Trade War and Trading Places: The U.S.-China Trade Dispute Highlights a Broader Clash
“If there’s a great deal to be gotten, we’ll get it—if not, we’ll find another plan.” Such were the words of United States Trade Representative Robert Lighthizer, the chief American negotiator in the U.S.-China trade talks, in a sit-down with National Public Radio’s (NPR) Alisa Chang on March 25 of this year.
Ominous implications aside, Lighthizer’s remarks underscore the heightening tensions between the world’s two largest economies matched only by the rising tit-for-tat tariffs. Indeed, the suggestion of “another plan” in conjunction with President Donald Trump’s hawkish national security team is wholly unsettling.
Previous U.S. administrations were more relaxed about China’s economic and political might, preferring mutual benefits from trade to difficult conversations about trade norms violations and human rights. One particularly chilling example came after the Tiananmen Square protests in 1989. To save face, the U.S. halted arms sales to China, but President George H.W. Bush wrote to Chinese leader Deng Xiaoping, expressing a desire to keep the protests and subsequent military killings from injuring U.S.-China relations.
Since then, China’s meteoric rise has shaken modern relations between the global superpowers. In 1989, the U.S.’s trade deficit was about six billion dollars. In 2018, that number reached approximately four hundred nineteen billion dollars. During that period, President Barack Obama was the first president to take major action to restructure trade with China and reduce the trade deficit. In 2012, Obama administration, along with the E.U., and Japan filed a complaint with the World Trade Organization (WTO) over China’s quotas on metal exports which forced corporations to relocate to China. Obama also pushed for the Trans-Pacific Partnership, a free-trade agreement in East Asia that would have excluded China.
The deficit itself, however, may not even be an issue worthy of upending trade relations over. Many economists argue that tackling the deficit is largely a fiscally pointless goal, and that using tariffs to do so could raise prices and reduce trade without tangible benefits.
All the same, President Trump is obsessive when it comes to deficits, especially the deficit with China, and he believes that the imbalance of trade fundamentally subverts the U.S.’s interests. This fear has driven the president’s trade crusade against China.
On May 10, the U.S. decided to ratchet up tariffs on two hundred billion dollars worth of Chinese imports from 10% to 25%. In conjunction with tariffs of 25% on fifty billion dollars of imports implemented in July of 2018, roughly two hundred fifty billion dollars of Chinese imports are now subject to duties. Trump also appears to be considering expanding tariffs to another three hundred billion dollars worth of goods, which would cover nearly all of the U.S.’s roughly five hundred sixty billion dollars worth of yearly imports from China, but he has “not made that decision yet.” Implying he is closer to reaching a decision on an additional round of tariffs, Trump remarked on June 6, “I could go up another at least $300 billion and I’ll do that at the right time.”
In retaliation, China imposed tariffs on sixty billion dollars worth of American imports which took effect June 1. On the same day, the Chinese Commerce Ministry announced that it would be creating a list of “undesirable entities” that damage commerce or threaten security in China. American firms are expected to make the blacklist.
Recent escalations follow a breakdown in talks between American and Chinese negotiators. A major sticking point concerns the permanence of any trade agreement. The U.S. team wants the provisions of a deal to be enshrined in Chinese law. According to The New York Times, the Chinese team would commit to enforcement only “through regulatory and administrative actions.”
Worries about China’s commitment to trade deals are perhaps justified. Mark Cohen, former attorney at the U.S. Embassy in Beijing, wrote “US-China trade agreements have often had the staying power of the dew on a summer’s rose,” citing a lack of sufficient legal binding as the source of this problem. Cohen provides the 2010 U.S.-China Joint Commission on Commerce and Trade as an example: the term “measure” in the agreement was ambiguous, and therefore local governments “did not believe they were bound by this… commitment.” Such ambiguity captures the difference between formalizing a trade resolution in law as opposed to simply implementing regulatory or administrative provisions.
Notably, other concessions sought by the U.S. may come to pass. Appealing to Trump’s desire to reduce the deficit, Chinese negotiators have expressed willingness to purchase more American goods like soybeans. Currently, China is the U.S.’s third-largest export destination, and major export products include aircraft, medical instruments, and agricultural products—including soybeans, cotton, and pork. The U.S. would like to expand that last category. Other countries have avoided buying large amounts of food products from the United States because of the country’s food-processing standards, holding back the U.S.’s export potential.
The Chinese negotiators have also agreed to work to stop intellectual property theft of American firms. This issue has long been a source of contention in the U.S.-China relationship, and a Justice Department indictment in December of last year highlighted links between China’s ministry of state security and a hacking campaign to steal American trade secrets in high-export industries like aviation and pharmaceuticals.
Yet more dramatic changes sought by the American negotiators will be harder to secure. The U.S. wants China to stop state subsidies for domestic firms and to shift away from forced technology transfers used to compel companies doing business in China to share trade secrets.
In other words, the U.S. wants to roll back state capitalism in China. American officials find the extensive use of state subsidies, capital allocation through a massive central bank system, government pressure on international firms to turn over intellectual property, and other measures to be categorically unfair and threatening to American industry. Whether the threat of tariffs can convince the Chinese government to implement such decisive changes remains to be seen.
As the Trump administration tells it, the U.S.-China trade dispute will not only serve American interests in the future but has in fact already boosted the economy. In the first quarter of 2019, American GDP grew by 3.2%, exceeding forecasts. Treasury Secretary Steven Mnuchin claimed, “There’s no question that some of the trade policies helped in the GDP number.”
The actual effects on the American and Chinese economies are predicted to be more strictly detrimental.
According to the Organisation for Economic Co-operation and Development (OECD), if the current levels of tariffs persist and business investment falls, global GDP growth could shrink by as much as 0.7% by 2021 to 2022. Meanwhile the U.S. and China could experience slowdowns in growth averaging 0.2-0.3% per year over the same period. All told, a lack of resolution could reportedly push U.S. GDP down by 0.8%. This year alone, China’s growth could fall by a whole percent.
Further, as U.S. firms are forced to shift away from Chinese imports to avoid tariffs, countries with low-cost manufacturing like Vietnam and Malaysia are projected to benefit in the short term.
Throughout the dispute, Trump has implied that China will in some way pay the costs of the tariffs. In all likelihood, American consumers will suffer: the OECD estimates that consumer prices will rise by an additional 0.2% in 2020 due to the trade war.
In a tweet on May 14, Trump referred to “[o]ur great Patriot Farmers”, perhaps an acknowledgment that agricultural exporters could face greater difficulty in exporting to China following the implementation of the tariffs. Yet, Trump expects these farmers to be one of the “biggest beneficiaries” of his escalating trade conflict with China.
Trump has often suggested that being tough on China facilitates the U.S.’s long-term interests. This position scores the president points in the present political climate. There is an observable bipartisan consensus that China poses a growing and immediate threat to American interests, and that a strong stand against the Asian powerhouse protects those interests. Daniel Mattingly ’04, a Yale political science professor and China expert, explained the nature of the shift in thinking to The Politic.
“There’s been a reckoning with China policy in the U.S. That’s not just Trump. There’s been a bipartisan element to this.”
Senator Chuck Schumer (D-NY), the Senate Minority Leader, tweeted his approval of Trump’s hardened approach to China on May 5: “Hang tough on China, President @realDonaldTrump… Strength is the only way to win with China.” And last fall, a bipartisan approach was made to inform American executives of China’s intellectual property theft techniques, attended by Senators Marco Rubio (R-FL) and Mark Warner (D-VA).
It is no wonder the Trump administration feels emboldened to press China to change its fundamental economic model and commit such changes to the country’s laws. The U.S.’s efforts to change China’s underlying institutions reflects the broader strategic relationship between the countries—a relationship with troubling historical antecedents.
The Greek historian Thucydides in his account of the Peloponnesian War between Athens and Sparta wrote, “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.” American academic Graham T. Allison dubbed this the “Thucydides trap” and argued that the relationship could be used to describe a general tendency for waning superpowers to wage war against rival rising nations.
Some analysts, including Allison, have applied this comparison to present U.S.-China relations.
Indeed, the recent trade dispute’s irregular nature may highlight the degree to which U.S.-China relations have been poisoned by notions of hegemony. Negotiations have become about more than fair trade and economic policy: they encompass security and structure in ways prior trade disputes typically have not. There is a significant difference between the United States-Mexico-Canada Agreement asking Mexico to beef up collective bargaining powers of unions and the American negotiators attempting to rewrite how the Chinese government directs domestic commerce.
The U.S.-China talks are also atypical in their procedures. The WTO, the international body for resolving trade disputes, has been all but abandoned by the parties, with China having simply filed a complaint that the U.S. is violating its obligations to the group—all while continuing talks with American negotiators.
Still, blame for the bilateral nature of recent events might fall more squarely on the shoulders of the U.S., or rather those of Lighthizer, whose fondness of bilateral resolution is decades in the making.
Bilateral engagements to resolve trade disputes are not entirely unknown in modern American history. In the 1980s, Lighthizer served a central role in discussions with Japan regarding auto exports. The Reagan administration fought to reduce Japanese exports to the U.S., which were deemed injurious to American manufacturing. To produce such export controls, the American negotiators threatened to impose unilateral punishment on Japan. The threat worked, but it should be noted that U.S. military forces were present in Japan during the Cold War, and the country was a strategic ally of the United States. In contrast, China’s military capabilities more closely rival those of the U.S.
Lighthizer’s approach is also colored by his strategic understanding of China. He testified to Congress back in 2010 that “U.S. policymakers had a profound confidence in the ultimate triumph of democracy and capitalism…This confidence…which can now be seen as hubris,…encouraged many U.S. policymakers to believe that China would inevitably embrace democracy and capitalism.” For Lighthizer, it is exactly China’s lukewarm relationship with capitalism and its rejection of democracy that give the state competitive advantages over the U.S. Thus, Lighthizer’s view would suggest U.S. interests can only be protected by forcing reforms on China. In his interview with NPR, Lighthizer stated, “I don’t think it’s unreasonable at all to expect that [China] operate on commercial principles the same as the rest of the world if they’re going to take advantage of those principles and those markets in the United States.”
Another complicating element of the trade discussions between the U.S. and China is the extent to which national security interests are involved. After the recent breakdown in negotiations, the U.S. Commerce Department announced restrictions on Chinese tech firm Huawei from working with American telecommunications firms. The U.S. had previously pressured allies to avoid working with Huawei in building ultra-fast 5G network infrastructure. According to Mattingly, the targeting of Huawei might be even more infuriating to the average Chinese citizen than the tariffs. “It’s a company that is a symbol of China’s rising technological power, a symbol of China’s growing prosperity,” he says. When asked whether attacks on Huawei might serve U.S. interests despite the costs, Mattingly expressed doubts: “In my view, the Trump administration has taken this too far in a way that doesn’t really benefit American interests. Nor is it clear that there is a coherent strategy when it comes to trade with China.”
The decision to block Huawei’s access to the West does not stand out: Chinese students have been subject to increased scrutiny regarding visas due to suspicions of espionage; Chinese investors face tougher review by the Committee on Foreign Investment in the United States, even for property purchases; and several U.S. departments have increased efforts to monitor supposed threats associated with China.
Thus, when American and Chinese negotiators discuss trade and commerce, it is against a backdrop of deep mistrust and Sinophobia.
It is no surprise that Kiron Skinner, a State Department policy expert, said recently at a think-tank forum, “It’s the first time that we will have a great-power competitor that is not Caucasian,” and called for a new approach akin to containment, the anti-Soviet Cold War strategy, to address China’s rise.
Recent updates suggest the conflict is only worsening. China has threatened to restrict the export of rare-earth metals, and Huawei updated its lawsuit against the White House. The legal challenge is against a bill that would prevent government agencies from contracting with firms that use Huawei’s equipment. Further, John Bolton, the national security adviser, met with his Taiwanese counterpart—a decision likely to enrage the Chinese government. Bolton’s decision undermines the One-China policy, and such a meeting has not occurred since the end of formal relations between the U.S. and Taiwan in 1979.
All the same, both Trump and Chinese president Xi Jinping face domestic pressures to arrive at some kind of resolution on trade. Many hope the G20 summit in Japan will present an opportunity for Trump and Xi to work towards such a resolution. The more prescient question is whether discussions can avoid a Thucydides-style conflict of truly epic proportions.