American-Chinese Trade Wars: Economics or Geopolitics?

Journal Title: Far Eastern Affairs

Issue Edition: Vol. 47, No. 2

Author: Vladimir Petrovsky


American-Chinese Trade Wars: Economics or Geopolitics?
Vladimir PETROVSKY

 

Source: Far Eastern Affairs, Vol. 47, No.2, 2019, pp. 62-71

DOI: http://dx.doi.org/10.21557/FEA.54073978

 

Abstract. The dispute between the United States and the People’s Republic of China over trade and economic issues has a long history. It has now become clear, however, that Donald Trump’s protectionist policy is in direct contrast to China’s consistent position in defense of free trade, based on the principles of the World Trade Organization (WTO). Washington sees in Beijing its main strategic competitor and has adopted a policy of long-term opposition to China in all spheres, including trade and economics. Having launched a trade war against China, the United States is also doing its best to weaken by noneconomic means their growing competition in the field of high technology.

Keywords: trade and economic relations, WTO rules and principles, protectionism, trade wars, strategic competition, dialectic of rivalry and cooperation.

 

Trade negotiations are increasingly often used as a political instrument. This is the first thing that comes to mind when one tries to understand what has happened around the trade war launched by the Trump administration against China. Geoeconomics and geopolitics are, of course, strongly intertwined, but is it “kosher” to use trade negotiations as an instrument of political wheeling-and-dealing, and why do we see this more and more often?

The dispute between the United States and China over trade and economic matters has a long history. It has now, however, become clear that Donald Trump’s protectionist policy is in sharp contrast to China’s consistent policy of defending free trade, based on WTO rules. The thesis of defending free trade, promoted by Xi Jinping at the Boao Forum in April 2018 was drawn up as early as the 19th CPC Congress and presented at the most recent forum in Davos.

This is what lies behind the conciliatory phrases in statements by Chinese representatives to the effect that China is not working toward perpetuating a positive balance of trade and is prepared to increase imports and improve conditions for investment and access to its financial and insurance markets, with the aim of stimulating domestic consumption.

The May 2018 visit to the United States of the delegation headed by Vice Premier Liu He of the PRC State Council, and the subsequent visit to China by U.S. Treasury Secretary Steven Mnuchin, were capped with the signing of a joint communiqué on trade and economic consultations. China and the United States agreed to take measures that would reduce the American trade deficit. It was assumed this would be done, on the one hand, by American goods and services satisfactorily meeting the demands of growing consumption in China, and by jobs and prerequisites for economic growth being created in the United States, on the other.

The two parties agreed to increase imports of American agricultural products and energy carriers, and to determine the areas for developing cooperation, encouraging mutual investment, and creating a fair and competitive business environment. It was also decided to continue high-level consultations on trade and economic issues (there is no such format between the United States and other countries).

In June 2018, the PRC State Council’s press office published a White Book titled China and the WTO to show how China was meeting its obligations within the organization; explain Beijing’s principles, position, policy, and proposals with respect to a multilateral trade mechanism; and to describe the concept and action plan for the country in conducting its policy of reforms and openness.

This document, which summarized 30 years of results from China’s efforts to become a major participant in the system of world trade, turned out to be highly appropriate under the conditions of the U.S.A.-China trade war. It stressed that the outburst of antiglobalist sentiment in recent years has, in combination with the growth of protectionism, created major challenges for the multilateral trade system of which the WTO is the heart. This clear hint aimed at the Trump administration, whose policy has led to trade wars not only with China but against Canada, Mexico, the countries of the European Union, and others as well.

In addition, the White Book presented some very interesting data on the American Chamber of Commerce in China, according to which around 60% of the enterprises in one survey continued to view China as one of the world’s best places for investment, while 74% of the Chamber’s members intended to increase their investments in the Chinese economy.1

By the summer of 2018, the feeling had arisen that at a minimum, any trade war would be delayed. Then, however, came the “summer escalation.” In June 2018, the White House announced the United States would impose customs duties of 25% on $50 billion worth of goods imported from China. These were intended to affect such spheres as the aerospace industry, information and communications technologies, robotechnology, industrial equipment, new materials, and automaking.

Beijing responded in kind, setting 25% import duties for American goods for exactly the same sum. The list contained 659 goods, for 545 of which the elevated tariffs were to take effect on July 6, 2018; no deadline was set for introducing tariffs on the remainder. The elevated tariffs were to be placed on agricultural goods, seafood, automobiles, medical equipment, and chemical products.

In response, Trump ordered a list of Chinese goods totaling $200 billion to be drawn up for the possible levying of an additional 10% in tariffs on them, should China raise duties on American products in the future as well.

Trump also stated that he planned to shut Chinese companies out of investing in high-tech firms in the United States, and to block additional exports of high technology from the United States to China. The natural question arises here: Were the American actions due entirely to economic motives? Does the United States really wish to sabotage the growing competition in the field of high technology by noneconomic means?

In 2015, the PRC government drew up the Made in China 2025 (MIC2015) strategy for industrial development, which gave priority to developing high-added-value production in the field of high technology. Up to 40% of all Chinese industrial goods were to be raised to this level by 2020, and up to 70% of all parts, components, and subassemblies in the aerospace, telecommunications, power generating, and processing industries by 2025.

The U.S. Foreign Relations Council labeled MIC2015 “a threat to American technological supremacy,” since it put American manufacturers at a competitive disadvantage. It was said that China would obviously force foreign companies to transfer technology in exchange for access to PRC markets and continue its conditions for doing business inside the country.

China’s explanation that MIC2025 was not a discriminatory strategy and did not have the goal of forcing American manufacturers out of high-tech industries, or that China would never wish to steal technology – just the opposite; it seeks cooperation with American companies that possess the latest in cutting-edge technologies and could help develop the Chinese economy under mutually beneficial conditions – simply fell on deaf ears.

It would seem the United States misinterpreted the key figures given in MIC2025 for import substitution (40% and 70%). These are not hard-and-fast indicators; rather, they are targets – goals used for strategic planning by all countries, including the United States itself (for example, in the Clinton administration’s National Information Infrastructure program, or the program for doubling exports under President Barack Obama).

It should once again be emphasized that the thrust of China’s response to the tightening of protectionism lies not in so-called countermeasures but in continuing the policy of openness and reform. China’s economic ascent and the laws of a market economy put everything into perspective.

In disputes with the United States, the Chinese were originally inclined toward compromise, since a retaliatory imposing of tariffs would only ratchet up the mechanism escalating the trade conflict. China knows from experience (including the economic sanctions following the events on Tiananmen Square) that raising the stakes by introducing countersanctions, harshening rhetoric, and so on, is entirely without promise. Here, incidentally, both Russia and China have something to learn.

A brief walk through history is in order here. January 2019 marked the 40th anniversary of official American-Chinese relations, something remembered mainly in Beijing. PRC Foreign Minister Wang Yi granted an interview on the topic, in which he presented China’s view on the experience and lessons learned from bilateral relations over the last several decades.

He noted in particular that the fear a powerful China might pose a challenge to or replace the United States is “a seriously mistaken strategic judgement.” The Foreign Minister also noted that as with other countries, there could be competition in China’s relations with the United States, but this should be “friendly rivalry and correspond to the principles of competition.”2

Washington has never had a problem with its satellite countries, which are tiny and dependent on the United States. However, the principle of America First! has always interfered in building relations with such countries as China and Russia.

This became especially obvious after the disintegration of the Soviet Union, when the Americans began talking about the “End of History” and their absolute world leadership. However, the United States was never to experience this imagined unipolarity, forgetting once and for all how to consider the opinions and interests of others. If the United States had earlier done its best to demonstrate its global leadership in one way or another, it now considers it a kind of fixture with which the rest of the world should simply come to terms.

At the same time, the United States failed to note and grasp how China’s peaceful ascent and the growth of its economic and political capabilities in the period of openness and reform changed this outdated picture of the world. China’s gradual transformation into a new superpower (in one joke, “China still isn’t Number One in the world, but it sure isn’t Number Two.”) is viewed by Americans with alarm and concern, and a desire to “restrain” a dangerous rival by any means possible.

We are not talking here about the rules of honest competition. Instead, anything needs dictate is allowed: attempts to achieve economic advantage by noneconomic means, imposing sanctions, hypocritical rhetoric in defense of human rights, and so on, and so on. And all of this against the background of both powers’ unprecedented trade and economic connectivity, and a gigantic volume of mutual trade turnover.

According to Joseph Nye, who originated the concept of “soft power,” interdependence is not a curse but a blessing, so long as it is used properly. It would seem, however, Washington has decided to ignore him, and the theory that economic interdependence between the United States and China will keep them from open conflict is, unfortunately, no longer being developed.

Washington sees Beijing as its main strategic rival and has adopted a policy of long-term opposition to China in all spheres. On October 4, 2018, Vice President Mike Pence delivered a sensational speech at the Hudson Institute, in which he said Beijing was interested in seeing President Trump turned out of office, and that the Chinese leadership was obviously making unprecedented attempts to influence the November mid-term elections to Congress and the next presidential campaign. Pence emphasized that these Chinese attempts to influence the American public were much more extensive than those “deployed by the Russians in 2016.”

After this, and against the background of other American attempts to accuse China of every deadly sin, the logical question arises: How serious is the deterioration of American-Chinese relations, and how long can it continue?

Fairly pessimistic prognoses have already been made. For example, Jack Ma, founder of the Alibaba Group, says the trade war between the United States and China could drag on for two decades. Ma notes that the current tension between the two countries over trade will most likely affect large Chinese companies very quickly. To avoid U.S. import duties, they will be forced to transfer their production to other countries.

How serious and long-term Washington’s protectionist intentions are can be judged from one of the clauses of the new agreement between the United States, Mexico, and Canada (USMCA), destined to replace the North American Free Trade Agreement (NAFTA). According to this provision, if any one of the three USMCA countries enters into a trade deal with a “nonmarket country,” the two others may withdraw from the agreement after six months and conclude their own bilateral trade deal.

Neither can anything good come of the anti-Chinese spy-o-mania campaign launched in the United States. According to (entirely unconfirmed) data from Bloomberg, the Chinese military conducted a massive cyber-espionage campaign, ostensibly to pressure local manufacturers of server equipment for American companies to place in motherboards chips “the size of a grain of rice” that are capable of intercepting data and downloading malicious codes into servers on command.

However, yet another walk through history is needed in order to grasp fully “how bad” and “how long” this could be. In his speech, Pence himself incidentally tried to perpetuate it by saying that China is playing “for the long term,” and in a “100-year marathon” has done much to acquire the image of a world power.

This means that with its many thousands of years of traditional strategic thought, Beijing truly knows how to wait and plan its development on a long-term basis. If one partner or another (in this case, U.S.A.) tries to upset this, a wide variety of steps could be taken, from patient attempts to reach agreement to harsh countermeasures and readiness to simply outwait an undesirable American administration.

In his speech, Pence incidentally noted that American-Chinese relations could simply be “torpedoed,” and made it clear Washington would not cross over “the red line.” He mentioned in particular that the United States would in the future adhere to the principle of “one China,” although he considered Taiwan’s political model to be better for the Chinese people.

In terms of recent history, the American Vice President recalled the events of the late 1990s, when the United States seriously believed that after the fall of the Soviet Union “freedom in China would expand in all forms.” These expectations (based partially on the internationally televised events on Tiananmen Square in June 1989, the first attempt at a color revolution in contemporary history) proved to be unjustified.

China made the historic choice of continuing its market reforms while keeping a one-party system to maintain stability and prevent the country’s collapse. Chinese leaders were not about to sacrifice political stability and the country’s territorial integrity to the demands of accelerated political modernization.

This was followed by harsh American sanctions that China knew how to survive. Despite opposition from the United States, it was even able to join the WTO more quickly than usual, and on its own terms. Pence, however, complained that “America agreed to give Beijing open access to our economy, and we brought China into the World Trade Organization.”

If attempts to contain China’s economic development failed then, they are even less promising today. China knows how to wait; its opponents can win battles, but they can hardly win the war. This most likely means the current period of deteriorating bilateral relations could be comparatively short (if Washington recognizes the uselessness of pressuring Beijing) and equal to how long the Trump administration remains in power.

Against this background, the meeting between U.S. President Trump and PRC Chairman Xi Jinping at the G20 summit of November 30-December 1, 2018 was categorized as a “temporary trade ceasefire.” Each side presented its interpretation of the results from what had been achieved. Donald Trump called his relationship with Xi “great” and presented the results from talks with him as meeting the American conditions: Washington would not be raising tariffs on $200 billion worth of Chinese imports as of January 1, 2019, while Beijing would “buy more U.S. products, based on market demand.”

On his part, the PRC Chairman said the heads of the two countries had arrived at a consensus on halting the introduction of new tariffs and ordered economic groups to step up consultations on reaching a concrete and mutually beneficial agreement aimed at lowering all tariffs. He stressed that Beijing was prepared to open markets, expand imports, and help in mitigating the corresponding trade and economic conflicts between China and the United States.

The Chinese government agreed in particular to lower or abolish tariffs on automobiles imported to China from the United States, which can be as high as 40%. Beijing officially announced that on the whole, China will actively expand imports (by way of, e.g., holding the first China International Import Expo) to satisfy the consumer needs of its people. It was noted in the closing documents of the G20 summit that China would lower its general level of tariffs from 9.8% to 7.5% in four rounds of adjustments during 2018.3

Because of the American-Chinese trade war, the world economy continues to be in a state of chaos (according to IMF estimates, the world GDP could fall 0.75% by 2020, due to the increased trade tension between the two countries. The key points of contention between Washington and Beijing over the future of the world’s trade and economic system remain unresolved. Trump’s slogan America First! fundamentally contradicts the views of Beijing, with its own growing economic might, on the state and future of the international trade system, based on the central role of the WTO.

It is sufficient to recall the recent APEC summit in Papua-New Guinea, which did not end with the signing of the traditional joint communiqué, due to the inability of the American and Chinese delegations to agree on the appropriate wording. If the Americans would not eliminate their remarks on protectionism, which upsets world trade, the Chinese refused to delete theirs about “unfair trade practices,” which would supposedly lead to the same result.

We should not, however, believe the narrative devised by the Western media on this matter. They claim that while the trade and economic giants clarify their relations, the rest of the world is standing by and waiting to see how it all ends. The thesis of the equal responsibility of the United States and China for the future of world trade does not stand up to scrutiny: the latter favors strengthening the central role of the WTO and its norms and principles, which postulate battling protectionism. Meanwhile, the White House has yet to explain to the rest of world what exactly “unfair trade practices” are.

Attempts by the U.S. administration to restrain China’s economic growth to the benefit of American supremacy, particularly by using trade restrictions to block implementation of the Made in China 2025 strategy, are likely to continue. However, it is worth noting the Chinese commentaries on the meeting in Buenos Aires, according to which the development of Sino-American relations demands that “friction between the two countries should be settled in good faith.”4

However, the ink had barely dried on the commentaries of those who viewed the Buenos Aires meeting between Trump and Xi as a ceasefire in the trade war when something occurred that was reminiscent of hostage-taking and the opening of a second front. The detaining in Canada of Meng Wanzhou, the Chief Financial Officer of the Chinese telecommunications giant Huawei, under pressure from the United States, became a full-fledged international scandal with far-reaching consequences.

U.S. federal officials demanded that Canada extradite Meng and presented Huawei with a list of 23 charges that included industrial espionage, financial fraud, violation of sanctions, and obstruction of justice. Acting Attorney General Matthew Whitaker announced the charges had been brought in both New York and Seattle.

In response, China’s Ministry of Foreign Affairs urged the United States to rescind the order to arrest Meng and “to avoid going further and further down a mistaken path.” Whitaker’s qualification that the charges were made not against China but in regard to a specific company was hardly convincing. In a statement by a representative of China’s Foreign Ministry, it was emphasized that the United States “has been using state power to smear and attack specific Chinese enterprises, destroying the legitimate operations of the companies,” and that “there is strong political motivation and manipulation behind it.”5

Other countries, and Russia in particular, have already encountered this more than once; it is sufficient to recall the cases of Bout, Yaroshenko, and the Russian hackers who, legally or illegally, were extradited to the United States and handed over to American justice.

This is why Russian Foreign Minister Sergei Lavrov, while noting that Russia will take no part in the American-Chinese trade war, stated “this is another example of a policy that has been rejected by the overwhelming majority of normal countries and peoples: a policy of extraterritorial application of national laws.” He went on to say “This is very arrogant, great-power politics that no one supports. It is being rejected even by the closest allies of the United States. They should put an end to this.”6

The problem was undoubtedly the American authorities’ dissatisfaction with the operations of Huawei itself. The Wall Street Journal reported that the U.S. Justice Department had long been investigating the company’s violations of American sanctions against Teheran. Matters went much farther than sanctions, however. The Americans accused Huawei (as they did earlier with China’s ZTE) of potential threats to the security of telecommunications networks, allegedly stemming from attempts to use tracking devices. The United States demanded from its closest allies (primarily Canada, Great Britain, Australia, and New Zealand, with which it had created the Five Eyes system for the joint gathering and use of intelligence data) that they refrain from including 5G technologies developed by Huawei in their tenders for government purchases.

There are grounds for assuming that the main issue is not ensuring security but a simple desire to avoid competition. Huawei has become a generally recognized leader in the development and application of 5G technologies and equipment on which the future will depend: the Internet of Things, smart cities, driverless automobiles, and much else. Since technologies and equipment are accompanied by the standards for their use, a behind-the-scenes battle is being waged to force the 5G standards developed by Huawei out of world markets.

So far as the claim “They should put an end to this!” is concerned, the question is: How? The extradition of detainees to the United States formally proceeds within the confines of national law, but upon American request (often accompanied by rude and humiliating pressure from American authorities that is normally hushed up).

There is also the American Congress’ historic practice of scrutinizing and unilaterally altering signed international treaties and agreements during their ratification. This is also a pure manifestation of J William Fulbright’s “arrogance of power.”

The issue can be raised in the UN Security Council, where any examination of it can be blocked by the representative from the United States. However, there remains the moral and ethical aspect of the current political practice with which work begins on the corresponding norms of international law.

If China, Russia, and other countries with similar claims were to submit a draft resolution On the Unacceptability of Attempts by UN Member Countries to Extend the Norms of National Law Extraterritorially, it would surely receive enthusiastic support from the overwhelming majority of UN General Assembly members – with the possible exception of the dozen or so most zealous followers of Washington’s policies.

Why is the Huawei story unfolding now? Is it not associated with the competitive battle over 5G communications network standards in the world market? Huawei Technologies produced the world’s first chip whose conductivity exceeded that of its predecessors by 2.5 times. In addition, 5G base stations can be erected in half the time of their 4G analogs. Huawei Technologies has already signed 30 commercial agreements on 5G technology and delivered more than 25,000 5G base stations around the world.

There is obviously an attempt under way to quash competition by any means necessary. In mid-January 2019, it was revealed that the United States intended to limit the operations of Chinese telecommunications companies. An Executive Order was drawn up calling for restrictions “over national security concerns” for those telecommunications companies that have ties to the PRC government and do business in the United States.

This was against the background of constant accusations against Chinese companies (including Huawei) of stealing American technologies and intellectual property. Huawei, however, calmly denies this. It has long been investing its efforts and money in the basic sciences and technologies. According to a company statement, “We were the first to make a breakthrough in the key technologies of the broad commercial use of 5G.”7

Open extortion and attempts to employ foreign economic means are unacceptable in trade negotiations. Events show the Chinese must cultivate strategic patience in order to bring trade and economic negotiations to an end and reach a deal. China is interested in this so that the trade war does not distract it from solving strategic problems associated with the growth of the economy and strengthening its position in the world trade.

It is thought this is where the key lies to understanding how U.S.A.-China relations look now and what lies ahead for them. Resolving differences is a possible and necessary prerequisite for revitalizing relations between the two world powers. The system of a multipronged strategic dialog of which they were once so proud, and into which they invested so much time and effort, is breaking down increasingly often under Donald Trump and needs a reboot. Beijing is aware of this; we must continue to hope that Washington grasps it as well.

Traditional thoughts on how the enormous mutual trade turnover and close trade and economic connectivity of the United States and China ensure against an escalation of rhetoric and conflict are not living up to expectations. However, if the two sides manage to devise a mechanism for resolving differences, making a really big trade deal would revive both American-Chinese relations and the world economy.

Beijing is calling on its American partners to remember the dialectic of cooperation and collaboration, noninterference of politics into economics, and honest competition and observing the rules of the game. China is consistently building its relations with the surrounding world, including the United States, based on the principle of mutual benefit and mutual respect for national interests.

Along with everything else, China’s attempts to establish evenhanded and respectful relations with the United States is one part of its efforts to create a new world order based on multipolarity. By developing relations of a reliable strategic partnership with China (which will not grow into a military and political alliance), Russia too is playing a far from minor role in this.

 

 

NOTES:

1. China and the World Trade Organization: Full Text. URL: http://english.gov. cn/archive/white_paper/2018/06/28/content_281476201898696.htm

2. URL: https://rg.ru/2019/01/17/mid-knr-kitaj-ne-sobiraetsia-stanovitsia-ssha-ili-zameniat-ih.html

3. Buenos-Ayresskiy plan deystviy [Buenos Aires Action Plan]. December 1, 2018. URL: http://www.kremlin.ru/supplement/5375

4. URL: http://russian.news.cn/2018-12/03/c_137646572.htm

5. URL: https://www.interfax.ru/world/648166

6. Vystupleniye i otvety na voprosy SMI ministra inostrannykh del Rossiyi S.V. La-vrova na press-konferentsiyi po itogam 25-go zasedaniya SMID OSCE, Milan, December 7, 2018. URL: http://www.mid.ru/ru/foreign_policy/news/-/asset_pub lisher/cKNonkJE02Bw/content/id/3437709

7. URL: http://russian.news.cn/2019-01/25/c_137771930.htm