United States President Donald Trump’s declaration of tariff warfare against China has little to do with trade. It is about raw power, a struggle over which of the two sparring hegemons will dominate technology and run the world in the 21st century.
The pretence of cordial coexistence has all but ended in the Hobbesian era of Trumpism. The latest US national security strategy report for the first time names China as a strategic rival that seeks to “challenge American power, influence and interests, attempting to erode American security and prosperity”. It is the poisonous-diplomatic context that makes this week’s trade skirmish so dangerous.
The Trump administration has justified its trade assault by dusting down Cold War laws and invoking US national security, accusing China of systematic economic theft. It specifically targeted the 10 sectors named in the Communist Party’s “Made in China 2025” report, Beijing’s blueprint for industrial domination under a command economy.
The Chinese should hardly be surprised that this party document released in 2015 should have raised alarm bells in Washington. It calls for the output of 100,000 robots annually within three years, with the open intent of leapfrogging the US in a robotics arms race. The list covers aerospace, electric vehicles, biomedicine, semiconductors, cloud computing, and artificial intelligence, all backed by state subsidy.
The Bush and Obama administrations both sought a modus vivendi with China, careful to avoid the “Thucydides Trap”, the eternal question of how dominant powers should handle emerging challengers. “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable,” said the Greek general in his History of the Peloponnesian War. Our modern textbook case was Franco-British fear over the rise of Wilhelmine Germany before the First World War (or was it Germany’s fear of Tzarist Russia?). Yet as Harvard’s Graham Allison argues, conflict is not pre-ordained. Britain ceded world leadership peacefully to America.
Former US president Barack Obama had sought to draw China into the international system through the G20 and the International Monetary Fund, treating Beijing as co-equal in a global condominium. Trump’s war cabinet will have none of it.
John Bolton, Trump’s National Security Adviser, preaches containment. “The West has bought into the illusion of China’s ‘peaceful rise’, that they’re going to be a ‘responsible stakeholder’ in world affairs; but they’re not engaged in ‘peaceful rise’ activities right now as you look at their military budget and their belligerent conduct in the South China Sea,” he told Breitbart News. The US sanctions detailed this week — but not yet activated — entail 25 per cent tariffs covering $50 billion (Dh183.9 billion) of Chinese exports in 1,300 hi-tech product lines from aircraft parts, to satellites, machine tools, and medical equipment. US companies have until late May to raise objections. Washington says China can still defuse the stand-off by opening its markets.
Beijing’s riposte has been symmetrical. It unveiled a tit-for-tat list of 106 product lines: Small aircraft, cars, chemicals, and soya beans, carefully chosen to hit Trump’s electoral base. “Any attempt to bring China to its knees through threats and intimidation will never succeed,” said the Chinese Foreign Ministry.
China and the US are now on a collision course. Trump tweets that “trade wars are good, and easy to win”. He has threatened to match retaliatory sanctions with yet more sanctions in an escalation spiral. Chinese President Xi Jinping in turn cannot show weakness. He will respond with equal calibration at every stage, even as he tries to seize the high ground by taking the case to the World Trade Organisation.
A Wall Street crash is perhaps the only deterrent that Trump really fears as the mid-term elections approach and Democrats threaten to gain control of impeachment powers on Capitol Hill. China could — if it chose — trigger this with large sales of its $1.2 trillion holding of US Treasuries. Yet, it is a perilous game for China as well.
It is an open question who would be hurt most if the stand-off worsens. China’s hawks are clearly prone to hubris and delusions, unaware of just how fragile their system has become after pushing debt to 270 per cent of gross domestic product. The return on new credit has collapsed and officials at the central bank (PBOC) fear a “Minsky moment”. The catch-up growth model is exhausted. The middle income trap looms.
Trump swings from cynicism to credulity. He thinks in childlike terms, convinced that China’s $375 billion surplus with the US renders the Chinese more vulnerable. Yet, the trade balance is almost meaningless. Apple generated $48 billion in revenues from China in 2016. This was nearly all from iPhones. Yet, data show almost zero imports of mobile phones that year. “From an international trade perspective, iPhones sold by Apple’s Chinese subsidiaries are not counted as imports. But from an economic and financial perspective, the iPhone is a US product, and the US benefits the most from it,” said Deutsche Bank.
An Organisation for Economic Cooperation and Development (OECD) study concluded that $334 from each iPhone made went to the US and just $10 went to China where final assembly occurred. Deutsche Bank estimates that $223 billion of US corporate sales in China are not reflected in trade figures. This brings the “aggregate sales balance” close to equilibrium. Of course, Trump might in one sense welcome a crisis that forced Apple, et al, to shut their factories in China and “reshore” back to the US. The anti-China camp is right that the Communist Party ruthlessly “gamed” the global trading system and exploited US markets after joining the World Trade Organisation. It pursued a mercantilist strategy of export-led growth, conquering foreign market share by holding down its currency.
It was this that prompted White House trade chief Peter Navarro to publish his book, Death by China, in 2011. Yet, the story was already out of date even then: China began to let the currency rise in 2005. Its current account surplus has shrunk from 10 per cent to 1.3 per cent of gross domestic product, heading to zero as the nation shifts to a consumption economy.
China is no longer a trade “sinner”. The US Treasury deems Germany to be a greater violator (via the euro). But that is not what this dispute is really about. The message that emanates from Bolton and Navarro is that China is an elemental threat to US strategic interests and must be checked before it is too late.
This is all too like the thinking of Sparta’s Archidamus in 430BC, or the thinking of Germany’s high command about Russia in 1914. To expect arguments of rational self-interest to prevail as this saga unfolds is to ignore history. We have moved beyond the realm of homo economicus.
— The Telegraph Group Limited, London, 2018
Ambrose Evans-Pritchard is International Business Editor of the Daily Telegraph. He has covered world politics and economics for 30 years, based in Europe, the US and Latin America.