US-China Trade War — A War Without Winners
The ‘Liberal International Order’ is an open and rule-based order (1) that stands on three pillars — the Security Order, Economic Order and Human Rights Order, that define its scope and nature and take under their purview the areas of globalisation. While understanding and perceptions of this order have grown and evolved since it was first signed in August 1941, the challenges facing it today are far from what was anticipated by its makers.
Revisionist and authoritarian powers in the world are challenging the status-quo of this order in more ways than one. This article explores one such power nation — China, which with the unprecedented growth of its industry, and consequently influence, has threatened the current global order and with it, The United States of America.
History of China’s Industrial Revolution
Under the guidance of Deng Xiaoping, China, in 1978, opened its doors to the world under its New Economic Policy. Special Economic Zones or SEZs were set up across the country to modernize and boost China’s Industry. FDI was welcomed and foreign trade regulations were also eased. This was the turning point of China’s economic fortune, which paved its way to becoming ‘The World’s Factory’(Ding&Meng-2017) (2).
With an average annual trade expansion rate of about 15% (Wei-1995) (3), China jumped ranks in world trade volume and between 1978 and 1989 went from 32nd to 13th in world exports. Carrying on this rally, by 2010 China had a world market share of about 10.4% (WTO) and by the end of 2013, it had overtaken United States with a total Import-Export value of the US $4.16 trillion (Rushton2014) (4). From 1987 to 2013, China has experienced an unprecedented growth rate of 9.5% every year.
China has become the world’s largest economy (on purchasing power parity basis), manufacturer, merchandise trader and holder of foreign exchange reserves (CSR Report) (5). Among the major reasons attributed to the success of China’s Industrial Policy are — Large scale capital investment, both domestic and foreign, rapid productivity growth and productivity gains i.e. increases in efficiency due to reallocation of resources and disinvestment.
China in a Globalising world
When the Chinese economy realigned its goals from a closed radically communist system to the open-door economy, it created a two-way passage for trade and investment with the world. The world and more specifically the Western Powers consisting of Europe, the Americas and Australia welcomed this move with two aims in mind — An access to one of the largest consumer markets in the world and a hope, that opening up of the Chinese economy would eventually erode the Authoritarian style of governance and China would fall in pattern with the liberal world order as a country having not just prosperity but also freedom and security.
For China, on the other hand, the sole purpose of opening up its own market was access to other large global markets. In the past 30 years till 2012–13, China has single-mindedly focussed on turning itself into the largest manufacturing and exporting hub with a larger agenda for economic world-dominance. This objective has been actively achieved through a series of measures including low minimum wages (which was not difficult to implement owing to the abundance of semi-skilled labour), a congenial business ecosystem with an efficient, low-cost and giant network of suppliers, manufacturers and distributors, low compliance (humanitarian and environmental) and extremely low taxes and duties. China has also been accused of manipulating its currency which was estimated to have been 20% undervalued against the dollar in 2010 (Kennedy2010)(6).
From the world’s perspective, cheaper goods being exported out of China made its exports an attractive and alluring option in contrast to those coming from the more developed nations. This started a trend wherein major companies with top-notch R&D departments and first-rate technology started relying on China for its low-cost manufacturing. This also meant that there was now an inherent dependency on China to keep the global supply chain running while keeping in check, the price of goods being produced.
To say the least, over the years China has patiently and strategically built and intertwined itself into all major economies making itself indispensable. In economic terms, this dependency has created an imbalance inflow of trade and investment for all major economies of the world, with the case in point here being the USA.
An analysis of the Causes, Events and Perspectives behind the US-China Trade War
With China’s ascent to an economic superpower, most nations sharing a bilateral trade relationship with it essentially went from sharing an inter-dependent trade setup (with mutually benefiting trade agreements based on comparative advantage in production and growth of the business) to a dependency on its exports, that is to say, with the exception of US.
The US has a bank of soft and hard power, which it exerts through its large holding positions in the spot, credit, energy and commodity markets alongside a sturdy and highly innovative technology sector (7) and unparalleled military power. It has also, over the years accused China of unfair trade practices and theft of intellectual property. Trouble brewed for the US when the WTO declared China a ‘market economy’ in 2017 limiting US’s options to protect its domestic market and economy from viable threats posed by Chinese companies and investors.
This started a domino effect with the adoption of Mr Trump’s Confrontation Policy in December 2017, wherein restrictions were introduced on Chinese investments in American technology, there was tightening of export controls and expansion of the list of dual-use products that could not be exported to China (8). An Entity list was also created to block a number of Chinese companies from doing business in the States. This included ZTE Corporation which had been accused of violating US sanctions against Iran.
What followed was a series of retaliation from both ends causing the largest and most significant trade war in modern history.
Although it can be rightly said that the actual events of the war started in June 2018, it is important to shed light on two significant statements made by Mr Trump in September 2011(10) & May 2016(11). To quote — “China is neither an ally nor a friend — they want to beat us and our own country.” And “We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.”
If one tries to understand the mindset of the then-presidential candidate, it begs the question — Was the world ignorant to China’s ambitions for economic and political dominance or illusioned by its charm and glory? It can’t be denied that the world had long sensed the threat that China’s rise posed and yet we stand at crossroads today, trying to negotiate a status-quo that has been long lost while putting together our resources at curbing China’s further ambitions and aspirations.
And while it’s clear that China has never hesitated in expressing its desire to be the foremost economic power (just like the US had done at one point of time), what is perturbing the world is the ideological dissimilarities of the two countries. Where the US believes in a free, democratic, prosperous and a secure globalised world, China, despite being exposed to a liberal system, chose to further its leftist authoritarian agenda — proof of which is the hegemonic displays of power to its border sharing neighbours and of course Hongkong and Taiwan.
China’s approach has influenced the outlook of the world with large economies like the US, Europe and India looking inward and opting to introduce protectionist measures and managed trade policies.
Trump’s Inward-looking Protectionist Ideology
Whether pragmatic or not, the US-China trade conflict can be dissected into four major areas at its root –
1. To reduce the bilateral trade deficit with China
2. To prevent intelligence and data theft and corner China on its unfair trade practices
3. To curb China’s military aspirations
4. To slow down China’s technological growth and its ‘Vision 2025’ which seeks to make it a global leader in 5G networks, Artificial Intelligence and Robotics
The economic hegemony created by China cannot be denied. And one stands correct in saying that, although China has advocated itself as a ‘staunch defender of free trade and the global trading system’(Kwan2019) (12), China is in actuality, one of the most ‘protectionist and mercantilist’ (Kwan2019) (13) economic systems in the world.
Here Mr Trump’s ideology as a devout capitalist & business-man far outshines his capacity as a President in shielding the domestic consumer and job market. As researchers have time and again pointed put — ‘In trying to “make America great again” Mr Trump has led the US to a direct violation of international law and multilateral trade agreements, guided only by national interests.’ (14) And in guarding its national interests and status of ‘Global Technology Leader’, Mr Trump has looked past key aspects of globalisation, bi- & multilateralism and comparative advantage.
He has pushed the US trade into a protectionist mould with a single-minded focus of a balanced Current Account and a trade surplus with its larger trading partners.
From Trade to Tech
The larger part of the previous decade saw China’s growth stagnating and slowly reducing — which Mr Xi Jinping has clearly accepted as a ‘natural pattern of growth’. But China also understands what if it is to stop itself from being stuck with moderating growth and a middle-income economy, it has to shift gears from a manufacturing export-led economy to an innovative consumer market. Orienteering itself around this goal, China has launched the ‘Made in China 2025’ which seeks to make it a global high-tech manufacturing economy. Under this industrialisation 4.0, China plans to reach 70% self-sustenance in the integration of big data, cloud computing and other emerging technologies that link it to the global supply chain. (McBride&Chatzky2019) (15)
This ambition of china has three major fallouts — one that it is in direct competition to the US as a current technology leader which further upsets the global liberal order as a higher level of self-sustenance means, more political, economic and territorial power for China, two that economic dominance of PRC and their socialistic values are in direct contrast to US’ capitalistic market system and three that it poses a major security threat in terms of data and intelligence handling which also resonates on its military and defence intelligence and gives it a natural edge.
The challenge for the US is to defeat the Chinese model without embracing the China way. This will require a high degree of integration at home and abroad along with a higher level of coordination among governments, businesses and academia as coalitions have a better chance of reshaping China’s policy.
Economic De-coupling — A Possibility?
An out-right answer — No. Economic decoupling is not possible. Globalisation has reached an inflexion point from which reversal is not possible. We can, however, work towards a system where reliance on ‘China’s disruptive economic model’ to run the global supply chain is slowly shifted towards newer and more emerging economies including the South-east & South Asia, Africa and South America.
Damage to Global Trade
While various speculations have been going on about the outcome of the US-China trade war, one aspect, which has time and again been pointed towards, is clear — There are no winners in this war which comes amid the economic slowdown, loss of GDP, an inflationary pressure caused by high import tariffs and negative impact on the global supply chain and industry.
Resources
1. https://www.gmfus.org/publications/what-liberal-international-order
2. https://books.google.co.in/books?id=PN5CDwAAQBAJ&pg=PT30&redir_esc=y#v=onepage&q&f=false
3. The Open-Door Policy and China’s Rapid Growth: Evidence from City-Level Data: Shang-Jin Wei (p. 73–104) — https://www.nber.org/chapters/c8545.pdf
4. Katherine Rushton (January 10, 2014). “China overtakes US to become world’s biggest goods trading nation”. The Telegraph.
5. https://fas.org/sgp/crs/row/RL33534.pdf
7. https://www.researchgate.net/publication/338550900_US-China_Trade_War_Causes_and_Outcomes
8. https://www.researchgate.net/publication/338550900_US-China_Trade_War_Causes_and_Outcomes
9. https://multimedia.scmp.com/widgets/vert_timeline/?id=tradewarannv
12. https://onlinelibrary.wiley.com/doi/full/10.1111/aepr.12284
13. https://onlinelibrary.wiley.com/doi/full/10.1111/aepr.12284
14. https://www.researchgate.net/publication/338550900_US-China_Trade_War_Causes_and_Outcomes