Trade War and American Strategic Trend Towards China
Since 2018, the Trump administration has imposed 25% tariffs on Chinese goods worth 50 billion US dollars and 10% tariffs on 200 billion US dollars of Chinese goods on the grounds of the US huge trade deficit with China, China’s infringements on US intellectual property rights, and unfair competition from China. The US has launched an unprecedented trade war with China by imposing tariffs. Through analyzing the current US-China economic and trade relations, the US policies in trade with China since Donald Trump took office, and the demands put forward by the US government so far, we can deduce the nature of this trade war and the trend of the US strategies and policies towards China.
US Did Not Lose in Trade with China
Since Trump’s presidential campaign, he has been attacking China for taking advantage of the US through a huge trade surplus. In his speech at the Hudson Institute, US Vice President Mike Pence emphasized that China’s development as the world’s second largest economy was largely “driven by American investment in China and the Communist Party of China (CPC) has also applied a series of policies inconsistent with free and fair trade”, which has resulted in the US trade deficit. Pence thus concluded that the US has “rebuilt China”. Steve Bannon, the former strategic consultant of Trump administration, went even further, describing China’s economic growth oriented by exports and investment as “funded” by the “the American working class and the middle class”. The Trump administration seems to believe that China has exploited the US through trade and that the rise of China has come at the expense of the US. However, the cause of the US trade deficit is not that China dumps goods to the US, but that the US is selling too little to the Chinese market, which is both an inevitable result of the US economic structure and an outcome of the restrictions on US trade policy towards China.
After the Second World War, the US led the establishment and process of a multilateral trading system with dollar as the settlement currency. This system gradually evolved into the world trading system with the end of the Cold War, and the dominance of the dollar became entrenched. The US domestic capital, with the help of the dollar’s dominant position, began to expand worldwide, and capital expansion became the core of the US foreign economic expansion in the post-World War II era. As more and more American companies went overseas and availed themselves of the cheap labor, natural resources, and the scientific and technological R&D capabilities of other countries to engage in production activities, the US domestic manufacturing industry was gradually hollowed out, and thus its economic structure went through fundamental changes. At present, the US service industry accounts for 84.4% of its total economy, while the manufacturing industry for merely about 10%, with only military enterprises, high-tech firms concentrated in the Silicon Valley, and a small number of firms in traditional manufacturing left in the country. Gradually, US goods available for export has dropped off.
In addition, the US Congress, with a Cold-War mentality, has imposed very strict restrictions on Chinese exports, especially high-end integrated circuits, high-speed computers, high-precision machine tools and other technology-intensive products. By closing its door, the US has further weakened its capability of exporting to China, which had never been that strong before.
Meanwhile, the US trade deficit with China comes mainly from the trade of goods, but the US-China trade is not only about goods, but also services. In this regard, the US well-developed service industry has put it in a stronger position. In 2017, the US has run a trade surplus in services of 54.1 billion dollars with China, but the Trump administra
tion chose to turn a blind eye to that.
Furthermore, trade is only one part of the two countries’ economic ties. Branches of many US companies in China such as GM, Ford, and Apple have far greater annual sales than Chinese companies in the US. For example, in 2015, sales of US companies in China reached 481.4 billion dollars, compared with only 25.6 billion dollars of sales of Chinese companies in the US. American companies are clearly benefiting more. The trade difference between the two countries could almost be taken as negligible if we adding up trade in goods and services, and company sales of branches in the opposite country.
Another fact that cannot be ignored is that a large part of the US imports from China each year are products made by American companies through Chinese branches or foundries. For example, the Apple products sold in the US market are mostly made by foundries in China. According to the world trade rules, these products are made in China and are thus included in China’s trade surplus with the US. But such products are American-branded, and most of their profits fall into the hands of American companies.
In fact, American elites are very clear about what is happening with US-China trade. China is exporting cheap and quality products to the US, and then using the dollars it has earned to purchase US treasury bonds. The US is getting a double benefit.
US has Launched an Economic War Rather than a Trade War
Since Trump took office, China and the US have conducted many rounds of negotiations on economic and trade issues at different levels. It could be concluded that although trade is one of the focuses of the US-China confrontation, it is definitely not the whole of the struggle, and may not even be the most crucial issue, based on US demands for China in the negotiations, remarks on different occasions by Trump, his economic adviser Larry Kudlow, trade representative Robert Lighthizer, and trade adviser Peter Navarro, as well as reports from the US Congress and government agencies. The author believes that the US mainly wants five things from China:
First, to reduce trade deficit. The Trump administration hopes that China will take appropriate measures to significantly reduce US trade deficit with China: 100 billion dollars every 12 months, or at least 200 billion dollars by the end of 2020 compared with the end of 2018.
Second, to lift all tariff barriers. The US believes that the World Trade Organization (WTO) shouldn’t divide the world’s countries into developed and developing ones in terms of tariffs, the practice of which allows countries like China to make full use of the WTO
rules to impose high tariffs on all kinds of goods from the US. In its view, China is no longer a developing country in a traditional sense, but still enjoys high tariff rates. For example, the average tariff rate of Chinese imports is three times that of the US, and in the case of automobiles, the import tariff rate is even 10 times that of the US. Hence, the US requires China to lower the tariffs on “all non-critical sectors” to US levels.
Third, to remove all non-tariff barriers. The Trump administration believes that these barriers are reflected in at least two aspects. To begin with, China has strict restrictions on market access, such as China’s ban on the import of US poultry and other agricultural products that has cut off the main market for American farmers. Then, the Chinese government has set up all sorts of obstacles on foreign investment through various policies and decrees, prohibiting foreign capital from entering certain industries, and imposing strict restrictions on shareholdings in other areas. In light of this, the Trump administration requires the Chinese government to expand market access and lift all investment restrictions including the shareholding ceiling of foreign companies in local joint ventures in China.
Fourth, to stop all US intellectual property rights infringement or theft. According to the US “2018 Special 301 Report”, the US is convinced that China continues to infringe on US intellectual property rights through the following means: Firstly, China uses foreign ownership restrictions, including joint venture regulations, shareholding and other investment rules, to require or pressure US companies to transfer technologies to their Chinese counterparts; Secondly, China’s system of technology regulations forces US companies to seek to license technologies to Chinese businesses on non-market-based terms that favor Chinese recipients; Thirdly, China directs and assists Chinese companies to systematically invest in and acquire US companies and assets to obtain cuttingedge technologies and intellectual property, and to transfer technologies to key industries in the government’s plan; Fourthly, China conducts and supports unauthorized intrusion and theft into US companies’ computer networks, enabling the Chinese government to obtain intellectual property, trade secrets or confidential business information without authorization.
Fifth, not to fund “Made in China 2025”. The Trump administration believes that the “Made in China 2025” development plan launched in 2015 will benefit certain industries and technologies through government policy preferences and financial subsidies, and “clearly shows China’s ambition to take over both the domestic and international market shares from foreigners”. This constitutes dishonest and unfair competition for US private companies. Therefore, the Trump administration askes China to immediately cancel the financial subsidies and other government support for the ten high-tech manufacturing sectors identified in “Made in China 2025”.
Among the Trump administration’s five demands, trade deficit and the socalled tariff barriers could be categorized as trade war-related. The other three, however, have far exceeded the scope of a trade war, indicating that the Trump administration is trying to extend the war to a wider economic field. In particular, to require China to remove restrictions on foreign investment and shareholdings and not to subsidize “Made in China 2025” has gone far beyond a trade war and spiraled into an economic war. As Trump’s former advisor Steve Bannon said: “This is not a trade war... We are in an economic war with China.”
The fundamental reason for the Trump administration to launch a trade war against China is the rapid growth of China’s overall strength, and the US thinks it must stop or at least delay the pace of China’s rise. After 40 years of reform and opening up, China has achieved remarkable development. In 2010, China became the world’s second largest economy; in 2012, it became the world’s largest country in terms of the trade of goods and the largest manufacturer; the Renminbi became the world’s second largest settlement currency and a member currency of the International Monetary Fund’s SDR basket; China is also one of the fastest-growing countries in the world in terms of scientific and technological advances; its growing strength has increasingly made China an important member involved in the reform and formulation of global economic, trade, and financial rules. As the fastest-growing country in the world, China naturally faces the suppression of the US – an established power. The trade war today is waged by the US to undermine China’s rise. On August 21, 2018, Trump’s speech in West Virginia revealed the US true intention in launching the trade war: “When I came, we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time. That’s not going to happen anymore.”
Specifically, through this trade war, the US wants to prevent China’s economy from becoming bigger and stronger. Therefore, “Made in China 2025” became its first target. The development guideline is formulated by the Chinese government to achieve the goal of building the nation into a manufacturing power, especially in ten key areas including new-generation information technology, artificial intelligence, and new energy technology. The Trump administration believes that China’s goal is to continue its “state-directed approach over the last six decades to build internationally competitive domestic firms... for domestic companies to replace foreign companies as designers and manufacturers of key technology and products”, and that “Made in China 2025” will “dominate the emerging high-tech industries that will drive future economic growth for China, but hurt economic growth for the United States and many other countries”. As a result, the first round of US tariffs on Chinese goods involved industries in “Made in China 2025” and the intention was obvious.
At the same time, the US government also hopes to create a chilling effect through a trade war, pushing capital out of China, delaying its development, and causing trouble for the Chinese economy and society. That is why the current trade war is actually an economic war.
Changes in US Strategic Environment and its China Policy in the Context of Trade War
A trade war waged by the US reflects both changes in the US domestic strategic environment concerning China and the significant adjustments in its policies toward China. The biggest change in the US domestic strategic environment concerning China is the emergence of a variety of “revisionism”, that is, revision of the strategies and policies toward China that were proposed by previous strategists and pro-establishment supporters. This “revisionism” trend of thought is influencing US strategies and policies toward China in at least two ways.
Firstly, under the influence of “revisionism”, strategists and pro-establishment supporters in the US have changed their views. It is now believed that with the rise of China and China’s role in the international political arena, US-China relations have reached a new turning point which calls for rethinking in US strategies toward China and the two countries’ relations. Although US politicians and think tanks have yet to reach a consensus for that purpose, the overall trend is pessimistic. The call for balancing and even curbing China’s influence is on the rise, as is reflected in the growing inclination towards viewing China as a strategic rival in the US policies toward China.
In March 2015, Robert Blackwill, former US deputy national security adviser for strategic planning and George W. Bush’s Ambassador to India, and Ashley Tellis, member of Bush’s National Security Council, released the report Revising US Grand Strategy Toward China . They believe that the US engagement policy with China is making the rival of the US stronger and thus it can no longer continue. They call for “a new grand strategy toward China that centers on balancing the rise of Chinese power rather than continuing to assist its ascendancy”. They no longer emphasize support and cooperation, but stress suppression and competition, and even believe that “intense US-China strategic competition becomes the new normal”. This conclusion was made over two years earlier than similar ones by the Trump administration.
This “revisionism” trend also led to the Trump administration’s two reports on US grand strategy: National Security Strategy and National Defense Strategy released in late 2017 and early 2018 respectively, which listed China as the most important strategic competitor and challenger of the US. Both reports believe that “China is contesting America’s geopolitical advantages” and is attempting to “change the international order” in their favor. The two strategic documents issued by the Trump administration have completed the revision of the US strategic positioning of China.
The trade war is precisely a reflection in the economic field of the US positioning China as a strategic competitor. Behind the US excessive bargain over “Made in China 2025” in trade talks is its worry about the challenges that China’s institutional advantages may bring to its current technological and industrial advantages; behind the US unwarranted accusations of China on intellectual property rights is its fear of the outflow of technologies to China; and behind restrictions on Chinese students studying in the US is also the US long-term concern about China’s so-called acquisition of American technologies.
Secondly, 40 years into reform and opening up, China has been gradually integrated into the international society, but its direction differs from the expectation of the West, and what’s more, changes anticipated by the West, especially those in domestic politics, have yet to happen. This has generated a broad consensus among politicians, think tanks, and the academic community in the US and other western countries that the US long-held policies toward China have failed. Such a reality requires the US to re-examine and revise its policies toward China and build a stronger and more sustainable strategy towards China. At a policy seminar organized by the American think tank – the Brookings Institution - on November 1, 2017, scholars who participated in the discussion analyzed the issue from different aspects. Ryan Haas pointed out, Americans generally believe that the strategy pursued by the US in the past three decades has not met their expectations; the rise of China has not been accompanied by the reform as the US had planned. Another scholar, Mira Rapp-Hooper also believes that China has not marched towards liberalization as the US had imagined. Kurt Campbell, former assistant secretary of state for East Asian and Pacific affairs during the Obama administration, and Ely Ratner, deputy national security adviser to former US Vice President Joe Biden, also coauthored an article arguing that the US has always hoped to determine China’s progress, but also always overestimated its own ability... Diplomacy and economic engagement have not brought about China’s political and economic openness...The free international system has neither tempted nor contained China as expected. China is walking its own road, and in this process, the expectations of the US have fallen through.
Frustrated, the pro-establishment camp asked the US government to reexamine and revise its policies toward China and establish a new, stronger and more sustainable China strategy. The Trump administration’s demands that China lift all non-tariff barriers, stop its “technology-for-market” practice for foreign investment, and cease providing policy support and financial subsidies for “Made in China 2025”, all demonstrate the US revisions and adjustments in its strategies and policies toward China.
To conclude, the changes in the US domestic strategic environment and the adjustments of the Trump administration’s China strategy both signify the advent of a new era in the two countries’ relations - an era that will feature the intensifying structural contradictions between the two countries. In particular, tensions between a rising power and an established power and conflicts between two different economic systems, development modes and ideologies will replace the traditional regular problems and become a major factor affecting the two countries’ relations.