China-US Relations: Whither the Trade War?

August 6, 2018

China-US Relations: Whither the Trade War?

by Bunn Nagara

FOR further proof that China’s planners don’t always get it right, look no further than the current trade war with the United States.

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According to the latest reports including from within China, Beijing is flitting between damage control mode and full-on panic. A senior researcher at a Chinese think tank recently remarked that China has never seen anything as aggressive as the Trump administration’s current actions on trade.

Yet these are still early days – far worse may yet come. China is unsure what to do and never saw any of it coming. It cannot understand Trump, and there is no sign it ever will. Not that Donald Trump’s style is necessarily comprehensible or even decipherable.

China is now reportedly casting about for useful advice on managing Trump. It is even looking abroad for workable tips.

Amid all the uncertainty, at least three things are clear. One, things are all set to get worse before they get any better. And while China still has buttons to press, it is inadequately prepared for more fallout.

Two, China cannot “read” Trump’s moves because they seem coded or inaccessible to sensible interpretation. That is actually his strength.

Image result for us-china trade war

A trade war hurts everybody and benefits nobody. A shooting war, likewise. An expenditure war, or competition to build transnational infrastructure, improves connectivity for trade and travel. It benefits everybody and hurts nobody. In the past, however, a country such as the US would have to borrow from China to initiate such projects.–Bunn Nagara

Three, the prospect of meaningful trade talks is virtually nil. China just has to sweat it out or worse, at least for now.

As of midweek, the US and China have imposed 25% tariffs on US$34bil (RM139bil) of each other’s goods with another US$16bil (RM65bil) of products as the next tranche.

At this point, Trump’s legion of critics in the US may need to take a breather to suspend their cynicism about his style. His very unpredictability, so often an object of ridicule, is actually a tactical advantage useful for keeping his opponents guessing, distracted and off-balance.

By bobbing and weaving, he seems to be inconsistent and even unsteady. But it helps to keep the other side wrong-footed. It is something China should know about – drunken kung fu or drunken boxing. China’s stiff and straitlaced policymakers today forget their own culture and history at their peril.

An international consensus is developing that China should have acted to address US trade complaints, and acted sooner. Now the costs of delay for China may be higher than anticipated.

It is not just the tariffs and trade restrictions, of course. For today’s excess-capacity China the problems include the risk of ballooning unemployment, crimped liquidity and the knock-on domestic social problems they can cause.

Paradoxically, the years of cruising on fat growth figures have bred a crippling complacency. Thus the sense of unpreparedness now stings so much more.

China’s once-abundant funds are now becoming cramped. Last week the People’s Bank of China injected US$74bil (RM302bil) into the system and the State Council announced another US$200bil (RM815bil) for infrastructure.

Among China’s miscalculations was its assertiveness over its South China Sea claims. With its overbearing presence in disputed territory, it upset neighbours and consumed decades-long goodwill and trust in the region.

That was not what the China of Deng Xiaoping or his immediate successors would have done. China then was wiser and more circumspect, knowing how to bide its time and apply soft power to win friends and influence people.

But that is not today’s China. Nonetheless, questionable conduct comes with a price tag quite regardless of any positive achievements before.

Another mistake was to misread European complaints about Trump’s trade policies. China thought it could lead an alliance of sorts against those policies, only to find that core Western interests meant more to Europe.

Image result for us-china trade war

As a result of these missteps, the US excluded China from its biennial Rimpac (Rim of the Pacific) 26-nation military exercise this year, while inviting Vietnam for the first time. But another exercise hosted this month by Australia, and involving 27 countries including China, will proceed as planned. However, there will be no live-fire drills for China.

Meanwhile Britain is raising its level of naval activity in the region but will not be part of Australia’s programme. A calibrated response to China’s South China Sea assertiveness seems to be emerging among the Western allies.

China will not fail to take notice. But whether it will have any effect on Beijing’s plans and policies is another matter.

Nonetheless, regardless of what concessions Australia is prepared to make with China, Canberra is still competing with Beijing on some issues.

One of these is Australia’s aid programmes for South Pacific island nations. This comes to A$1.3bil (RM4bil) for this year. Although this amount may seem paltry, it compares favourably to China’s US$1.7bil (RM7bil) for 2006 to 2016.

Ordinarily, China would be able to top Australia’s allocation in a single stroke. But the trade war with the US is making itself felt. Besides, China has other cost items to look after, not least the sprawling multi-nation Belt and Road Initiative (BRI).

The BRI is not just another project – it has been set in stone in the destinies of the Communist Party of China, the state system and President Xi Jinping himself.

If Australia’s aid efforts in the South Pacific still appear limited, the US State Department is on a spending spree in a renamed Asia-Pacific with an India option, now dubbed the “Indo-Pacific.”

At an Indo-Pacific Business Forum in Washington last Monday, Secretary of State Mike Pompeo unveiled new largesse for developing infrastructure in the region.

The trio of countries in this scheduled spending exercise are the US, Japan and Australia.

Not officially mentioned is the great big elephant in the room, China, the object of this round of manoeuvres.

Can the US really hope to outspend and out-construct China? Can it do so even with the help of Japan and Australia? There was also a time when the answer would be an unqualified no. But now China’s spending style has become somewhat cramped.

The trade war aside, little if anything has changed in the fortunes of Japan and Australia.

Japan’s economy remains largely in the doldrums for a quarter of a century now. No great elevation in fortunes seems likely.

The Australian economy is increasingly drawn into China’s orbit, while Canberra is in two minds about opting to be more Asian or staying fully within the Western alliance.

The US economy has not risen substantially in recent times, nor has it shown much sign of doing so sustainably over the long term.

A trade war hurts everybody and benefits nobody. A shooting war, likewise. An expenditure war, or competition to build transnational infrastructure, improves connectivity for trade and travel. It benefits everybody and hurts nobody. In the past, however, a country such as the US would have to borrow from China to initiate such projects.

It may still have to do so. The countries between them would probably benefit the most. In spite of itself, China has begun to undergo a sobering experience about the costs of massive infrastructure projects.

It has unwittingly become more conscious of the predicament of countries like Malaysia. Asking questions about the viability and returns on investment of such projects is Beijing’s new normal.

The larger question is whether the trade war will hurt China or the US first, appreciably, to alter the course in the other’s favour.

But don’t hold your breath.

Bunn Nagara is a Senior Fellow at the Institute of Strategic and International Studies (ISIS) Malaysia.

2 thoughts on “China-US Relations: Whither the Trade War?

  1. The writer writes from what he can see from the events that had happened, but leaves out the most important point, that is, no matter what China does and does not do the West, especially the US, is going to be confrontational. Some people called it the Thucydides trap. Whatever the case, this is something Beijing has to live with. I do agree, however, that the present administration isn’t noted for imagination, nor indeed was Deng Hsiaoping’s (most people appeared to have forgotten the sanctions imposed on China during his administration). I used to write to some Chinese websites, and they never welcomed my blunt observations, so I left them alone. We’ll let history decide its course.

  2. A very superficial analysis. Li Keqiang went to Europe on a diplomatic trip didn’t mean he had high hope of convincing the European to form an alliance of sorts against Trump’s trade policies. And it didn’t mean Europe to value their “western interests” to say no to China. There’s no harm to try.

    European Commission President Jean-Claude Juncker met with Donald Trump at the White House to talk about trade, and they held a press conference afterward at which they said positive things about the US-EU trade relationship. This didn’t mean they have formed an alliance against China. I see this is at best a temporary respite from US-EU trade tensions. What does all this mean in terms of substance? That’s hard to say at this point. The key items the parties agreed on were the following:

    – They will work towards “zero tariffs, zero non-tariff barriers, and zero subsidies” on non-auto industrial products. That’s not a huge category of goods, as it excludes agriculture and raw materials, among other things, and zero non-tariff barriers and subsidies seems really unlikely. But still, it would be great if we made progress here.

    – The EU will buy more US soybeans and liquid natural gas. This was probably going to happen anyway because of market shifts and other factors. Are the Europeans going to put braised tofu into their daily menu?

    – They will have a dialogue about conflicting regulatory standards in the US and EU. This is a long-time goal of US and EU trade policy-makers. It sounds easier than it really is.

    – They will work together on reform of the WTO, and to address problems to the trading system caused by China.

    As for the existing tariffs the Trump administration has imposed on steel and aluminum from the EU, and the retaliatory tariffs imposed by the EU, those will stay in place, but progress on the broader talks could help resolve the tariff issue. Also, it appears that the threatened tariffs on auto imports will not be imposed on the EU.

    Neither Juncker nor the Trump administration managed to release the details of their agreement, how it will work legally, or whether there is a timeline for bringing it to fruition. And that’s because the “deal” doesn’t yet exist at all. As Trump said, “We’re starting the negotiations now, but we know very much where it’s going.” The joint statement was full of this kind of hedging. The EU “wants to import more liquefied natural gas (LNG).” The two parties agreed to “launch a dialogue.” Increased soybean exports to the EU were reportedly on the table as a concession, as Trump’s tariffs on China threaten important swing state districts at play in the 2018 midterm elections.

    Xi doesn’t know how to handle an unpredictable Trump? Xi pulled his team off after the third round of the trade negotiation, convinced that Trump’s trade war is more about world dominance than trade. Xi decides to dug in for a protracted war to wait out Trump, and refuses to return to the negotiating table until Trump stops the bullying and return to the topic of trade. Sun Tzu’s “Art of War” states: “There’s a time to fight, there’s a time to negotiate.” This is the time to fight.

    The traditional theory of a trade war is that the importing country has more leverage than an exporting country. The US has more import of Chinese goods to slap tariffs on than the Chinese do on American goods. But tit-for-tat is only one form of the trade war. The Chinese have other weapons in their arsenal. And the Chinese have told the Americans by quoting Mao Zedong: “You fight your war you way, I fight my war my way.”

    In recent days, Trump and his trade team running around boasting that the US is winning the trade war with China. And there’s been a spate of press headlines and news stories pointing to seeming evidence to that the US. Two examples on the economic side suffice: One focused on the fall of the total value of Chinese equity shares being traded compared to those on Japan’s stock market, and the other pointed to slowing growth of China’s economy. How much are these propaganda and psychological warfare?

    If the US is winning the trade war, why are Trump and his trade team so desperately trying to bring the Chinese back to the negotiating table? Are they having such a soft spot for the Chinese people? Very recently Pompeo talked to Wang Yi at Singapore but nothing doing. No one is going unscathed from a trade war. I believe both sides understand that.

    But I understand Mr. Nagara’s concern as Malaysia is one of those intermediate countries where China buys most of the components to manufacture its products. Malaysia is hurting, too.

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