co-author of Red Capitalism, The Fragile Financial Foundations of China’s Extraordinary Rise
There are few areas in which President Trump can claim to have bi-partisan support but his China policy is one area which has energized both parties and many other constituents across the globe. Whether there is a Trump China policy is often not even clear. Policy implies a clear, coherent and comprehensive series of measures and legislation to achieve some specific goals. Few could articulate the measures or goals but his willingness to speak bluntly towards China and its many breaches of international norms, abusive trade and business practices, and impose tariffs on Chinese imports has started the most frank and dynamic discussion around of all areas of Chinese engagement for decades.
Trump has opened a Pandora’s Box of China issues that will long outlast his Presidency, whether it be one term or two. To many with direct experience of the country his complaints are well known. For decades businessmen have complained in private of the difficulties of doing business in China while publicly lauding the Chinese marketplace for future growth and kowtowing to Chinese leadership in the hope of great favour. China’s neighbours are alarmed as China speaks words of friendship and peace yet claims almost all the South China Sea, builds manmade islands and then promptly militarizes them breaking a promise not to. Ethnic populations in Tibet and Xinjiang have for years suffered persecution, as have lawyers and dissidents who have called only for the country’s own constitution be followed.
After years of engagement underpinned by an underlying hope that a richer, prosperous China would naturally bring political reform Trump has called time on that. The post-Tiananmen model of engagement is a poor guide for what is coming next.
Before his election Trump promised to get tough with China on trade. Through 2017 it was business as usual yet as 2018 dawned the gloves came off and Trump started a series of tariffs on solar, steel, washing machines and other goods not only against China but also against the US strongest allies of the EU, Japan and South Korea. Trump reveled in calling out bigger tariffs, 25% up from 10%, over an ever-larger range of goods, 50 billion USD, 200 billion USD! He had all the big numbers in his favour. As the deficient was so large China’s direct response simply could not match Trump on a like for like basis. But his fixation on the bilateral trade deficient is like judging your health solely by measuring your height. It is only one measure, and a pretty limited measure of the economic relationship between two countries. The talk of China to buy more agricultural products or energy from the US would adjust the bilateral deficient but do nothing to address the real issues which American and other foreign businesses have with China. Market access, an uneven playing field within China, vast intellectual property theft and forced technology transfers cover part but not all the gripes. None of those could be understood by looking at a trade deficient nor does trade in services or capital flows get considered from such a narrow lens.
But Trump’s blunt approach did allow others to step and broaden the discussion. No one now, one hopes, thinks the trade war is solely about a deficient or how many tons of soybeans China will or will not buy. But therein lies a fatal flaw in the hopes of a trade deal. A “deal” just can’t address all the problems which flew from that Pandora’s Box.
Since those first shots in early 2018 the Trade War has been front page headlines. For the past year it is has been a series of on again off again negotiations. Expectations raised; expectations dashed. A brief Trump Xi meeting results in what’s called a truce that lasts a few days before official or unofficial channels on either side talk back up the serious disagreements and insincere approach of the other side.
Is a Huawei deal part of the trade negotiations or not? Was Meng Wenzhou detained for legitimate sanctions busting charges or is that just a cover just to gain a human pawn in the bigger discussion? Almost anything seems possible as the world’s largest two economies fall out and readjust their interactions. Huawei is the latest beneficiary of the latest truce with a partial relaxation of the earlier crippling restrictions, but it sends a very confusing message both domestically and internationally. What exactly is the Trump China policy? The Chinese have grown used to a predicable US administration regardless of political persuasion then used and abused that stability to their advantage. Now instead they are left punch drunk as Trump has an endless ability to starts fights but is less impressive at ending or winning them.
The reality though is that there can be no “deal” between China and the US, certainly not a comprehensive one which can address the myriad of issues outstanding between them. There may be a deal covering certain aspects of trade and enforcement mechanisms, but the underlying countries economic infrastructure is so fundamentally different. Even then the deal maybe little different from the outcome of renegotiating NAFTA which changed little beyond the name and is yet to come into force.
What is already happening is the realignment of global supply chains and China’s role as factory of the world. For several years, the cost of manufacturing in China has been rising and has ceased to be the cheapest producer for certain industries. Manufacturers are already moving production out of China, seldom to the US, but to South East Asia or back to Korea and Japan. Automation and robotics have cut the dependency of armies of low skilled workers. Manufacturing in China will become for the China market as there seems little upside and lots of headaches to be Made in China for sale in the US.
Investment in China will be scaled back for fear of putting too many eggs in a China basket. Why make a high-profile investment now? Better to delay for 6 months or longer and see how things play out. Even as China has lowered thresholds in the financial sector is there really an opportunity now that the Chinese economy is slowing, and the domestic players have such entrenched positions?
As the business environment sours foreign personnel will be moved out of China. Partly from safety concerns but also driven from a desire to localize staffing and the simple reality that China isn’t offering the business potential which requires more experienced staff.
The change in engagement with China will see a bolder and more forthright business community willing to speak up about the uneven playing field and pressures they face in China. This has already started with chambers of commerce speaking out to highlight the difficulties confronting their members.
Of course, the anti-China rhetoric of the political sphere in the US is causing a backlash there as well. At times bordering on the racist, there is a much greater scrutiny, some would say paranoia around Chinese born researchers, engineers, students and businessmen. Cancellation of long-term visas and generally tougher entry requirements has already taken its toll. The backlash comes from the earlier naïve policies which ignored basic reciprocity and rushed to open the doors to Chinese without sufficient checks or the promised openness from the Chinese side. American policy across many areas of China has been willfully blind to the real challenges that China poses. China had largely made its intentions clear, but policy makers ignored long term Chinese ambitions to achieve short term returns. After decades of multi-level engagement is it any wonder that trying to rebalance, and in some areas completely re-align the interaction, that there are going to be mistakes, excesses and pain.
What does a coherent China policy look like? What tools remain in the Trump toolbox? And is the “trade war” even winnable?
Firstly, the trade war dialogue talks about a deal and to Trump maybe he does see this like any other real estate deal or reality TV business. But this isn’t a single contract, dealing with China is going to vary tremendously from field to field. Global issues like climate change and ocean pollution requires co-operation from all sides, yet other areas will be hardnosed, bilateral and at times even confrontational.
Trump should be reaffirming alliances with America’s longstanding allies. Almost all allies have similar gripes and concerns with China, so it is foolish to pick fights with everyone. Trump’s entire style, manner and delivery has alienated the EU, and while having a good relationship with Japan he has called into doubt the post-war security alliance. Yet a combined US, EU, Japan approach to China is the last thing China wants. It would be an unbeatable grouping. China delights is playing one side against the other in a game of divide and rule. It has great success is exploiting the weaknesses within the EU to curry favour with Eastern European countries and Italy as the EU central authorities try to form a tougher China policy.
Developing from that should be the reassessment of the TPP trade deal. Thrown out by Trump in the first day of his presidency this multi-lateral deal was focused on pressuring China to change if it wanted to deal with these countries. Locking in Australia, Japan and the rest of the Pacific is very much in America’s favour. Rejecting multi-lateralism when it comes to China will result in partial and ad hoc arrangements which China will exploit to the fullest.
The West should look to call out China when it breaches agreed norms or indeed its own promises. Too often grievous human rights abuses or geopolitical grasping are downplayed or addressed in private so as not to offend China. This needs to stop. Calling China to account publicly for the situation in Xinjiang, the South and East China Sea or indeed in the economic sphere is essential for a healthy and honest interaction. That does not mean a late-night twitter blast but proper open discussion, statements and action from the entire administration. Nobody concerns themselves with criticizing the US yet almost all shy away from speaking plainly to and about China.
Beyond trade tariffs the US still has tremendous leverage over China. As home to the world’s deepest and broadest capital markets the possibility of a capital war front is all too real. Senator Marco Rubio has already fired early salvos in that field with recent legislation demanding higher disclosure standards on Chinese companies listed in the US. That is only the tip of the pressure that could be applied if the full might of the US system was directed at restricting China access.
A similar story could be told of technology, specifically chip design. While many marvel at recent technological advances and catch up of China it must be remembered that China runs on Intel chips and US intellectual property. Huawei sits at the center of that debate and therefore it is emblematic of many of the issues raised by the trade war.
Trump has reset China US relations. There is no going back to the previous failed policies but his blunt approach and narrow focus on deficient and tariffs is not the basis on which to build a realistic relationship. However unpleasant outsiders find the Chinese Communist Party, the Chinese economy is not on the brink of collapse, China is not Venezuela, nor is there reason to think the CCP is just going to dissolve away. Authoritarian rule in China is too strongly embedded to think it will evaporate overnight.
A full out economic war between the US and China is not a desirable outcome of the existing confrontation. Both economies will suffer and with them the global economy. But dealing with China needs to be based on the reality of what China is and what it does. For the past three decades the US and others have dealt with China based on what they hope it will become and now they are shocked to realize that China didn’t develop as they hoped. That is changing.
（This paper was written on 20 July.）
Privatizing China: Inside China's Stock Markets
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Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise
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