announced that, starting March 2, Chinese companies can submit applications to import 696 types of products from the U.S., bypassing previously introduced tariffs. The list features key U.S. exports to China, including agricultural products, energy, machinery, and equipment. 

Despite the magnitude of the trade confrontation between the world’s two largest economies, the China-U.S. trade war heralded something more than an ordinary clash of business interests. The customary system of international trade relations formed in recent decades is in effect being dismantled. The Trump administration is acting similarly toward other countries, including its European “allies,” as well as Canada and Mexico. The erosion of the WTO that Washington inspired by blocking the appointment of judges to the appeals body of this organization also fits into the same chain, effectively stifling the organization. Not so long ago, the U.S. was proclaiming itself to be the main advocate of free trade and liberalism, but now, when major competitors have appeared on the horizon, it has unflinchingly abandoned its outdated views and resorted to overt protectionism. Obviously, the U.S. sees the future architecture of international trade not as interaction within a single organization on the basis of common rules, but as bilateral “deals” concluded under duress and ensuring a “fair” level of purchases of American products.

Washington, of course, is also ideologically supporting pressure on China in order to at least outwardly justify its actions. In the Western media, China has become touted as the center of global dumping and “illegal” government subsidies. The Made in China 2025 program was demonized, portrayed as all but a plan to secure world technological dominance. China’s One Belt, One Way initiative has come to be painted in the Western media as nothing more than a “debt trap” aimed at “enslaving” developing countries to China by imposing loans with excessive payment terms. Huawei and China’s plans to roll out 5G networks abroad were attacked particularly viciously. It was said that Chinese equipment would transmit all processed information to China’s intelligence services.

China did not leave these attacks unanswered. In particular, it published White Books on trade friction with the U.S. that state that in 2000-2015, the U.S. government provided $68 billion in subsidies to American companies, most of which were intended for large corporations. Hundreds of billions of dollars in subsidies were provided in the form of tax breaks and other preferences. The main beneficiaries were aircraft manufacturers, agriculture and microelectronics producers. Although the U.S. criticizes China for subsidizing industrial development under the Made in China 2025 plan, Washington is actively coming up with similar industrial development strategies. Moreover, when putting together the Made in China 2025 plan, the Chinese took an example from similar American documents: the National Strategic Plan for Advanced Manufacturing and A Strategy for American Innovation.14

As for the accusations against Huawei, in light of Edward Snowden’s revelations about the Prism program, under which companies like Microsoft, Google and Facebook provide U.S. intelligence agencies access to their central servers, as well as news that the “independent” Swiss supplier of cryptographic equipment Crypto has been owned by the CIA for decades, they look far-fetched, to say the least.

It seems that the Chinese, when signing the “first phase” of the trade agreement, were proceeding from the need to quickly neutralize the conflict and normalize relations. The main goal for Beijing was not only to end the tariff war, but also prevent it from turning into a political confrontation and affecting finance and technology. As the sanctions against Huawei and ZTE showed, in technological terms, China is still dependent on the U.S. In addition, the Americans have political levers it can use to put pressure on sensitive spots like Hong Kong, Taiwan and Xinjiang. In this regard, Beijing is emphasizing that China does not intend to challenge the U.S. and does not plan to replace its role on the world stage.

Most political analysts agree that China has a real chance of becoming a superpower in the 21st century. However, the Americans managed to strike at a vulnerable moment, when China had not yet taken off but was still rolling down the runway.

Will the trade war continue after Trump’s first term expires? Trump was the first American politician to risk open conflict with China for the sake of its strategic containment. The idea had long been discussed in American corridors of power but was considered too dangerous due to unforeseen consequences from its implementation. Considering that Trump came to the White House as an unorthodox politician, an “outsider,” if the Chinese containment policy fails or comes at too high a price for the American economy, it will be easy for the next generation of American leaders to blame the indiscreet Trump. Then, under new, possibly democratic administrations, Chinese-U.S. trade relations would return to a peaceful track.

If the pressure on China succeeds and it is willing to make major concessions, all subsequent administrations will continue the containment policy, making it a modus operandi in American foreign policy. Only the intensity of the measures to actively deter the geopolitical opponent will fluctuate.

NOTES

1 https://www.cnbc.com/2019/10/17/imf-trade-war-hit-to-global-economy-could-be-as-big-as-switzerland.html

2 https://www.pewresearch.org/global/2019/08/13/u-s-views-of-china-turn-sharply-negative-amid-trade-tensions

3 Mearsheimer J. The Tragedy of Great Powers Politics. Norton & Company, 2001.

4 Allison G. Destined for War: Can America and China Escape Thucydides's Trap? Houghton Mifflin Harcourt, 2017.

5 https://www.rand.org/content/dam/rand/pubs/occasional_papers/2011/RAND_OP344.pdf

6 Ferguson, Niall. The Ascent of Money: A Financial History of the World. The Penguin Press HC, 2008.

7 https://news.stanford.edu/2017/01/04/stanford-experts-debate-future-u-s-china-relationship

8 https://thediplomat.com/2015/05/u-s-china-mutually-assured-economic-destruction/

9 https://www.newyorker.com/maga-zine/

2018/01/08/making-china-great-again

10 http://opinion.people.com.cn/n1/2018/0405/c1003-29909228.html

11 http://www.xinhuanet.com/politics/2018-06/16/c_1122993729.htm

12 https://www.thevergcom/2020/1/30/21114885/huawei-overtakes-apple-2019-analysts-strategy-analytics-counterpoint-research-canalys

13 https://www.spglobal.com/ratings/en/research/articles/200116-global-trade-at-a-crossroads-u-s-china-phase-one-deal-is-mildly-positive-as-bulk-of-tariffs-remain-11316670

 14 http://www.xinhuanet.com/world/2019-06/02/c_1124573312.htm