Trade War Only the Beginning, Battle Not Over Yet

Personal view of the U.S.-China trade war

Qiming Sun

Doctoral advisor and professor of School of Economics and Management, Beijing University of Posts and Telecommunications

Deputy Managing Director of Hainan Green Industry Co., Ltd. (environmental industry) and Service Economics Research Center

Since its reform and open-door policies began, China has basically maintained a trade surplus, while the United States has been running a trade deficit. Initially, China earned dollars by exporting resources, primary products and low value-added products. Let us take the textile trade as an example. At a high-quality cotton production site in Xinjiang, cotton farmers used the rare Tian Shan snowmelt for irrigation, polluted the land with pesticides and chemical fertilizers to ensure cotton production volume and quality, and kept export costs low by reducing the salaries of the female workers harvesting the cotton. Even so, Chinese cotton fabrics were restricted by the United States’ strict import quotas, and the exported high-quality cotton fabrics were thrown away after one use like cheap goods. Despite their efforts, they had earned only a tiny amount of dollars. The small trade surplus was earned by nothing less than the hard work of Chinese workers. At that time, China had to endure structurally unequal trade because its economy was weak and its overall capability was poor. China barely managed to save dollars. China in those days was not a threat to the United States and therefore did not come under the U.S. microscope. In other words, from the perspective of the United States, China at the time was merely a supplier of low-end products and, while providing benefits, could not be a strategic competitor. Therefore, all the United States had to do regarding its debt was simply demand a revaluation of the yuan from China.

However, now times have changed.

China is already the world’s second-largest economic power, and her GDP is higher than that of the United States at 60%. As the historical experience of the “Thucydides Trap” shows, if the growth of an emerging economic community threatens the status of the number-one economic community, then the rivalry between the two communities can extend beyond superficial bargaining to an all-out conflict. The bargaining between the United States and China is “revolution.” “Revolution is not inviting guests to dinner, elaborating documents, drawing pictures, or embroidering. It is not such an elegant, graceful thing” (Mao Zedong). In U.S.-China trade negotiations, diplomatic messages such as “mutual equality”, “mutual exchange of assistance (providing one another with what one has but the other doesn’t to benefit both)” and “win-win lose-lose (If you work with one another, both will make a profit, but if you both go it alone, then both will lose out)” can of course be used, but it is important to remember that this is a life or death struggle, with the winner becoming the king and the loser becoming the prisoner.

Opinion 1: Since the end of World War II, the United States, the world’s largest economic giant, has always strategically surrounded and launched effective attacks on the second largest economic power. Turning over the front car is a warning to the rear car (a proverb that says when you see a car in front of you overturn, your car should not follow the same path), and so far, U.S. attacks have been absolutely appalling.

After World War II, the Soviet Union became America’s main competitor. The Soviet Union was a victorious member of the Allies, with its economic, political and cultural capabilities comparable to those of the United States, as well as having superior natural resources. At that time, the world was comprised of the two super powers – the United States and the Soviet Union – and divided into two camps – capitalism and socialism. During the 40 years of the Cold War and the arms race, however, the Soviet Union had to sell natural resources by the piece to pay for it. On the other hand, the United States simply paid in the dollar bills it had printed. Over the past 40 years, the Soviet Union’s national wealth was almost depleted and the balance between its industry and its economy collapsed. Moreover, the Soviet Union lost its chance to become the world’s richest power because it did not place the improvement of the people’s welfare as the primary goal of its national economic development strategy.

Until then, this was just the first of a long battle between the United States and the Soviet Union.

Afterwards, a Nobel Prize winning American scholar, Jeffrey Sachs, and the acting Prime Minister of the Soviet Union, Egor Gaidar, carried out the 500 Day Program to privatize the state-owned properties of the Soviet Union. As a result, this not only sent the Soviet economy into a serious shock but also caused the Soviet Union, which had 15 constituent republics at that time, to be dissolved and revert back to present-day Russia. When the Russian savior, now called the “Great Emperor Putin” said “Give me 10 years and I will give the Russian people a strong Russia,” the United States dropped the price of oil, triggering a bomb that backed Russia into a corner, just as its economy was beginning to recover. After such a long, drawn out Cold War and endless, pinpointed attacks, Russia has become unable to match the United States for the time being.

In the 1970s, it was Japan who was the target of U.S. attacks. After World War II, the United States supported and developed Japan after its defeat in World War II, expanded its dollar issuance, and established its own world hegemony. It has also used Japan as a strategic base in the Pacific to restrain the development of the Soviet Union and China. The Japanese economy, which was supported by the United States, grew rapidly, creating a miracle in the history of the world economy. At the end of the 1980s, Japan’s financial assets once overtook the United States to become the world’s largest. In the early 1980s, however, the United States launched “Plaza Accord,” triggering the appreciation of the yen and the collapse of the bubble economy. The bomb exploded and the bubble burst when Japan was enjoying the euphoria of a strong yen – when the rich Japanese were gobbling up luxury goods and antiques from all over the world, when Japanese companies were buying real estate such as Columbia Pictures and Rockefeller Center, and when they said, “Tokyo’s wealth can buy the United States” and “We’ll buy the Statue of Liberty and made her wear Japanese clothes.” The Japanese economy has remained stagnant since “the Lost 20 Years.” and though Japan has managed to maintain its position as the world’s second and third largest economy, it has lost the courage to stand against the United States, and is now at its beck and call.

The United States’ third and most formidable rival is the European Union. The pinpointed attack on the euro was one of its most subtle and ingenious attacks which took full advantage of market forces. While Britain, France and Germany cannot compete with the United States on their own, joining forces means their power is not just increased, but multiplied. From the day the EU was born, the goal of the euro has been to unite Europe and overcome the dollar’s hegemony. In fact, the euro has even managed to compete against the dollar over a certain period of time in some areas. For the United States, the euro has been the natural enemy of the dollar and a thorn in its side since its inception. For a while, Europe and the euro were able to stay strong, so the United States could not attack them easily. Since 2000, however, the United States has seized the advantage. The economic situation in EU member states has varied widely, and some governments have long been saddled with massive debts. In retrospect, the Lehman shock in 2008 was the ideal spark for the United States to ignite the fire of the European debt crisis. In addition, the subsequent refugee crisis and Britain’s exit from the EU have become a succession of explosions aimed at bringing down the skyscraper of the euro. My reason for saying this is twofold. Firstly, although the United States was hurt as a result of the financial crisis, its injuries were not serious. Russia and Japan continued as before, and China was able to seize the opportunity to expand further, but the euro was brought to the verge of a collapse. The current trend shows clearly that the EU and the Eurozone are slowly going downhill, and there is nothing they can do about it. Secondly, the ability of the United States to regulate its economic cycle over the last 30 years and its experience in dealing with the dot-com bubble in 2000 shows that after the subprime mortgage crisis began, the United States must have had the ability to prevent the first domino – “Lehman Brothers” – from falling. Despite having the power to delay or recover from the Lehman crisis, the fact it did nothing allowed this financial crisis to provoke a series of crises, including the European debt crisis. In the end, they succeeded in defeating the EU and the euro. The precision and perfection of this means of attack seemed to be ordained by heaven, so breathtaking was its skill. It was not something that could be achieved by a single person or government during one term of office. It was the result of long-term strategic maneuvering by the United States, whose long-term strategic philosophy was to manipulate market rules and target competitors. The weakening of the euro is a major victory for the dollar. At this point in time, the ruble, yen, and euro have all been given a thorough beating by the dollar. Needless to say, the next target will be the yuan.

Opinion 2: The trade war is just the beginning of the game between the United States and China. There will be a real economic war, high-end technology war, information war, financial war, and in a worst case scenario, real war.

In the real economic war, the “Made in China 2025” strategy would counteract the reshoring strategy of the U.S. manufacturing industry. The United States dominates high-end manufacturing but is deficient in low-end and mid-range manufacturing, and they are in need of skilled workers. China’s evaluation of its own manufacturing industry is “We are many, but not strong,” and the “Made in China 2025” is focused on strengthening its manufacturing industry. China’s low-end and mid-range manufacturing covers all sectors and is the most complete manufacturing industry in the world. It also owns high-end manufacturing technologies such as highways development and Maglev technology, so if China’s manufacturing could work with countries like Russia, Japan, and Germany, it would be the on top of the world. In high-end technologies, Huawei is fighting back, but we should recognize that China is losing ground overall. There’s still a long way to bridge the gap between Huawei’s Hong Meng OS and Google’s Android, and BeiDou Navigation Satellite System and GPS. In terms of educational culture and information management, Chinese Marxist political economics is in a confrontation with Western micro-macroeconomics, and China’s traditional “golden mean” culture as disseminated by the Confucius Institute is set in opposition to American foreign culture. Both are strongly independent, so they will compete both in the short and long term. In the financial war, the dollar is much stronger than the yuan, but the biggest advantage of the yuan is that it can be centrally controlled by the state. As long as the internationalization of the yuan does not fall into the trap of U.S. currency control, Beijing’s ability to resolve the financial crisis may be comparable to that of the United States. In terms of military power, the United States has a clear advantage, but China’s military power cannot be underestimated, as illustrated by the saying that “Those who have known soldiers since ancient times are not warlike, and those who invade us should be killed even if they run to the ends of the earth.”

Opinion 3: A strategic policy to use as bargaining chips between the United States and China. Establish a stable, tripolar system by forming a coalition with Russia and Europe, and teaming up and developing together with countries along the “One Belt One Road” initiative.

The game between the United States and China will not finish easily. Since its foundation, the People’s Republic of China has been besieged by capitalist countries such as the United States. Now, half a century later, the U.S. dollar has overcome the ruble, yen and euro, although it has declined politically due to 9/11 and economically due to the financial crisis. In the meantime, China has finally become no.2 in the world and the yuan has earned the right to face the dollar. In fact, the United States has always restrained China’s development. It’s just had so many competitors to deal with that it wasn’t able to target China up till now. Now, China is already America’s strongest competitor. The curtain has now been raised on strategic bargaining between the United States and China and the Senkaku Islands dispute and Hong Kong Umbrella Movement are only a taster. The South China Sea disputes are the start of the game. In response to the United States’ strategic naval blockade on China, China advocated the “One Belt, One Road Initiative” and established the AIIB to strengthen the foundation for the internationalization of the yuan. Therefore, it is China’s permanent objective and code of conduct to unite and develop together with countries along the “One Belt One Road.”

According to the triangular principle of stability, a stable, balanced and harmonious world system can be formed only when the three vertices keep each other in check. The ideal “tripolar system” would be as follows. The EU will not be dissolved, but will continue to be independent from the United States as a political, economic and military alliance, acting as a pole in the world. China and Russia form an economic, military, and diplomatic community and constitute a power that maintains worldwide peace and stability. The last pole is the United States.

The greatest difficulty in creating the stable tripolar system lies in creating an alliance between China and Russia. Although there are still many uncertainties toward the establishment of an alliance between China and Russia, it is a natural trend for China and Russia to form such an alliance for their survival and development as the global strategic structure changes. There are three reasons. Firstly, China and Russia have long suffered from the dollar’s hegemony. Like a reaction to repression, China and Russia want their own strength and share a common desire to escape the hegemony of the dollar. Secondly, neither China nor Russia can compete with the United States on their own. If you cooperate with one another, you will both profit, but if you go it alone, you will both lose out. Only when two forces come together can they constitute a global monopole. Moreover, since China and Russia are highly complementary to each other in terms of resources, industry, and military, and both have large populations and land areas, the two countries could solve many problems if they collaborated together. A China-Russian alliance can provide China with massive strategic support; it will solve China’s plight by designing and leading a strategic global structure, greatly enhance China’s ability to deal with a variety of issues in the region, and act as a settling influence on South China Sea disputes. China and Russia can also work together to intervene in the Middle East and form strategic alliances with Middle Eastern countries. The strong attraction of a China-Russia alliance will push more and more Middle Eastern countries to turn away from the United States and lead to an increase in the number of satellite countries of the China-Russia alliance.

Another difficulty in creating the stable tripolar system is preventing the EU from collapsing. The European debt crisis, acceptance of refugees, Britain’s withdrawal from the EU, France’s troubles and Germany’s financial difficulties are all superficial issues. Fiscal and military integration are the fundamental solutions to protect the EU.

From the perspective of China itself, developing a strong air force and navy is a prerequisite for China to emerge as a major power. Therefore, China’s strong military strategy and development and construction in the South China Sea are inevitable choices. Building a strong nation through science and technology based on “Made in China 2025” is the only way to strengthen China’s economic power. National education and Chinese cultural confidence will be the driving force to develop China.

（This paper was written on 14 June.）