As Trade War Drags on, Beijing and Washington Cement Competitor Status

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 UPDATE:

In recent months, the two sides have been locked in negotiations to complete a “phase one” deal that China hopes will roll back some existing tariffs and cancel additional ones (such as the scheduled Dec. 15 tariff). Trump, however, has not committed to scrapping any tariffs and even suggested the trade talks could drag on past next year’s election. In addition to disagreeing over the level of tariff relief, the two sides have reportedly clashed over issues such as the exact amount of agricultural products China would purchase from the U.S. and the enforcement mechanism to protect intellectual property.


a6.china.trump.liu.he.oval.storyAs 2019 comes to a close, the trade war between the U.S. and China that has dominated the news all year is far from over. If anything, it could augur a new era of relations between the world’s two largest economies — and for this administration, that era would represent a course correction that rightly emphasizes competition over cooperation.

For years, as China became a rising power, the U.S. hoped that integrating it into the global economic community — notably by allowing it into the World Trade Organization in 2001 — would lead to democratic changes in the nation of 1.3 billion.

But those changes never materialized. China’s communist government has maintained a firm grip on power while expanding its ambitions across the region, both militarily, by fortifying its presence in the contested waters of the South China Sea, and economically, through its Belt and Road Initiative, which would create a modern-day Silk Road stretching from Asia to Europe.

Former President Obama tried to walk a fine line between courting China and increasing America’s influence in the Pacific through his Asia Pivot, which was aimed at counterbalancing Chinese hegemony in the region.

While Obama did not explicitly view China as an enemy, his successor recently labeled Chinese President Xi Jinping as just that. Under President Trump, the relationship between the U.S. and China has shifted from guarded cooperation to open hostility, especially on the trade front.

At the moment, the U.S. economy remains larger than China’s, with a GDP of $20 trillion in 2018 versus China’s GDP of $13.6 trillion last year, according to the World Bank. President Trump wants to keep it that way and has zeroed in on the U.S. trade deficit with China, which stands at $167 billion for the first half of 2019, according to U.S. Census figures.

Trump has targeted this deficit through a series of escalating tariffs. The president had already slapped tariffs of 25% on $250 billion worth of Chinese goods such as machinery and furniture this past May after a year of up-and-down trade talks failed to yield any progress. On Sept. 1, Trump imposed a 15% tariff on an additional $125 billion in Chinese imports such as flat-panel TV screens and footwear, but he held off on raising the 25% tax on $250 billion worth of Chinese goods to 30% pending the outcome of talks. Meanwhile, another round of tariffs of 15% on $156 billion in Chinese products such as cellphones, laptops, toys and clothing is scheduled for Dec. 15. For its part, China has retaliated by slapping tariffs on U.S. imports such as cars and crops.

In recent months, the two sides have been locked in negotiations to complete a “phase one” deal that China hopes will roll back some existing tariffs and cancel additional ones (such as the scheduled Dec. 15 tariff). Trump, however, has not committed to scrapping any tariffs. In addition to disagreeing over the level of tariff relief, the two sides have reportedly clashed over issues such as the exact amount of agricultural products China would purchase from the U.S. and the enforcement mechanism to protect intellectual property.

Many economists say tit-for-tat tariffs are blunt-force instruments that mete out pain to everyone, and they argue that trade deficits, which are caused by a variety of factors such as consumption and savings habits, are not indicative of an economy’s overall health.

So, while Trump has said that China is paying the U.S. billions of dollars in tariffs, economists point out that tariffs are in fact import taxes that American businesses pay, often passing the costs down to consumers. The eventual goal is to compel businesses to bring China-based manufacturing back to the U.S. — and Trump has demanded that U.S. companies do just that — but businesses are more likely to shift manufacturing and supply chains to other low-wage countries such as Vietnam (also see “As U.S. and China Duke It Out in Tariff War, Other Nations Emerge as Winners” in the August 2019 issue).

a6.china.truck.tariffs.storyWhile many economists say Trump’s fixation on deficits is misguided, the president has earned praise for confronting longstanding irritants in the U.S.-China relationship, namely Beijing’s theft of intellectual property, its expansive state subsidies and the forced transfer of technology from American companies wanting to do business in China.

As trade talks drag on, the question becomes who will blink first, especially if the trade battle precipitates a global economic downturn ahead of the U.S. election. In October, the IMF said it expects global growth to slow to its weakest pace since the 2008 global financial crisis, cutting its expected growth for 2019 from 3.9% down to 2.6%. According to the IMF, the biggest factor weighing growth down is the U.S.-China trade war.

The Diplomat asked Elizabeth Economy, the director for Asia studies at the Council on Foreign Relations and a visiting fellow at Stanford University, to explain the current U.S.-China standoff and its implications for the two countries and for the world.

The Washington Diplomat: The U.S.-China relationship is changing to one of outright competition instead of strategic cooperation. What would you say is the catalyst for this evolution?

Elizabeth Economy: The U.S.-China relationship has always been characterized by elements of cooperation and competition, but competition now outweighs cooperation as the dominant narrative. I think that there are three catalysts for this shift.

The first, and most important, is the fundamental transformation in Chinese domestic and foreign policy unleashed by Xi Jinping. The Xi model is one that sharply limits the opportunity for foreign actors and ideas to engage within China through policies such as Made in China 2025 … at the same time as it promotes a far more ambitious and expansive foreign policy. China’s aggressive approach to sovereignty issues — the South China Sea, Hong Kong and Taiwan — elements of its Belt and Road Initiative, its military build-up and its efforts to reform norms and institutions around global governance all make it much more of a competitor than partner for the United States.

a6.china.elizabeth.economy.storyThere is a sense that China is challenging the United States on all fronts — political, economic and security — both in the bilateral relationship and on the global stage. This has contributed to a sense in the United States that the Xi era offers significantly diminished opportunities for cooperation. There is no longer a belief that if the United States simply models principles of openness and transparency, as well as the rule of law, China will eventually follow suit.

The second catalyst is the emergence of China as a center of innovation and rising economic power. Any country with the economic heft and technological prowess of China will be a competitor of the United States. The real issue is whether China maintains a level playing field for multinationals. If it did, its economic rise and the competition it posed for U.S. firms would be understood in the same context as Germany and Japan today. However, the range of market and nonmarket barriers to competition make China’s economic rise far more challenging because Beijing does not play by the rules governing other advanced economies’ interactions. The result is that the United States confronts not only a legitimate economic competitor, but also one who doesn’t play by the rules.

Finally, the change in U.S. administrations from Obama to Trump introduced a set of senior officials who possessed a different set of understandings regarding Chinese intentions and the degree of threat that China’s economic and military rise poses to the United States. So, the perception of the Trump administration has also played a part in this shift from emphasizing cooperation to competition.

TWD: There are two main elements of U.S.-China competition: military and economic. China just released a defense white paper that seems to react to the latest U.S. National Security Strategy. The two countries are basically calling each other out as non-friendly without officially declaring each other enemies. Is this the start of a new cold war?

EE: It is possible that we are entering a new cold war, although I certainly hope that is not the case. Most U.S. China analysts would agree that there is growing economic and military competition. Many argue, however, that it is a not a cold war because, unlike the Soviet Union, China is not exporting its political system and because there is far greater economic interdependence between the United States and China than there was between the United States and the Soviet Union during the Cold War.

I worry, however, that a technological bifurcation between China and Western-based systems will contribute to a cold war-type polarization. Moreover, while China is not exporting communism as an ideal or even the dominance of a communist party, it is exporting elements of its political system that support authoritarianism.

a6.china.skyscraper.shanghai.storyIt is undertaking political capacity building in countries such as Tanzania, training officials on how to manage the internet and control political dissent. It has conducted cybersecurity seminars for Belt and Road countries on how to do real-time censorship of the internet. And, certainly, it is exporting its surveillance system to many countries, although this could also be understood as simply an economic export opportunity.

In addition, at the level of global governance, China is working to reshape norms and institutions to fit its political priorities and values in areas such as development finance, human rights and the internet. And, I would argue, it is having some success in this effort.

Even as China is forcibly removing more than 1 million citizens [the Uyghurs] from their homes in Xinjiang and placing them in labor and re-education camps, ambassadors from 37 countries signed a letter in July in support of China’s human rights practices. Most of these ambassadors represent countries with like-minded authoritarian political systems. The political element of a new cold war may not be communist versus democratic countries, but authoritarian states versus democracies.

TWD: On the economic front, the U.S.-China trade war continues. Can you break down the negotiating positions of each side? How do you interpret the trade war’s effects on the U.S. and China individually in the short and long term? And what does all this mean for the global economy?

EE: The trade war reflects a range of different U.S. concerns and impulses — some of them are short-term ‘feel-good’ asks, while others represent a demand for significant structural change in the Chinese economy. They include zeroing out the trade deficit through more Chinese purchases of U.S. goods, protecting intellectual property and ending nonmarket barriers to entry, such as Made in China 2025, coerced technology transfer and subsidies to state-owned enterprises.

Washington also insists that there be some mechanism of enforcement, such as keeping some tariffs in place and/or an independent adjudication system, since China has often failed to deliver on its promises to make changes in its trade and investment policies.

On the Chinese side, the government wants the restrictions lifted on Huawei and an end to punitive measures against other Chinese tech companies, the lifting of all tariffs and a realistic ask in terms of goods purchases from the United States to redress the bilateral trade deficit.

Some countries, such as Vietnam, Taiwan, Bangladesh and South Korea, have benefited as multinationals, and even some Chinese companies, have begun to move their supply chains out of China to these other well-positioned manufacturing powerhouses.

a6.china.trump.tariff.war.fashion.storyNonetheless, overall global growth is slowing, and both the Chinese and American economies are suffering from the unpredictability generated by the trade war, as well as real hits to sectors such as agriculture and technology.

TWD: What are your thoughts on where the tariff talks stand, and do you expect any kind of mild breakthrough in the next month or two?

EE: With the announcement that a ‘phase one’ deal is underway, it appears that both sides are attempting to take the temperature down on the trade front. The cancellation of the 2019 Asia-Pacific Economic Cooperation (APEC) summit slated for mid-November in Chile, however, probably set negotiations back a bit. The meeting had provided a target date for negotiators to have a deal for the two presidents to sign. Without such an incentive, the likelihood increases that over time, offhand remarks and speculation by officials and/or commentators could contribute to derail the progress that has apparently been achieved to date.

TWD: How will the trade war, which looks set to continue into next year, impact the 2020 elections?

EE: There is strong incentive for President Trump to demonstrate some progress on the trade war before the election, particularly if growth in the United States continues to slow. Of course it is also possible for him to avoid real progress and simply target electoral swing states with favored treatment —such as subsides for soybean producers — to try to see himself through the election.

TWD: Anything you want to add?

EE: While the trade war has brought a spotlight to the United States and China, it is important to remember that most of the world’s advanced economies and market democracies share Washington’s concerns about the nature of China’s political, military and economic power, and China’s failure to adhere to international norms around freedom of navigation, free trade and human rights. The EU has publicly proclaimed China a ‘systemic rival’ promoting alternative forms of governance. Xi Jinping’s China is not a uniquely American concern.


About the Author

Aileen Torres-Bennett is a contributing writer for The Washington Diplomat.

Last Edited on December 4, 2019

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