China-us Trade Fric­tion:

Steel­ing for Con­flict

NewsChina - - CONTENTS - By Li Jia

Chi­nese and US of­fi­cials and an­a­lysts are di­vided on whether the world's two largest economies have tech­ni­cally en­tered a trade war. At the very least, the two na­tions have drawn swords. The US im­posed puni­tive tar­iffs on steel and alu­minum im­ports from China on March 23, and China im­me­di­ately re­tal­i­ated with ad­di­tional tar­iffs on a range of US im­ports. Then the US pro­posed putting 25 per­cent tar­iffs on an es­ti­mated US$50 bil­lion worth of Chi­nese im­ports, spread across some 1,300 prod­ucts, putting the pro­posal out for pub­lic com­ment. If the US ul­ti­mately de­cides to im­ple­ment them, China is ex­pected to re­spond in kind. When the US pledged to in­crease the stakes to US$150 bil­lion, China vowed to de­fend her in­ter­ests “at any cost.” The two sides have al­ready taken their dis­putes to the World Trade Or­ga­ni­za­tion (WTO).

In­ter­na­tional cap­i­tal mar­kets tum­bled each time the two coun­tries height­ened their rhetoric and raised the stakes, and re­bounded once they in­di­cated the pos­si­bil­ity of reach­ing an agree­ment.

Chi­nese an­a­lysts have linked the US ac­tions to a long-term po­lit­i­cal and com­mer­cial strat­egy, rather than short-term busi­ness gain – par­tic­u­larly to US fears of a nar­rowed eco­nomic and tech­no­log­i­cal gap with China, and US Pres­i­dent Don­ald Trump's at­tempts to court his do­mes­tic elec­torate be­fore the midterm Con­gres­sional elec­tion later this year.

Given this, many Chi­nese an­a­lysts ar­gue that Trump's trade moves re­flect a sig­nif­i­cant change in the US strat­egy to­ward China, and that any US pres­i­dent – whether Hil­lary Clin­ton or any­one else had been elected – would have adopted a sim­i­lar pos­ture, though not nec­es­sar­ily by us­ing the same puni­tive tools. There are also dis­cus­sions on how this ex­ter­nal pres­sure will af­fect the pace of China's re­form and open­ing-up.

More Than Just Trade

The US trade deficit with China has been a thorny is­sue for years, and Trump re­peat­edly blamed China for it dur­ing and af­ter his pres­i­den­tial cam­paign.

Sim­i­lar US trade moves against other ma­jor economies like the Euro­pean Union and Ja­pan are not rare. How­ever, the US as­sault on steel and alu­minum im­ports this time fol­lows the claim that its na­tional se­cu­rity is at risk. Although China is not a ma­jor ex­porter to the US, it was ac­cused of dis­tort­ing global mar­kets with its do­mes­tic over­ca­pac­ity due to gov­ern­ment in­ter­ven­tion in the in­dus­try. Much larger steel ex­porters than China, no­tably US al­lies like Canada, the EU, Aus­tralia and

South Korea, have been granted a tem­po­rary ex­emp­tion from the tar­iffs.

The 1,300 Chi­nese prod­ucts pend­ing ad­di­tional tar­iffs are mainly in pri­or­ity sec­tors sin­gled out by the Made in China 2025 pol­icy, the coun­try's na­tional strat­egy to be­come a high-tech global man­u­fac­tur­ing power, such as in­for­ma­tion tech­nol­ogy and ma­chin­ery. The list is the re­sult of a US in­ves­ti­ga­tion of China's poli­cies and prac­tices on tech­nol­ogy trans­fer, in­tel­lec­tual prop­erty rights and in­no­va­tion, par­tic­u­larly when im­ple­ment­ing “Made in China 2025.” The in­ves­ti­ga­tion, un­der Sec­tion 301 of the US Trade Act of 1974, also cov­ers Chi­nese in­vest­ment into US hi-tech star­tups in Sil­i­con Val­ley. The US Depart­ment of the Trea­sury is re­quired to pro­pose re­stric­tions on Chi­nese in­vest­ment in US tech­nolo­gies.

The re­port, re­leased on March 22, con­cludes that the Chi­nese gov­ern­ment sup­ports acts and poli­cies that “bol­ster China's stated in­ten­tion of seiz­ing eco­nomic lead­er­ship in ad­vanced tech­nol­ogy,” ac­cord­ing to a press re­lease from the US Trade Rep­re­sen­ta­tive Of­fice (USTR) on April 3. In ad­di­tion, the White House's Na­tional Se­cu­rity Strat­egy of 2017 holds that “China's mil­i­tary mod­ern­iza­tion and eco­nomic ex­pan­sion” is partly built on its ac­cess to the US in­no­va­tion sys­tem.

These re­ports and mea­sures from the US have all fo­cused on China's tech­nol­ogy poli­cies, the gov­ern­ment's role in the econ­omy and the im­pli­ca­tions for US se­cu­rity. Given this, there is a con­sen­sus among Chi­nese an­a­lysts of in­ter­na­tional re­la­tions and eco­nomics that ad­dress­ing the trade im­bal­ance, mar­ket ac­cess and in­tel­lec­tual prop­erty is just the short-term goal. They say this is a tool of the Trump ad­min­is­tra­tion to hin­der China's ad­vance to a high-end sup­ply chain that would chal­lenge US supremacy in the global econ­omy and tech­nol­ogy, and in so do­ing, the foun­da­tion of US global hege­mony.

Bean Coun­ters

In a March 22 state­ment on the out­come of the Sec­tion 301 in­ves­ti­ga­tion, the USChina Busi­ness Coun­cil, which rep­re­sents around 200 US com­pa­nies that do busi­ness with China, said it “agrees with the Trump ad­min­is­tra­tion” on the need to ad­dress China's tech­nol­ogy poli­cies, although it did not

want “uni­lat­eral tar­iffs that may do more harm than good.”

There has been plenty of op­po­si­tion within the US, no­tably from US soy­bean farm­ers and re­tail­ers of con­sumer goods. How­ever, their op­po­si­tion has been against the use of tar­iffs as a tool, not against the jus­ti­fi­ca­tions that the Trump ad­min­is­tra­tion has used in or­der to levy them – that is, the trade im­bal­ance with China, mar­ket ac­cess and in­tel­lec­tual prop­erty is­sues. There is a con­sen­sus among US elites that China should not be treated as a de­vel­op­ing econ­omy any longer, ac­cord­ing to Ed­ward Alden, the Bernard L. Schwartz se­nior fel­low at the US Coun­cil on For­eign Re­la­tions, a New York-based think tank, who ad­dressed the Bei­jing-based Cen­ter for China and Glob­al­iza­tion (CCG) on March 21.

Alden's speech de­scribed how this po­si­tion has evolved over the years. China's WTO ac­ces­sion in 2001 was the last straw for US pro-free trade forces which had al­ready been greatly un­der­mined by surg­ing Ja­panese im­ports and Mex­i­can im­mi­grant work­ers in pre­vi­ous decades. US multi­na­tional com­pa­nies ben­e­fited greatly from glob­al­iza­tion, and thus lob­bied strongly for more en­gage­ment with China. But they have faced grow­ing do­mes­tic pres­sure from the US pub­lic, with a widen­ing trade deficit and jobs flow­ing off­shore since China joined the WTO. In the past few years, this pres­sure co­a­lesced with the com­pa­nies' own gripes about China's mar­ket ac­cess re­stric­tions. As a re­sult, they be­gan to sup­port a tougher stance to­ward China.

As the old voices in fa­vor of China fade, new voices have been slow to emerge. The part­ner­ships be­tween Chi­nese in­vestors and small tech star­tups in the US are much weaker than those be­tween US multi­na­tion­als and their Chi­nese part­ners. These smaller US com­pa­nies have lit­tle in­cen­tive to lobby US pol­i­cy­mak­ers on be­half of their Chi­nese in­vestors, said Wang Yuquan, a found­ing part­ner at Haiyin Cap­i­tal, a Bei­jing-based ven­ture cap­i­tal­ist who in­vests in a num­ber of such tech star­tups. He told Newschina that while these star­tups have a strong de­mand and de­sire for Chi­nese in­vestors' sup­port in or­der to ac­cess cus­tom­ized man­u­fac­tur­ing and mar­ket­ing re­sources in China, it takes time to de­velop a strong and deep part­ner­ship dur­ing the long process of bring­ing a tech­nol­ogy from the lab­o­ra­tory to the as­sem­bly-line. Com­pared with Ja­panese in­vestors, Chi­nese in­vestors are new­com­ers to the mar­ket. In ad­di­tion, US star­tups have con­cerns about their in­tel­lec­tual prop­erty rights in China.

Change of At­ti­tude

The per­ceived change of at­ti­tude to­ward China among the US pub­lic, the busi­ness com­mu­nity and pol­i­cy­mak­ers is re­garded by Chi­nese an­a­lysts as stretch­ing far be­yond com­mer­cial con­cerns into strate­gic ones. In its most re­cent Na­tional Se­cu­rity Strat­egy, China was de­fined as a “re­vi­sion­ist” ri­val power which was chal­leng­ing US se­cu­rity, pros­per­ity and in­flu­ence. This came as some­what of a shock to many Chi­nese ob­servers. Fol­low­ing this, the 2017 USTR Re­port to Congress on China's WTO Com­pli­ance claimed the US had made a mis­take in sup­port­ing China's WTO ac­ces­sion, as the US ex­pec­ta­tion of ex­pand­ing more lib­eral eco­nomic and po­lit­i­cal prac­tices to coun­tries like China by in­te­grat­ing them into the Us-led global trad­ing sys­tem had not come to fruition. Trade and se­cu­rity hawks in the US now dom­i­nate the White House. This com­bi­na­tion of strong rhetoric and high-pro­file staff picks has been cited by Chi­nese an­a­lysts as ev­i­dence the trade con­flict is part of a shift­ing US strat­egy that will aim to con­tain, rather than en­gage with China – one that moves away from a mea­sured hedge on en­gage­ment and con­tain­ment.

Nu­mer­ous pre­dic­tions by Chi­nese and in­ter­na­tional an­a­lysts vary on the out­come of this round of trade fric­tion be­tween China and the US. Their key ques­tions are how long it will last, and who will win.

As ex­pected, China's re­tal­ia­tory list tar­gets ma­jor US ex­ports to China, in­clud­ing soy­beans, cars and their parts, and air­craft and their parts. Farm­ers are an im­por­tant po­lit­i­cal base for Trump. So far, soy­bean farm­ers have united with wheat and corn as­so­ci­a­tions and urged Trump to avert a po­ten­tial trade war. Mean­while, the dras­tic mar­ket volatil­ity brought by trade war fears has Wall Street frus­trated. Chi­nese ex­perts have pro­posed a va­ri­ety of other tools, in­clud­ing re­stric­tions on rare earth ex­ports to the US and a re­duc­tion in China's deficit in trade in ser­vices with the US.

China is fac­ing a “dilemma” about how to re­spond to US trade ac­tion, said Pro­fes­sor Shi Yin­hong of the Ren­min Uni­ver­sity of China, a lead­ing Chi­nese scholar of US stud­ies, at a fo­rum spon­sored by the CCG and the China Global Tele­vi­sion Net­work, the in­ter­na­tional arm of the na­tional state broad­caster China Cen­tral Tele­vi­sion, in Bei­jing on March 27. He said if China makes too many con­ces­sions, Trump will be mo­ti­vated to seek more eco­nomic and po­lit­i­cal gains. If China plays it too tough, the risk of a trade war will in­crease. In ad­di­tion, there are con­cerns over pos­si­ble in­fla­tion­ary pres­sure if soy­bean im­ports be­come more ex­pen­sive.

An­other risk for China is that Trump is con­sid­er­ing re­join­ing the Trans-pa­cific Part­ner­ship, a Us-led free trade agree­ment that his na­tion with­drew from in 2017, in or­der to form a “trade coali­tion of the will­ing” to off­set China's in­dus­trial power, ac­cord­ing to a re­port of the US busi­ness news provider CNBC on April 12.

A Long Race

Even if the fric­tion be­tween China and the US eases, few on the Chi­nese side be­lieve the respite will last, due to the strate­gic na­ture of the dis­pute. Shi Yin­hong said the US may

raise the is­sue again from time to time, given that bi­lat­eral re­la­tions as a whole will fluc­tu­ate down­ward in the long term.

In the long run, the big­gest risk for China in its re­sponse to US pres­sure is that China also turns in­ward and its ef­forts to fur­ther re­form and open up stag­nate. If con­cerns about an eco­nomic slow­down caused by trade fric­tion lead the Chi­nese gov­ern­ment to halt do­mes­tic struc­tural re­form – and the pre­ven­tion of fi­nan­cial risks – and re­vert in­stead to credit and in­vest­ment ex­pan­sion, it will be very dif­fi­cult for the coun­try to get back on the right track of growth. Zhang Ming stressed that this is the trap that China has to avoid.

China will win as long as it avoids one sce­nario, said Pro­fes­sor Lu Feng of the Na­tional School of De­vel­op­ment (NSD) at Pek­ing Uni­ver­sity. In an NSD China Pol­icy Talk on March 29, Lu said the trade fric­tion with the US and the shift in US strate­gic pol­icy to­ward China would trig­ger a con­fronta­tional sen­ti­ment within China, which could ham­per the im­ple­men­ta­tion of fur­ther do­mes­tic re­form. Though he thinks the pos­si­bil­ity is small, “China has to stay vig­i­lant about this po­ten­tial risk dur­ing this volatile pe­riod of re­la­tions with the US,” he con­cluded.

Pro­fes­sor Zha Dao­jiong, an in­ter­na­tional pol­i­tics ex­pert at Pek­ing Uni­ver­sity, agreed. “The last thing China should do is any­thing that could dam­age the coun­try's own eco­nomic dynamics and in­ter­na­tional com­pet­i­tive­ness in the pre­text of not bend­ing over to the US,” he said at the NSD fo­rum.

While urg­ing de­vel­oped coun­tries to re­lax con­trol of hi-tech ex­ports to China, Chi­nese Pres­i­dent Xi Jin­ping un­veiled a pack­age of fur­ther re­form and open­ing-up poli­cies at the 2018 Boao Fo­rum for Asia An­nual Con­fer­ence on April 10. The mea­sures cover wider mar­ket ac­cess, bet­ter in­tel­lec­tual prop­erty rights pro­tec­tion, a more rule-based busi­ness en­vi­ron­ment and ex­pan­sion of im­ports. Xi stressed that it is China's “strate­gic de­ci­sion” to sup­port a more in­clu­sive, open and bal­anced eco­nomic glob­al­iza­tion that would not only boost China's own de­vel­op­ment, but also ben­e­fit the rest of the world.

But re­al­iz­ing this vi­sion will re­quire co­op­er­a­tion, or at the very least, less ten­sion, be­tween the world's two largest economies.

A US ves­sel loaded with soy beans. US soy bean ex­ports to China were worth US$13.7 bil­lion in 2017, the sec­ond-largest US ex­port to China

A cer­e­mony is held as a Boe­ing 747-8, the long­est air­plane in the world at that time, joins the fleet of China’s na­tional car­rier, Air China, Bei­jing, Oc­to­ber 9, 2014. It was also the first Boe­ing 747-8 in Asia

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