By Qing Shan Ding
With bilateral trade between the U.S. and China estimated to be worth $710 billion a year, a blooming trade war benefits no one. The causes of this trade war go beyond issues such as intellectual properties and deficits; it reflects a bigger pattern that the U.S. is wary of a growing challenger threatening its global influence.
Despite ongoing negotiations, there are no signs to suggest the trade war between the U.S. and China is about to end. The U.S. President Donald Trump threatened to impose more tariffs on China worth another $267 billion. This is in addition to existing tariffs of $50 billion and imminent tariffs on another $200 billion worth of Chinese goods. All the proposed combined tariffs will be worth $517 billion, virtually the entire Chinese exports to America.[i] China has vowed to respond if the latest tariffs come into force.
This escalating trade war between the two largest economies in the world makes no economic sense. The trade between the U.S. and China amounts to roughly $710 billion a year.[ii] In a globalised economy, China and the U.S. are highly dependent on each other. Earlier in the year, U.S. Department of Commerce has banned U.S. companies from supplying components to the Chinese telecom equipment maker ZTE which resulted in the company being unable to function for a few months, and the impact of new tariffs has already harmed American businesses – from aircraft manufacturers to baby cot makers.[iii] The potential damage to economic growth and job losses will be severe on both sides. So what are root causes of this damaging trillion-dollar trade dispute?
The American rationale for imposing these tariffs is well documented. It started with the U.S. Trade Representative’s Section 301 investigations and concluded the alleged Chinese theft of American intellectual properties and forced technology transfers as the main justification for imposing tariffs. Donald Trump’s insistence on cutting the trade deficit with China is another motivation. However, China has already committed on greater protection of intellectual property and ending mandatory technology transfer in joint ventures. There are no immediate signs to suggest tariffs actually work, China’s surplus with the U.S. increased by 10% in August to $31 billion.[iv][ms-protect-content id=”9932″]
There must be other considerations behind this costly impasse. One of the Chinese government’s initiatives has been scrutinised numerous times in the original investigation. The “Made in China 2025” is a government industry and technology strategy aiming to build strategic capability and innovation power in prioritised sectors. Already considered as industry leaders in some sectors such as industrial robotics, high speed rail and renewable energies, it seems that the American government has started to worry China might start to challenge its global leadership in technology and innovation.[v] And the Trump administration is determined to stop China at all cost.
This trade war also reflects a broader strategic shift. It suggests the U.S. is starting to re-evaluate its relationship with China. Ever since Richard Nixon’s surprise visit to China in the 1970s, both countries were committed to build a healthy relationship which resulted into one of the biggest trading relationship and two inter-dependent economies. However, in recent years, there are alterative thinking which started to emerge that treated China as a rivalry rather than a partner. The Obama administration’s “Pivot to Asia” strategy was largely interpreted in China as a move to contain its growing influence in Asia.[vi] American warships regularly challenging China in the disputed waters of South China Sea is the latest example of the two countries competing for leadership in the region.[vii] All these confrontations add further ammunitions to those in the U.S. who believe that China is becoming a threat to its global leadership.
Other ambitious projects abroad cause nothing but further suspicion. One of President Xi Jinping’s signature initiatives is the “One Belt One Road” strategy. It is a massive infrastructure programme that aims to link China with the Middle East, Europe, Africa and beyond via high-speed rail and sea shipping lanes. It is an economic and diplomatic strategy capable of transforming global trade. This initiative will enable regional collaborations to an unprecedented level and establish China at the centre of a new global trade system.[viii]
The Chinese RMB is long way away from matching the dominance of U.S. dollar. However, some might consider the growing influence of Chinese currency as another example of China’s challenge on America’s global leadership.
China’s planned internationalisation of its currency RMB is another sour spot for some China doubters. Apart from constantly branding China as a currency manipulator, the U.S. also worries about the growing influence of RMB in international trade. China sees overreliance on the U.S. dollar for the trade settlement transaction as risky for China in times of economic uncertainty. In recent years, the Chinese government has pushed the internationalisation of RMB gradually, and in November 2015 RMB was included in the International Monetary Fund’s Special Drawing Rights currency basket. China has started to use RMB to replace the U.S. dollar in some of its biggest international trade deals. Ironically, the trade war is helping to boost the use of RMB in international transactions. Despite the tariffs and depreciation of RMB, as of the end of the second quarter, overseas institutional and individual holdings of RMB-denominated financial assets totalled 4.9 trillion Yuan (US$717 billion), which means the share of RMB-denominated stocks and bonds as a percentage of total assets held by global investors increased to about 3.0%.[ix] The Chinese RMB is long way away from matching the dominance of U.S. dollar. However, some might consider the growing influence of Chinese currency as another example of China’s challenge on America’s global leadership. The dominant position of U.S. dollar in the global financial system is the product of post second world war Bretton Woods system, one of the most coveted assets of the American government.
In Africa, China already sidelined the U.S. and Europe in terms of economic cooperation, investment and wider engagement. The recent announcement of a further $60 billion investment in Africa sparked criticisms of new colonialism. Although readily dismissed by African leaders, the biggest gathering of representatives from almost every African country for a summit in Beijing, and some leaders’ claim of a new world order will no doubt strengthen the belief that China is reshaping global geopolitics and challenging American influence.[x]
It has to be pointed out that the Chinese government needs to take some of the blames for fracturing one of its most important diplomatic relationships. In recent months, China has started to downplay the Made in China 2025 policy. The excessive propaganda of this industrial policy and boasting of China’s capabilities have alarmed the U.S. and European countries, and played an unintended role of fanning the flames that led to this trade war. In China’s diplomatic cycles some officials have suggested it was a mistake for the government to promote this policy so forcefully and publicly.[xi] As a result, one of the propaganda chief was rumoured to have been forced to step down.
Beijing might have wrongly believed Trump was bluffing and was not determined to carry through his threats.[i] This inevitably led the trade tensions to escalate and now both sides are locked in a difficult situation in which no one wants to be perceived as weak.
Another major political miscalculation by Beijing is they might have misjudged the situation. The Chinese leadership seemed to have been caught off guard by Trump’s protectionist rhetoric and considered it too much as election vote winning tactics. Beijing also appeared to underestimate the growing anti-China sentiment amongst the American elite and policymakers. What’s more damaging is they could have misjudged Trump as well, simply dismissed him as a businessman that could be persuaded by offering some commercial incentives such as allowing its hotel chain to operate in China. Beijing might have wrongly believed Trump was bluffing and was not determined to carry through his threats.[xii] This inevitably led the trade tensions to escalate and now both sides are locked in a difficult situation in which no one wants to be perceived as weak.
There is no doubt the stakes are very high, as the world economies become ever more interconnected, the global supply chain could easier be destroyed by any further escalation. South East Asian countries such as South Korea and Malaysia are already victims, as their companies supply vast amount of components and other so called “intermediate goods” to China.[xiii] Certainly, many around the globe hope both countries could return to negotiation tables and reach a resolution. However, to find an agreeable compromise could prove to be very difficult. On China’s side, President Xi has position itself as a strong leader, any move that can be interpreted as weak will be perceived as unacceptable domestically.
Perhaps, the U.S. will be able to soften its stance. As the chief economics commentator of the Financial Times Martin Wolf suggested, no sovereign power could accept the humiliating demands being made by the U.S.[xiv] The demand for a reduction of the bilateral deficits by $200 billion is unrealistic; it would literally require the Chinese state to take control of its economy and artificially manage its export. The notion of U.S. gaining unrestricted access to investment in China but reserving the right to restrict Chinese investment is also unacceptable. It is ridiculous to impede China from advancing its manufacturing capabilities and stop technological innovation.
With the looming mid-term election in the U.S., perhaps, some of the suffering American farmers, one of Trump’s strongest supporting bases could persuade the administration to change its stance. This combined with some American business leaders’ warning about the dangers to jobs and growth of the trade war between the two biggest economic powers, could potentially force the Trump administration to lessen its demands.
China might have already started to prepare for the worst. The Chinese government announced it will boost domestic infrastructure spending, including a new Sichuan-Tibet high speed rail line, to offset the adverse effects of the trade dispute.[xv] The expert analysis from the Hoover Institution which suggests China’s economic growth could be reduced by only 0.3% due to the trade war could further strengthen their belief that it is a risk worth taking.[xvi] For the Chinese leadership, they have to hold on to its negotiating positions, because this trade war reminds many Chinese people of its humiliating past. In the 19th century, they were forced to open its borders and trade by gunboats and unequal treaties. What followed was a century of humiliation in the school history books, no Chinese leader, even the mighty President Xi, would survive signing a trade agreement deemed as an abject surrender.
Featured image courtesy: Nikki Asian Review
About the Author
Dr Qing Shan Ding is a Senior Lecturer in Marketing at the University of Huddersfield, United Kingdom. His primary research area is Chinese consumers, studying the impact of country of origin, consumer ethnocentrism and consumer animosity. Qing also writes about modern China and its changing economy.
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