The China-US Trade "War": China on the Trump Roller-Coaster - Part 2

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Special Advisor and Resident Senior Fellow - U.S. and Asia

Chinese sources cannot be directly compared with the analysis and opinions of Western economists since the media and, to a lesser extent, expert opinion are controlled by the Party-state. Yet there have been varying views, both from different perspectives and over time: even the Party line itself may change. The tone can range from realist caution to war cries – indeed, one of our sources uses the term "war" 54 times in the course of one single article.

According to the CNKI (China National Knowledge Infrastructure), the largest academic online library in China, more than 3000 pieces were published on these trade frictions between 1982 and October 2018. More notably, 1800 out of 3000 were published in only nine months of 2018… Our selection runs from the spring of 2018 to the fall of 2019, covering only a tiny fraction of publications. Earlier views – from the spring of 2017, when Donald Trump raised the trade issue and the possibility of tariffs – had generally been optimistic, based on China’s economic strength and also on the belief that China could deal with a savvy businessman turned president.

Initial optimism faded in April 2018

In April 2018, after Donald Trump announces a 25% tariff increase on 50 billion USD of Chinese goods, the tone is more subdued. One view, taking into account rising tech barriers, explains that "the US overall strength still prevails, and there are still obvious shortcomings in China’s technologies".¹ Another view underlines that China’s large trade surplus puts the country in a disadvantageous bargaining position. To minimize losses and constrain the US, explains the author, it should shift the battle field and pick the weak point in the US position: finance. For the author, the logic is simple: America is a deficit spending country, its lack of money and debt financing model are fatal weaknesses. China on the other hand has abundant capital.

This view will remain untested by government action. China basically ended in 2018 its sales of US Treasury bonds. It only had a very limited currency devaluation to the dollar: for example, 6% from the end of November 2017 to the end of November 2019, and never more than 10% from peak to trough during the same period. China seems wary of opening any new front in the economic conflict with the United States.

In fact, in June 2018, several authors associated with one of China’s main securities companies make a lengthy comparison with the US-Japan trade conflict of the 1980s, arguing that China should not follow Japan’s old path.² However, the study points out even more weakness in the Chinese case: Japan’s manufacturing value never exceeded its final consumption by more than 10.5%, while China’s surplus manufacturing is 23.2% higher than consumption in 2019 ; Chinese investment in real estate is 14% of GDP – the highest among major economies today; China had a debt-to-GDP ratio of 256% in 2017, "close to Japan’s level in the early 1990s". Against this, they recognize – and other views emphasize it as well – that China, unlike Japan, is a full-set industrial producer and exporter.

Acknowledging a strategic conflict – July 2018

The tone changes again on July 6, 2018, the day when a 25% increase in US tariffs on 34 billion USD of Chinese goods kicked in. An interview of Yu Yongding – a renowned monetary economist known in the past for reformist views – comes under a header on the "unavoidable trade war".³ Yu Yongding hits out at section 301 of the US commerce law, describing it as "domestic law" unacceptable in light of WTO standards.

The tone changed again on July 6, 2018, the day when a 25% increase in US tariffs on 34 billion USD of Chinese goods kicked in.

He denies any pressure of the Chinese state on foreign companies to transfer technology, while rather frankly writing that the main motivation of Chinese companies in joint ventures is precisely to acquire foreign technologies. "If they can’t get foreign technology, why bother to establish joint ventures with foreign companies?" It is an unusually straightforward admission from Chinese sources, when it comes to the issue of tech transfer.

He ascribes the responsibility of conflict to the United States, which is now designating China as its "number one competitor". According to him, in the Clinton era, China was positioned as a "strategic partner"; under president G.W. Bush, as a "responsible stakeholder" ; and the previous Obama administration sought to build a "partnership of mutual respect and mutual benefit".

Among his list, only the last designation attributed to the Obama administration is accurate. No US administration has ever signed on to a "strategic partnership", while a "partnership" was only mentioned once by Secretary of State Warren Christopher. In 1996, during his visit to Shanghai, a Chinese banner hailing a "strategic partnership" was indeed on display. Barack Obama used the two words together in a radio interview on the eve of his first presidential visit to China in November 2009.⁴ The terms have never been used again. As for "responsible stakeholder", it was crafted by Robert Zoellick, former US trade representative and World Bank president, as an exhortation to China. It was aspirational and never an actual descriptor, much less an official term.

On July 11, 2018 – one day after Donald Trump announced further tariffs of 10% on 200 billion USD worth of imports from China – another think tanker goes further: The US is conducting both a "trade war", to gain commercial benefits, and a "strategic war", to prevent a further rise of the Chinese economy.⁵ The second goal in fact takes precedence. The author, however, identifies a key American weakness: "the existence of interest groups influences policies, with conflicts between their interests and the US strategic goals". Advising Chinese concessions aimed specifically at US multinationals, the author is confident that China "can win the trade war".

China’s political system will prevail over democracy

This political economy argument will soon turn into a political argument on China’s systemic advantage: A People’s Dailyop-ed by a researcher within the Ministry of Commerce compares China’s "long-term persistence in liberating and developing social productive forces" with the "changes in the national policy line after each election of political parties in the United States".⁶ He is clearly not impressed with the latter, and emphasizes the superiority of the Chinese system: "democratic centralism can absorb wisdom from all quarters and make efficient decisions".⁷

On August 10, 2018 – three days after Trump announced a 25% tariff increase on 16 billion dollars of Chinese goods – reassurance to the Chinese domestic audience is in order: another political economist mentions the limited US-China trade to GDP ratio, and therefore the low impact of American trade tariffs.⁸He shows more concern regarding the reduced openings for Chinese investment in the US, although in his view this also hurts the Trump administration’s quest for direct foreign investment.⁹

A month after the US announced – on September 24, 2018 – a coming rise from 10% to 25% of tariffs on 200 billion of Chinese goods, Seeking Truth (Qiushi), the Party’s authoritative ideological magazine, will publish a 4000+ character piece listing all the reasons why China must prevail in the long term.¹⁰ The article cites every possible argument, and repeats the standard mantra about "turning a crisis into an opportunity". China’s output of 220 industrial products ranks first in the world.¹¹ In the same breath, the publication boasts that China’s GDP remained on the 6.7-6.9% growth path.

This is about "struggle" (douzheng, 斗争), and a "more important" argument for the author is that "the Chinese people have cultivated an indomitable spirit of unity and struggle in the historical process of standing up, getting rich and self-strengthening". Politics now prevail over economics, and the trade conflict has been elevated to a "struggle", in other words a war.

A search for deeper explanations

In the year that followed, the trade conflict with the US had its sudden ups and downs, essentially orchestrated from Donald Trump’s Twitter account. The tone will remain militant and political. It was also clear by that time that China had to move beyond its initial assessment of Donald Trump as a businessman practicing the art of the deal, or the simplification that he is backed by conservative hawks who want to contain China. One easily imagines the search for explanation going on as Donald Trump, repeatedly, returns to the trade conflict position while talking of his "friend" Xi Jinping. In this renewed search for an explanation, and perhaps for a paradigm that would enable better management of the conflict at the political level, two different views emerge, which we shall call the "expert" and the "red" views.

At this point, it is clear that in-depth research has been conducted in China about the roots of the Trump administration’s trade offensive, and not only by current intelligence efforts. In the "expert" camp, we single out one explanation of the rationale behind the trade conflict by Zhong Feiteng, from the Chinese Academy of Social Sciences (CASS).¹² Drawing from multiple cases, it is likely that the article is in fact the product of a team research. Its originality lies in the emphasis on the domestic base of support for Donald Trump and the connection with his stand on international economic policy and foreign policy. Using data from value chains in Sino-US trade flows, the paper explains that American companies derive more profit than their Chinese counterparts from these flows: therefore, if American foreign policy followed economic "realism", it would not resort to the "trade bullying" of China. But the root of current American foreign policy is not economic. Trump’s rewriting of globalization (rather than retreating from it) is based on the perceived need of his lower- and middle-class supporters, and they do not coincide with the interests of "big capitalism" or the international values of the upper classes.Our source goes on: "the Chinese media have misunderstood the nature of the Trump administration". It quotes Robert Keohane: "the main challenges to foreign policy are domestic".

Even more remarkably, it tracs back the current policy to a prediction made by Robert Gilpin in the 1970s: if American power was to decline, the US would pull back from globalization and international agreements. Our author may not know it, but Robert Gilpin became in the early 1980s an inspirator for the tech conflicts with Japan such as the battle for supremacy in chips, and an advocate in tech export controls. But the paper does conclude that, "after 30 years of development, China has basically replaced Japan's position in the trade relationship between the United States and East Asia".

"After 30 years of development, China has basically replaced Japan's position in the trade relationship between the United States and East Asia."

Preparing for all eventualities

But the "red" view is also brought to light. The lines of conflict have hardened. At its worst, a lengthy article in an ideological journal on how to respond to the US trade war devotes 24 out of 39 footnotes to quotes from Mao, with another 4 from both Xi Jinping and Lenin, and 1 from respectively Marx and Deng Xiaoping: the remaining 4 sources are from the People’s Daily.¹³ The author sees no difference between Republicans and Democrats, the military-industrial complex or Wall Street. Within this verbiage however, one still finds the notion that concessions to capitalism – namely, greater profits – are good tactics, as opposed to ideological compromise. Indeed, within a hardline September 2019 speech to the Central Party School emphasizing the "great struggle" (weida douzheng, 伟大斗争), Xi said that while there can be no compromise over principles, flexibility can have its uses…

A well-known figure such as Long Yongtu, China’s former negotiator of the WTO, had criticized the inclusion by China of political considerations into trade talks, and particularly the choice of soybeans as a target for retaliation against US tariff increases. In late August 2019, China has indeed announced that it rescinds soybean and pork sanctions, this on the heels of a new trade escalation by Donald Trump. In November 2019, Long says that China roots for Trump’s re-election because he is "easy to read" and predictable: he is concerned with material interests, not politics, unlike his predecessors. China’s views have thus come full circle, back to initial hopes for a quick fix. The more likely reason could be that Donald Trump and his administration are in fact deemed to be unpredictable. For Beijing’s defense, one should add that unpredictability is not exclusive to China. China’s political and ideological establishment braces for what could possibly be a long fight: during an 18-day period in late November 2019, China’s CCTV broadcast every day up to 13 anti-American programs, a clear message to domestic viewers. But its negotiators also put forward short-term, stop gap trade concessions, hoping that Donald Trump buys these.

Conclusion

In usual times, it is often said that Chinese policy can be unpredictable, while insisting on the need for predictability from its partners. China is also thought to have the initiative in disputes, while it often claims to be merely reacting to others’ actions. That paradigm has been reversed with the Trump administration. It has thrown China off-balance. Throughout the last two years, Chinese officials and experts have been scrambling for responses and explanations to the twists and turns of the Trump administration’s trade policy. Although the analysis occasionally falls back on the resilience and political superiority of China’s system, there is a realist thread of cautiousness that goes through many sources. Is the real or potential damage to the Chinese economy a key factor? In the forthcoming part 3 of this blog on the US-China trade conflict, we will be looking at numbers and what they say about who "wins" and who "loses" so far.

¹Li Jiguang, "Temporarily End of the Trade War, What Has China Learnt (贸易战暂告段落，中国有何收获与警示)", Beijing Daily, May 23, 2018
²Shen Minggao, Zhao Hongyan & Chen Jianghui, "There Is No Winner in the Trade War, But There Will Be a Winner Between China and the United States! 贸易战没有赢家，但中美之间会有赢家！", China Chief Economist Forum, June 21, 2018
³"How to Respond to this Unavoidable Trade War - Interview with Yu Yongding at the Chinese Academy of Social Sciences 如何应对这场不可避免的贸易战？ ——专访中国社会科学院学部委员余永定", Caijing, June 7, 2018
⁴François Godement, "Obama in Asia", Yale Global Review, November 16, 2009
⁵Yao Zhizhong, "Recognition What the Victors Are in the Trade War 打赢贸易战的标志", CSSN, July 11, 2018
⁶Mei Xinyu, "Institutional Advantage: the Key to Win the Trade War 制度优势:迎击贸易战的关键底气", People’s Daily Overseas Edition, July 16, 2018
⁷Ibid
⁸Su Qingyi, "The Impact of Trade War on the Chinese Economy Is Limited and Controllable 贸易战对中国经济的影响有限并可控", Guangming Daily, August 10, 2018
⁹Ibid
¹⁰Wang Yiming, "U.S. Trade War Cannot Change China's Period of Historical Opportunity 美国打贸易战改变不了我国所处的历史机遇期", Qiushi, October 27, 2018
¹¹Ibid
¹²Zhong Feiteng is head of the Department of Great Power Relations Studies, National Institute of International Strategy, Chinese Academy of Social Sciences. Zhong Feiteng, "Beyond the Hegemony Competition: The Political Economics of the Sino-US Trade War 超越霸权之争：中美贸易战的政治经济学逻)", Foreign Affairs Review, August 30, 2019
¹³Li Shenming, "Properly Respond to the Sino-US Trade War Provoked by the United States 妥善应对美国挑起的中美贸易战", World Socialism Studies, August 5, 2019