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Steeling For Conflict

As the world’s two largest economies battle it out over trade, there are signs that acrimony could become the new normal. For China, the question could be how to chart the future path of its reform and opening-up

By NewsChina Updated May.3

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 US-China 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.