US-China Relations: Trade Wars or Countervailing Powers?

The Western powers have to acknowledge the rise of China and either include the country in the hegemonic core or be prepared for the emergence of a counter hegemonic power, writes David Lane, Emeritus Fellow of Emmanuel College, Cambridge University.

In 2018, the USA’s trade deficit with China amounted to 419 billion dollars: US imports from China came to $540 billion (major imports are computers, mobile phones and clothing) but flow the other way (aircraft, soybeans, vehicles) was only $120 billion. China has a massive positive balance of trade with the USA and has used its dollar surplus to buy US Treasury notes – thereby maintaining the value of the dollar, and concurrently making China its largest foreign lender. In December 2018, US debt to China was $1.12 trillion. These imbalances have had both positive and negative effects. American consumers have benefitted from lower priced goods, and American companies, with subsidiaries or suppliers in China as well as retailers in the USA, have profited. On the other hand, the flight of production to China and other Asian countries has led to significant loss of jobs – the number of employees in US manufacturing industry has fallen by 34 per cent between 1998 and 2010. Financially, Chinese ownership of US debt gives potential influence over US financial policy, as a blanket sale of Treasury notes would weaken the dollar and possibly lead to a rise of US interest rates making lending more expensive.

Trade Policy

An obvious solution to the imbalance is to increase tariffs on Chinese imports. This has been Donald Trump’s policy. In 2018, he raised tariffs to 25 per cent on Chinese steel and 10 per cent on aluminum imports. In May 1919, the USA increased tariff rates from 10 per cent to 25 per cent on 5,745 Chinese goods. China immediately responded by imposing tariffs of up to 25 per cent on 5,140 US products. These actions will certainly reduce world trade by considerable sums (the IMF has estimated a reduction of global growth by 2020 of 455 billion dollars).

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Some forecasts suggest that the US policy of deliberately reducing economic ties with China will lead to the transfer of some foreign investment and production capacity from China to ASEAN countries. Considering the uneven development of ASEAN countries, there are grounds to assume that the distribution of this limited gain will be very lop-sided.

Resolving these difficulties, however, is not merely a matter of negotiations over trade. Trade can be used as a lever in geo-politics. China’s relations with the West, especially with the USA, have deteriorated on many counts: suspicion over the One Belt One Road initiative, China’s more self-confident foreign policy, and the success in foreign markets of Chinese hi-tech corporations such as Huawei. In support of American companies, to counter Chinese economic penetration, the US has set up an ‘entity list’ requiring US companies to obtain licenses to sell products to selected Chinese companies as well as to control the purchase of their own commodities. The objective is to cut off China’s hi-tech companies from the global supply chain.

Political Differences

Underlying these developments is not just a disagreement about the conditions in which trade is conducted but also a more fundamental issue of the place of China in the geo-political system. The US and China have different views about how states should participate in the world order. The ‘opening up’ of China proceeded on the assumption of Deng Xiaoping that white cats and black cats were equally acceptable if they could catch mice. For Deng cats represented public and private sectors of the economy and legitimated private companies and foreign investment. Initially both sides gained from the opening up. Western companies were able to out-source production as well as setting up their own subsidiaries which earned profits. China gained from technological transfer and the market opportunities which arose from the opening up of markets under WTO rules.

Competitive Interdependence

In the next stage, China moved from being economically dependent on the West for technological development, to being in a state of competitive interdependence. China had turned the table and became a successful competitor. Faced with a rising economic power, the US then turned to making its own rules of international trade to work in its favour.

The Trump administration’s goal is to retain supremacy in the hi-tech industries which will shape the future: these include vehicles, new materials and electronic devices, gene technology and pharmaceuticals. US policy is to win back production domestically through tax measures, tariffs and neglect of environmental policies which benefit production in the USA, on the one hand, and put up obstacles to competitors on the other.

China still requires access to Western markets and encourages foreign investment to bring in advanced technology. To this end, China has opened up its own markets and has significantly reduced restrictions on foreign ownership of Chinese assets. The remaining block to overseas interests is the Communist Party’s effective control over strategic sectors, including financial services as well as state ownership of many large corporations. Foreign stakes in joint ventures are capped at 49 per cent. In Deng’s analogy, commercial cats don’t only create trade, but they fight each other and the black Communist cat does not want to be eaten up by the white bourgeois cat. This leads to conflict when the white cat has some other big hungry cats on its side.

The Rise of a Bi-Polar System

A consequence of these developments is that globalisation is moving into another phase. The Western view of globalisation is that, distinct from internationalisation, goods, services, capital should flow freely over borders. When the West (in the form of the dominant triad of USA, EU and Japan) was hegemonic, this kind of globalisation gave rise to a form of non-territorial power – as long as the rest of the world played to the rules of the universal global market. China, however, has not accepted this view of globalisation. What the Chinese leadership wants are accessible markets, but ones subject to controls by nation states. In this way states can limit not only the inflow and outflow of capital but also the flow of media.

China secured conditions for inward investments which respect to property rights and the transfer of technologies. The Trump administration, now facing the consequence of Chinese competition, appears to be following a similar line. By utilising state security as a pretext, the US seeks to damage companies such as Huawei. Exposing authoritarian tendencies will damage China’s image and its soft power. Civil rights issues have been exploited by the West: the ‘umbrella revolution’, the extradition demonstrations in Hong Kong, and the containment of the Dalai Lama and the Uyghur Islamists. These issues diminish the authority of China as a moral international actor.

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This is how a global economic crisis can break out. We can only but hope that China has a number of other strategies and non-conventional moves up its sleeve in case the trade war escalates in order to achieve results without leaving the global economy in tatters.

An unintended consequence of US actions will be to encourage import substitution by the Chinese. Their technical level is still behind that of the US but it is sufficiently advanced to enable domestic innovation. The economy, with a vast population and natural resources, is large enough to afford a high level of autonomous sustainability. China has extended its sphere of interests regionally through countries in the Shanghai Cooperation Organisation, the Eurasian Economic Union and the One Belt One Road Initiative. Under external pressure the political leadership will spur ideological invention and a strengthening of China’s civilisational values.

US policy is promoting a division of the world economy into two competing blocs. This will undermine the inclusive geo-political strategy of the Western triad (USA, European Union, and Japan). The possible benefits of military action against China are far outweighed by the costs. The present logic of world politics is that the Western powers have to acknowledge the rise of China and either include the country in the hegemonic core or be prepared for the emergence of a counter hegemonic power.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.