What comes next in Us–china trade war?

Daily Mirror (Sri Lanka) - - MIRROR BUSINESS / LATE CITY - BY STEPHEN ROACH

The es­ca­la­tion of tit-for-tat tariffs be­tween the United States and China is now in the danger zone. Surely, rea­son will ul­ti­mately pre­vail. At least that is the com­mon re­frain in the echo cham­ber, es­pe­cially in light of the dark his­tory of ear­lier trade wars.

While it is likely that a deal will be struck on or be­fore the up­com­ing G20 Os­aka sum­mit in late June, I fear any such agree­ment is likely to be su­per­fi­cial and of­fer lit­tle or no fun­da­men­tal res­o­lu­tion to the deep-rooted con­flict be­tween the world’s two great pow­ers.

Likely to be su­per­fi­cial

The deal is likely to be su­per­fi­cial be­cause it will prob­a­bly fo­cus on the least con­se­quen­tial as­pect of the dis­pute — the bi­lat­eral US– China trade im­bal­ance. This is the light­ning rod in the de­bate, the cul­prit be­hind what US Pres­i­dent Don­ald Trump calls the ‘car­nage’ of job losses and wage pres­sures.

Yes, in 2018, the United States had a US$419 bil­lion mer­chan­dise trade deficit with China, ac­count­ing for fully 48 per­cent of its mas­sive over­all mer­chan­dise trade gap of US$879 bil­lion. But what Trump — and most other US politi­cians won’t ad­mit, Repub­li­cans and Democrats alike — is that the United States ran trade deficits with 102 coun­tries in 2018.

This re­flects a pro­found short­fall of do­mes­tic sav­ing that is likely to get worse in the years ahead, ow­ing in large part to the reck­less tax cuts of late 2017 ap­proved by none other than Congress and the Pres­i­dent.

Con­se­quently, to the ex­tent that the com­ing deal fea­tures the ab­sur­dity of a bi­lat­eral fix for Amer­ica’s mul­ti­lat­eral trade prob­lem, it will achieve very lit­tle in ad­dress­ing the so-called struc­tural is­sues that lie at the heart of this con­flict — namely al­le­ga­tions of in­tel­lec­tual prop­erty theft, forced tech­nol­ogy trans­fer, cyber hack­ing, and un­fair industrial poli­cies or­ches­trated by China’s state-owned en­ter­prises. It is im­por­tant to stress the word ‘al­le­ga­tions’ in de­scrib­ing the struc­tural con­flict. Most of the charges are, in fact, based on flimsy ev­i­dence that would not be ad­mis­si­ble in a US court of law.

Far deeper ques­tion

But the false nar­ra­tive begs the far deeper ques­tion: What hap­pened to the strate­gic en­gage­ment that has long been the glue bind­ing the US and Chi­nese economies to­gether?

A deep-rooted re­la­tion­ship prob­lem trace­able to para­noia in both na­tions is at work. The bi­par­ti­san US view is that it is all China’s fault. China, in the words of a Trump Ad­min­is­tra­tion white pa­per is­sued last June, is thought to pose an ex­is­ten­tial threat to the very fu­ture of US pros­per­ity.

The Chi­nese view is equally de­fen­sive — un­der­pinned by perceived threats of a US con­tain­ment strat­egy. From the Asian ‘pivot’, to the Trans-pa­cific Part­ner­ship, to Trump’s tariffs, China’s lead­ers are con­sumed by their own ex­is­ten­tial fears that the United States is tak­ing dead aim on China’s as­pi­ra­tional 2049 cen­te­nary goals for eco­nomic de­vel­op­ment and re­ju­ve­na­tion.

The charges and coun­ter­charges are an out­growth of a long-sim­mer­ing mu­tual dis­trust that bor­rows a page from the clas­sic script of code­pen­dency. Both na­tions de­pend on the other to sup­port eco­nomic growth — some­thing that China as an ex­port-led econ­omy has long recog­nised. But this point is dis­missed by Washington politi­cians, de­spite Amer­ica’s re­liance on low-cost con­sumer prod­ucts from China, mas­sive Chi­nese pur­chases of US Trea­suries, and China’s sig­nif­i­cance as Amer­ica’s third largest and most rapidly grow­ing ex­port mar­ket.

The prob­lem with code­pen­dency, whether it is with humans or economies, is that it is a very re­ac­tive and ul­ti­mately dys­func­tional re­la­tion­ship.

When one part­ner changes the rules of en­gage­ment, the other feels threat­ened, and con­flict arises. While both dy­namic economies are al­ways chang­ing, the shifts un­der way in China are by far the most pro­found — from man­u­fac­tur­ing to ser­vices, from ex­ports to con­sump­tion, and from im­ported to indige­nous in­no­va­tion. The United States, by con­trast, clings to the hubris of its su­pe­rior growth model.

Iron­i­cally, the United States was more com­fort­able with the ‘Old China’ and now feels threat­ened by the ‘Next China’. Amer­ica’s ag­gres­sive re­ac­tion to these threats is a man­i­fes­ta­tion of the con­flict phase of code­pen­dency.

So what comes next? The risk is a quag­mire with no easy way out. De­spite a su­per­fi­cial deal fo­cus­ing on the bi­lat­eral trade im­bal­ance, the struc­tural con­flict over tech­nol­ogy is likely to endure.

This points to what can be called an eco­nomic cold war — a pro­tracted pe­riod of charges and counter-charges, in­clud­ing tariffs and other sanc­tions, that will sap the vi­tal­ity of both com­bat­ants.

Res­o­lu­tion ul­ti­mately comes only by strength from within. For China that means suc­cess­fully im­ple­ment­ing re­forms that pro­mote the eco­nomic re­bal­anc­ing it has long sought.

For the United States that en­tails re­build­ing the do­mes­tic sav­ing it needs to re­store com­pet­i­tive­ness by investing in in­fra­struc­ture, pro­duc­tive ca­pac­ity, and hu­man cap­i­tal. With that shared strength comes a re­newed op­por­tu­nity for con­struc­tive en­gage­ment.

Is that re­ally ask­ing too much of the world’s great pow­ers?

(East Asia Forum)

(Dr Stephen Roach is a Se­nior Fel­low at Yale Univer­sity’s Jack­son In­sti­tute of Global Af­fairs and a Se­nior Lec­turer at

Yale’s School of Man­age­ment)

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