Escalating US and China trade tensions pose a systemic geostrategic challenge
- In Foreign Policy
- 04:36 AM, May 17, 2019
- Ramaharitha Pusarla
In his Presidential campaign Trump took strong objections to America’s burgeoning trade deficit with China saying, “We can’t continue to allow China to rape our country and that’s what they are doing. It is the greatest theft in the history of the World”. After taking over as President, he hosted President Xi at his Mar-a-Lago, Florida estate where both leaders agreed to set up a 100-Day Action Plan sort out trade differences. Both countries reached a trade agreement following which US gained more access to China’s agriculture, energy and financial markets and reciprocally China is now allowed to sell cooked poultry to the US. Meanwhile, USTR began investigations into the trade practices, intellectual rights, transfer of technology, steel and aluminium imports. Underscoring the significance of strong US-China ties, Trump made a state visit to China in November 2017.
By March 2018, Trump signed a memorandum restricting Chinese investments into technology sector, imposing tariffs on specific Chinese products to protect the domestic manufacturing and taking China to task for its discriminatory trade practices at WTO. Prior to signing the trade memoranda, Trump unleashed “global safeguard tariffs” on steel and aluminium imports from different countries ushering America into an era of protectionism. In April China slapped a 25% tariff on 106 US products which included Soybeans, automobiles and Chemicals. In the next fortnight America announced seven-year ban on the Chinese Telecom company ZTE for violating US sanctions. Losing no time, China imposed anti-dumping duties on US Sorghum imports. Amidst these retaliatory tariffs, the countries held trade talks where America demanded China to reduce the $200 billion trade deficit within two years. Soon Trump retracted ban on ZTE and China withdrew duties on Sorghum. After China agreed to buy more Chinese products countries temporarily agreed to put a hold on tariff war.
But within a week both countries reinstated the 25% tariffs, on specific list of products, subsequently US levy 10% tariffs on $200 billion worth Chinese goods. Showing no signs of bowing down, US increases the tariffs to 25%. By mid-August China lodges a complaint against US in WTO. Unmoved by China’s second compliant to WTO, Trump threatens to impose tariffs on $517 billion worth of goods forcing China to the negotiating table. With both parties showing reluctance to reach an agreement, they roll out third round of tariffs in September. For the first time, in October representatives from both countries resume telephonic conversations. Finally, at a working dinner in G-20 Summit meet, countries agreed to stop levying fresh tariffs for a period of 90 days.
From January to March, countries held trade talks and Trump even extended tariff deadline. As a good will gesture President Xi met US trade representatives in Beijing and banned few strains of Fentanyl. After talks with Chinese officials on May 1st Steve Mnuchin announced that talks were “productive”. But by May 5th a diplomatic cable of 150-pages draft with numerous edits arrives in Washington where China reneges on its commitments reached in trade deal. The final document resonated Chinese reluctance to address the core issues that plagued the bilateral trade like transfer of technology, heavy subsidies to SOEs, intellectual rights, currency manipulation and access to financial services and insurance sector. Miffed by China’s eleventh hour’s manipulations in the trade agreement, Trump called for restitution of tariff regime and tariff rise from existing 10% to 25% on $200 billion Chinese imports.
USTR Robert Lighthizer, who headed US delegations took serious note of China’s effortless backtracking, mocked its “empty reform promise”. He called for enforcement of punitive tariff regime on China to bring about legally binding changes in its laws to ensure long term implementation of the trade deals. Toughening his stance Donald Trump tweeted “I say openly to President Xi and all of my many friends in China that China will be hurt very badly if you do not make deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed and you backed out.” With much of 30% of trade treaty edited at the last moment, the intractable differences over Chinese subsidies, still unaddressed, talks are halted.
On Sunday China announced 25% tariffs on $60 billion US imports with effect from June 1st and threatened qualitative measures severely hindering American business operations in China. So far, US levied tariffs on $250 billion Chinese imports and $110 billion US imports are subjected to Chinese tariffs. With this, China can levy tariffs on additional $10 billion, while America have a greater leverage over China as it can threaten tariffs on additional $300 billion. With China failing the limit state subsidies, US is mulling revision of its laws related to foreign investment and export of high-tech goods.
During the trade talks, government restrained hawkish Chinese media. After Trump’s tweet, “buyers of the product can make it themselves in the USA (ideal) or buy from non-tariffed countries”. Chinese officials hit back at the US saying, “China has not only the determination and capability but willingness to fight a prolonged war”. Invoking nationalistic spirit and to chide away Chinese critics who resented an extended trade war China upped the trade war rhetoric. On Tuesday Xinhua News Agency and People’s Daily accused US of “greed and arrogance” and termed mounting trade tensions as “People’s War”- the war cry of Mao Zedong against Japan. The editorial without naming Trump added, “the trade war in the United States is strongly advocated by one person and one team”. Amplifying this message, the state broadcasting service termed this as “fight for a new world” and that “there is nothing new we haven’t seen before”. Social media reiterated “the Chinese economy is a sea, not a small pond. A rainstorm can destroy a small pond but it cannot harm a sea. After numerous storms, the sea is still there.”
Trade war between the two largest economies is bound to have global impact. After a marginal recovery during the truce period, industrial activity in both countries tanked in April just before trade talks. Economists estimate that higher tariffs might cause 0.4 to 0.5% slide in China’s GDP and while US will experience 0.1% cut in GDP. Global GDP might register a 0.15% slump. Stock markets in both countries and across the globe have witnessed steady decline. While Trump is jubilant over accelerated growth rate of 3.2 in the first quarter, he is betting on the rate cut from the Federal Bank to ease pressure on the economy. Similarly, Chinese companies are rallying on anticipation of a fiscal and financial stimulus package. The first round of tariffs as of now didn’t have much impact on US but economists believe that American consumers might start feeling heat of next round of tariff because of difficulties in outsourcing goods from other sources. Nearly all growth indicators of Chinese economy have fallen and this is bound to have an impact on the slowing Chinese economy which is expected to grow at 6%.
The real bone of contention in the ongoing trade deal is Chinese subsidies. Determined to have an edge over America in high-technology manufacturing Chinese government in 2015 launched the grand “Made in China 2025” and identified ten crucial sectors. These include- telecommunications, electric cars, artificial intelligence, information technology, aerospace engineering, synthetic materials, bio-medicine, rail infrastructure, high-tech marine engineering and advanced electronic equipment. To emerge as global leader in technology, China is planning to pump in $300 billion. China’s aggressive push towards promoting Huawei as the global leader of 5G technology is test case of state-sponsored promotion of telecommunication industry. After Chinese officials informed that they can’t amend their laws which included curbs on industrial subsidies, US hardened its stance.
At the time of writing, intensifying trade war, President Trump signed an executive order banning Chinese telecommunication giant Huawei and other foreign companies from doing business in America citing national security reasons. Officials privy to these developments said that Trump signed the order prepared months ago. Huawei is placed in entity list blocking its from buying IT products from American companies. This order has created ripples in global telecommunications industry with EU worried about the plausibility of secondary sanctions in its companies as well. While the details of the order are not made public, it gives commerce department 150 days to frame regulations but markets are rattled. Chinese Foreign Ministry lashed out against Trump’s order as “an industrial sabotage”. Though China hasn’t announced retaliatory measures immediately, it is expected blacklist any American company as a message to the US.
China’s reluctance to cede ground to America in terms of ending industrial subsidies, low interest loans and tax holiday to exporting companies fearing domestic backlash has paved way for intensification of trade war. Though Trump sounded optimistic and expressed his keenness to meet President Xi along the side-lines of G-20 summit by the end of June at Osaka, blacklisting of Huawei is an attempt to arm twist Beijing.
Besides, the economic and technological war, by wading through the strategic waters of Taiwan Strait, America is taking China head on. Since 2018 America’s policy towards China transitioned from “strategic cooperation to strategic competition”. Strategists even signalled arrival of an era of “great power rivalry”. Indeed, the Sino-US relations till date symbolise coming together of nations whose ideologies diametrically divergent. Baring the critical and sparing congruence in economic policies, both countries are poles apart. The engagement which is now more than four decades old is devoid of trust and characteristically replete of suspicion and animosity. The common binding force of the Sino-US relations has been a threat from Russia. After Russia ceased to be a potent force, China refused to give way to America’s ambitions of being the lone super power. America’s refusal to cede world hegemony and acceptance of emergence of multipolar world heightened China’s fears. Soon both countries began to consider each as a “regime security” dilemma. Indeed, China’s deep-rooted suspicions of America’s intentions has been the guiding force behind PLA’s accelerated development of “New-Type Technology Weapons Plan” or the “995 Plan”. Development of the anti-ship ballistic missiles and unmanned aerial vehicles have integral to the plan. 995 signifies American bombing of China’s Belgrade Embassy over reports of Beijing assisting the Yugoslavia government in May 1999. Middle Kingdom which is unforgiving of its historical sufferings have renamed its advanced weapons development program as reminder of American attack. Ever since President Xi’s take over China made no secret about its ambitions of becoming a global superpower after its phenomenal success on economic front.
Notwithstanding the totalitarian policies of China, America maintained strong economic anticipating a libertarian outlook from Beijing. But the asymmetric trade practices of China and the mercantilist style of operation of China through the Belt and Road Initiatives have strengthened fears of Western World. Unlike free economies, China has fashioned and instituted BRI to offload its excess production and manufacturing. With its eventual rise and attempts to seek economic, trade, technological and military parity with America, Beijing is contesting the post-cold war era dominated by US. The eventual metamorphosis of economic symbionts into potential (implacable) adversaries’ is primed to lead to a tumultuous phase in geopolitics. This latitude of massive rejig in world order offers immense strategic opportunities for New Delhi.
References:
- https://thestrategybridge.org/the-bridge/2019/5/7/not-a-new-erahistorical-memory-and-continuities-in-us-china-rivalry
- https://nationalinterest.org/feature/trade-war-china-inevitable-56712
- https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/
- https://www.reuters.com/article/us-usa-trade-china-backtracking-exclusiv-idUSKCN1SE0WJ?fbclid=IwAR0VI78dgaQxe0iXRGt0bWSUSshUQgX8KtMOdHfNufVvCNOnBOZmAeEpLG8
- https://www.scmp.com/economy/china-economy/article/3009960/china-kung-fu-master-and-can-deliver-deadly-punch-us-economy
- https://www.marketwatch.com/story/bully-us-wishful-thinking-china-preps-for-peoples-war-as-trend-tensions-mount-2019-05-14
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