CHINAwatch

The Trade War and Sino-US relations

Radio Hong Kong's Backchat live panel discussion on 5 November, 2018 looks at the dynamics of the trade war and shifts in future Sino-US relations. 

Trade, People, and Money: Understanding China's Unique Capabilities

Stephen Olson, Hong Kong-based research fellow of the Hinrich Foundation, in an article of 24 October, 2018 in The American Prospect, a liberal magazine based in Washington D.C., suggests that the West, (particularly the United States), needs to  negotiate a modus vivendi with China's very different economic system and unique global capabilities in trade, peoples and money, "to pursue national objectives and shape it relations—economic, trade, strategic, and diplomatic—with other countries and multilateral institutions." This may well be pivotal in helping to shape a looming Chinese Century

The Chinese Century is well under way: Many trends that appear global are in fact Chinese

An infographic of The Economist (27 October, 2018) shows that -

• Chinese economy in PPP terms became the world’s largest in 2013;
• Its GDP per person at PPP has risen tenfold since 1990;
• Because China is so populous and is developing so quickly, it is responsible for a remarkable share of global change. Since the start of the financial crisis in 2008, for example, China has accounted for 45% of the gain in world GDP;
• In 1990 some 750m Chinese people lived in extreme poverty; today fewer than 10m do. That represents two-thirds of the world’s decline in poverty during that time;
• China is also responsible for half of the total increase in patent applications over the same period;
• China’s record has exerted a “gravitational pull” on the world’s economic output, tilting it towards the East;
• The People’s Liberation Army accounts for over 60% of the total increase in global defence spending since 1990;
• China is also the source of 55% of the increase in the world’s carbon emissions since 1990.

The infographic, however, does not capture the reality that China now sits at the centre of a global supply and value chain. Even if not made in China, many goods have imbedded a Chinese component in terms of materials, parts, logistics or trade. Many countries across the globe depend significantly on Chinese trade and investments.

This global centrality will intensify with China's Belt and Road Initiative, driven by Policy, Infrastructure, Trade, Finance and People-to-People Connectivity, covering 64 countries representing 62% of world population and 30% of world GDP with potential investment $5 trillion, many times the size of the post-war Marshal Plan in comparable money-of-day terms.

According to a McKinsey Global Institute Report of September, 2018, emerging economies (of which the Chinese economy is bigger than the rest of the BRICS combined), have accounted for almost two-thirds of the world’s GDP growth and more than half of new consumption over the past 15 years. This translates into a declining relative share of global GDP contributed by the United States, its recent positive growth notwithstanding.

Taking into account all of the above, it seems unlikely that the "Chinese Century" scenario will be reversed, America's current 360-degree pushback against China notwithstanding. 

However, it begs the question how a transition into a possible Chinese Century could be benign. China's state-directed capitalism and authoritarian regime are not everybody's cup of tea. Helping to shape a benign transition into a World Order of global appeal may well call for negotiating a modus vivendi with a now-wide-awake giant with unique capabilities to shake the world. 

Belt and Road is alive and kicking

A Standard Chartered Bank special report of 9 October, Belt and Road - Making its presence felt examines the latest developments on the ground in Asia, Africa and the Middle East, including what has happened after the US has declared a trade war against China. 

The report shows that -

"Trade and investment links between China and BRI countries continue to deepen, cementing alliances, improving competitiveness and shifting the global supply chain amid the US-China trade war. Rapid BRI expansion comes with challenges and risks – BRI partner countries face widening trade deficits and rising external debt. Bilateral debt relief offered by China should help to avoid systemic debt fallout. Increased transparency would likely improve project quality, address growing concerns and facilitate debt resolution. Commercial, environmental and social viability would help ensure project sustainability."

Download Standard Chartered - Belt and Road Report 9 October 2018  

According to a report dated 26 October, 2018 in the Asia Times, China's trade with Belt and Road countries exceeds US$860 billon over the first three quarters in 2018, a rise of 13.2% from a year earlier. Over the same period, Chinese enterprises have made a total US$10.78 billion of non-financial direct investment in these  countries, a rise of 12.3% from last year. They have helped establish 82 economic and trade cooperation zones, creating 244,000 local jobs and paying taxes and fees to host countries totalling US$2.01 billion.

During a historic visit to Beijing, the first in seven years, and accompanied by a 500-strong business delegation, Japan's Prime Minister Abe pledged to change course in relations with China, from confrontation to a "new era of cooperation", paving the way to Japanese participation in China's Belt and Road Initiative in some 30 joint infrastructural projects. Click here  Not only would this breakthrough reinvigorate interest in China's global Initiative, it would also help to shore up the corporate governance and credibility of both the projects concerned and the whole Initiative as well. 

China-US Trade Relation and Challenges: Past, Present, Future and Policy Options

The Center for China and Globalization (CCG), a leading global think tank in China of international repute, released a Report (Issue 7 of Volume 25) dated September 2018 titled China-US Trade Relation and Challenges: Past, Present, Future and Policy Options. 

A CCG delegation traveled to Washington for a five-day visit to conduct over 20 activities in September as part of Track II diplomacy efforts to promote bilateral trust and understanding. 

On September 26, with the Hudson Institute, a leading conservative think-tank, CCG co-hosted a symposium titled “40 Years of Sino-US relations: Past, Present, Future and Policy Recommendations.” Hudson Institute President and CEO Kenneth R. Weinstein gave opening remarks. Michael Pillsbury, Hudson Institute senior fellow and Director for China Strategy chaired the event. His 2015 book "The Hundred Year Marathon: China's Secret Strategy to Replace America as the Global Superpower" is widely held to have inspired Vice President's fiery anti-China speech at the Hudson Institute on 4 October, declaring nothing less than a full-blown new Cold War against China. Click here

The following extracts usefully highlight the potential damage that a protracted trade war may have on the American and global economy -

"The National Association of Chemical Distributors released a study this month that predicted nearly 28,000 chemical distributor and supplier jobs would be eliminated because of higher prices due to the USD 200 billion round of tariffs. The US Chamber of Commerce estimated that as many as 2.6 million jobs could be threatened by the Trump administration’s trade policies. An Axios analysis claims that the retaliatory Chinese tariffs would affect 11 million American workers concentrated in rural, deeply red, already-struggling parts of the US. Forecasting sectoral employment impacts under a full trade war scenario, the Peterson Institute for International Economics (PIIE) expects large employment decline to occur. Even short-term aborted trade war could lead to private sector employment falls of 1.3 million. The chief economist of Moody predicts 150,000 fewer jobs in the US if current and proposed tariffs are continued. More than 60 US industry groups launched a coalition called Americans for Free Trade, comprising thousands of companies, farmers and manufacturers, arguing that the trade war will kill US jobs and raise prices for US households."

"Goods originating in China will also become more expensive, pushing up costs for both businesses and consumers. Apple sent a letter to the USTR highlighting how the upcoming tariffs on USD 200 billion Chinese goods would “increase the cost of our US operations, divert our resources, and disadvantage Apple compared to foreign competitors.” Intel pointed out that many products in the list have final assembly or testing done in China, but chips will be subject to tariffs on the full value. Intel estimates it would cost USD 650-875 million to relocate a chip factors away from China. Tech companies Dell, Hewlett-Packard and Juniper Networks have raised similar concerns about harm to US companies, workers and consumers from applying tariffs to networking products and accessories."

"In September, IMF Managing Director Christine Lagarde warned that as well as triggering vulnerabilities in China’s Asian neighbors, a US-China trade war could also deliver a shock to already struggling emerging markets such as Turkey, Argentina, and Russia via a domino effect on global value chains and the impact on risk appetite around the world."

"Work by the IMF predicts that if threatened trade barriers are implemented, each country could see the cost of imports rise by 10%, leading to a 15% contraction in global trade over five years and 0.5% fall in global output compared to the projected level by 2020. The European Central Bank and Bank of Korea have already revised down their growth forecasts for the Euro area and Korea respectively due to the introduction of tariff measures."

"A report by the Brookings Institution forecasts that a relatively minor global trade war where tariffs rise 10% would reduce GDP of most countries between 1 and 4.5%. The authors of the report warn that a 40% hike in tariffs could cause a deep global recession akin to the Smoot-Hawley tariff of 1930.61 Meanwhile, Roberto Azevêdo, director general of the World Trade Organization, emphasizes that a trade war would hurt people all over the world, citing research that found that the poorest consumers could lose up to 63% of their spending power."

CCG puts forward the following recommendations for both China and US policymakers:  

• Build on the agreements already reached through bilateral negotiations and work to increase Sino-US bilateral trade and opportunities in services trade.
• Forge a new bilateral agreement on intellectual property rights (IPR).
• Increase opportunities for US companies in China Manufacturing 2025.
• 4. Seek further tariff reduction through bilateral negotiations and re-engage in BIT talks.
• Build on the foundation of domestic reforms to rebalance the Chinese and US economies as ways to achieve trade balance.
• Update the way that Sino-US trade is measured to more accurately reflect the value derived by each side.
• Expand cooperation in infrastructure and explore creating a Sino-US infrastructure investment fund.
• China and the US can work together to reform the WTO.
• Strengthen Sino-US cooperation between provinces and states. 1Develop the role of Track II diplomacy and promote bilateral dialogue.

While the above recommendations are all practical and realistic, they do not address the hidden unease about a rising powerful challenger of worrying governing model and ideology to the world order underpinned by American supremacy. Indeed, this is the crux of Michael Pillsbury's seminal book. However polite and balanced he might have chaired the symposium, one wonders how much the American powers that be agreed that the CCG recipe is sufficient to stop the brewing Cold War in its tracks, even if it may ultimately fail to contain China.

IMF urges US, China to de-escalate tensions

Live interview  with Press TV on 13 October, 2018, explaining why the US opens up an all-out Cold War against China.

How President Trump is helping Beijing in the South China Sea but may open up a new Cold War front on human rights

In an insightful Op-ed (9 October) of the Washington Post, veteran strategist Robert Kaplan explains why the Western Pacific is no longer a unipolar American naval lake. From a rising China's perspective as a great power, it is China's home waters, for security and other reasons, just like the Caribbean for the United States. It's the latter that is considered the aggressive hegemon.

Unless the US wants a catastrophic shooting war, the only way to counter China's incremental influence is a US system of free trade and democratic alliance, supported by consistency of one's words All this seems being undermined by President Trump's capricious antics, according to Kaplan. 

In a second Op-ed in The Post. columnist Josh Rogin reveals that the Trump administration is to launch another salvo in a "new, bold, and risky" strategy to confront China, this time on human rights in Tibet. Riding on old and new criticisms of repressions of Tibetans and Uighurs, and using the principle of "reciprocity", the Senate is hoping to pass a Reciprocal Access to Tibet Act by the end of the year, forcing China to open up Tibet for inspection by journals and US officials on pain of sanctions against Beijing officials. Reminiscent of Western coercion during China's humiliated past, this would be rubbing salt in China's wounds from the trade war. As there is no way China would succumb to this, this latest move is likely to push US-China relations over the precipice.

It is to be hoped that depending on the outcome of the November US mid-term elections, President Trump may be disposed to de-escalating this vicious spiral which may well threaten to turn a Cold War into something far worse. 

A new Cold War against China may have the opposite effect of what "America First" wants

One would have to go back to America's Cold War days to find anything remotely comparable to the ferocity of Vice President Mike Pence's across-the-board anti-China speech at the Hudson Institute on 4 October, 2018. The New York Times aptly points this out as a new Cold War against China.

In support, the recently concluded US-Mexico-Canada Agreement (USMCA) contains a "poison pill" clause forbidding parallel agreements with "non-market economies" (read China). Similar clauses are expected to be inserted into future US agreements with Japan and the European Union to build a Western economic wall to isolate the Middle Kingdom.

Concurrently, following consistent drop in the RMB exchange rate, there appear pressures from the White House to declare China a currency manipulator, sparking worries about a full-blown currency war. 

As if on cue, The Diplomat, a D.C.-based geopolitical magazine, published an article The World According to China on 3 October. China is portrayed as scheming to dominate the world, first by following Western rules and international institutions, then biding its time, eventually bending them to suit China's "authoritarian" "neo-mercantilism". The Economist weighs in with a cover story of 4 October that "China has designs on Europe"

China's rapid and unorthodox rise has brought disillusion and consternation to the United States as the world's extant superpower. Its alleged violation of intellectual property rights and perceived lack of market reciprocity, as well as its recent assertiveness in the South China Sea, are seen as direct threats to American national interests. Much of these worries, which are bipartisan, is shared by key members of the European Union and other US allies. 

Beijing is not exactly blind to these concerns. It has been implementing measures safeguarding intellectual property, including that of foreign enterprises. It has opened up selected sectors of its economy in pilot free-trade-zones (FTZ). Click here However, these measures are regarded by the West as too little, too late. 

Beijing has often been reiterating that China harbours no hegemonic ambitions. Such assertions are not entirely untrustworthy. China doesn't have the capacity to fully contest America's global military dominance. Nor will it be able to supplant the supremacy of the dollar anytime soon. However, as China has grown into a thousand-ton panda, it can no longer hide its size, weight and consequential influence under a bushel. 

In any case, rather than resorting to brute force, the China Dream of national renaissance would stand a better chance of realization through building a global "community of common destiny", playing by multilateral rules and capitalizing on China's global connectivity with win-win benefits. This would attract more following than adopting beggar-thy-neighbor coercive policies.

Apparently, the Trump administration's trade and Cold War have four objectives: (a) redress China's trade imbalance with the United States, including pressure on the RMB to appreciate, (b) fully opening up China's financial and commercial markets for American businesses, (c) prohibiting China from getting proprietary technology through market concessions, and (d) restraining China's support for "Made in China 2025" high-tech industries. Some of these objectives cut to the quick of China's long-term economic competitiveness and stability.

China should be able to import much more of what America is willing to export to China, e.g. shale gas. While China will continue to open up more of its financial and commercial markets, the spectre of the former USSR's collapse dictates a more cautious and measured approach. Similarly, Japan's lost decades following massive yen appreciation as a result of the "Plaza Accord" has long been a sobering tale.

As for technology, China knows it cannot force the transfer of cutting-edge technologies. In any case, the near-death experience under US sanction of ZTE, one of China's leading high-tech firms, shows how dependent China's semiconductor industry remains on foreign core technology. The experience has become a clarion call for China to pull out all the stops to achieve core technology independence. 

As for "Made in China 2025", it doesn't seem a sinister plan for world domination, otherwise Beijing would not have been so upfront about it from the start. As pointed out in China's recent 36,000-word White Paper on the US trade war , it was inspired by the United States' "Strategy for American Innovation" (2011) and "National Strategic Plan for Advanced Manufacturing" (2012) to ween the nation off a labour-and-energy-intensive unsustainable development model. 

In the final analysis, while China's economy will suffer from America's all-out Cold War, its economic trajectory is unlikely to be derailed. China is the world's second largest economy, on track to become the largest. What is more, it is fully embedded in the globalized supply and value chain. Few countries can be entirely segregated from China economically. Even as US-led agreements like the USMCA try to exclude China, the countries involved, America included, are dependent on China's vast market.

For example, while under USMCA, Canada and Mexico may no longer be able to forge a bilateral agreement with China, there is no reason why they cannot join a regional trading bloc such as the Regional Comprehensive Economic Partnership being negotiated or the proposed Free Trade Area of the Asia-Pacific, where China is but one (albeit a prominent one) of a large group of countries. In any case, the World Trade Organization's global community of nations, of which China is the largest trader, is unlikely to crumple. 

In its latest Global Financial Stability Report (10 October, 2018), the IMF assessed China's balancing act following the trade war as broadly stable, following a fairly positive report card on 26 July. What is more, notwithstanding the Trump administration's targeted attack on the "Made in China 2025" strategy, China is surging ahead with  innovation and advanced technologies on the front row for the Fourth Industrial Revolution .

Externally, despite some setbacks, the Belt and Road Initiative continues to deepen trade and investment links in Asia, Africa and the Middle East, according to an October Standard Chartered Bank report . This reinforced global trade and investment connectivity augurs well for accelerating the internationalization of the RMB, which is increasingly being used for bilateral trade settlements, including energy contracts. While unlikely to usurp the primacy of the greenback, this trend at least serves as a buffer against a frontal US currency war. 

Officially, the United States denies that it tries to contain, let alone, thwart China's rise. Be that as it may, it is likely to be wishful thinking that an all-out trade war or even Cold War would derail China's trajectory. 

If anything, America-inspired global pressures on China are likely to shock and impassion the Chinese nation to redouble efforts in reform and opening up and in hastening the realization of the China Dream. 

In any event, while huge challenges and risks are likely to persist, the United States and China are not necessarily destined for conflict, if leaders and the peoples on both sides dare to think outside the box. Kevin Rudd's 2015 TED Talk "Are China and the US doomed to conflict" remains instructive. 

Trade war or not, from AI to blockchain and new energy vehicles, China is on the front row for the Fourth Industrial Revolution

South China Morning Post column dated 8 October by Edward Tse, Founder and CEO of Gao Feng Advisory, flags up China's robust advances in innovation and advanced technologies, the Trump administration's 360-degree pushback against China notwithstanding.

This underpins China's resolve in keeping calm and carrying on to transform its economy and to move up to the world's top economic table. 

US-China conflict portends reset of world order

Radio interview with Radio Sputnik of Moscow on 28 September 2018