Like slowly moving tectonic plates — in which at first there is no perceptible change then a jarring earthquake — the ground is finally shifting in the trade war between the United States and China. The press previously spoke of a skirmish and then of tit-for-tat tariffs, which all sound much lighter than what in fact is happening.
This trade war is not just about trade, which would be easy to fix, but about the geopolitical and economic rise of China. The Chinese offer to purchase more American agricultural products was an example of how progress could have been made in resolving a pure trade-deficit issue, if that was the case.
The US, under the present leadership team, feels threatened by the ever-evolving position of China and especially the stellar rise in Chinese self-sufficiency in new technologies — the so-called Fourth Industrial Revolution. It was all fine when China was “the factory of the world”, producing goods also for American companies and benefitting millions of Americans with low-cost consumer items, but the “Made in China 2025” plan (which was in fact released by Premier Li Keqiang more than two years ago), seems to have really caught the attention of the White House. The plan was greatly inspired by a similar German government program “Industry 4.0” but it seems to have riled the US government with its ambition for China to integrate the latest technologies to create a much more efficient industrial base, and most notably to become less dependent on foreign technology.
It must be remembered that the close advisers to president Trump include Peter Navarro (69), the most extreme advocate of an aggressive stance toward China (and author of Death by China) and Larry Kudlow (71), best known for his previous life as a television host on economic matters, which he often erred on, and his public struggles with drug addiction.
Many acknowledged and experienced China experts have either left the State Department or are being ignored, creating a unique situation in which there seems to be no balanced and objective strategic China discussion in the White House.
The Trump approach therefore is simplistic, purely transactional and reveals a serious lack of understanding of both modern-day China and of the significant benefits that global trade — and China’s World Trade Organization accession — brought the United States.
In a nutshell, the US approach is as follows: attempt the carrot-and-stick approach with trade tariffs as the stick, and smartphone giant ZTE as the carrot, to reverse China’s progress in automation and development and acquisition of new technologies.
There are some serious deficiencies in this approach.
Firstly, “Made in China 2025” is indeed a government guideline but it is also a consolidation of things that were already happening on the ground. Companies were, and are, evolving and exploring efficiencies to keep on growing in a rapidly changing environment. The last-mover advantage enables many newer Chinese companies to be more flexible, and take advantage of the latest technologies at lower cost, in a way that many Western companies burdened by their legacies cannot. The point is that even without official government plans, many elements of “Made in China 2025” would have happened anyway.
Secondly, demographics play an important role in the Chinese strategy. The old “factory of the world” role was made possible by migrant labor moving to the Pearl River Delta and other areas. This approach will no longer be possible since the seemingly endless pool of migrant workers will decrease as society ages and economic development in the poor interior provinces reduces the need to migrate. Chinese companies have a need to explore the latest technologies in robotics and artificial intelligence, as their potential labor force shrinks sharply in a generation.
Thirdly, the envisaged efficiencies have a positive impact on the environment. As production companies embrace new technologies, their production processes become greener, cleaner and less labor-intensive. New automation technology both reduces the amount of materials wasted and minimizes energy use. A cleaner, greener China is now a top government priority, hence the focus on acquiring and developing the latest technologies. It is also of the utmost importance for China’s environmental focus and obligations under the Paris Agreement.
For the reasons mentioned above, China will not, and cannot, move away from its aim to obtain the latest technologies and become a world-class player. The trade war therefore already begins on a false premise that the Chinese strategy will change. Furthermore, Trump’s “hot and cold” approach to ZTE has underlined one thing for the Chinese government: that China must reduce its dependence on foreign companies, so as not to leave key areas of its industry to the mercy of a foreign government. This key strategic insight runs exactly contrary to what the US wishes but such unintended consequences happen when a new policy is not rigorously examined before implementation.
The Chinese government has indicated that it will counter the US import tariffs in a proportionate manner and will use the auspices of the WTO to have them reversed. Every subsequent American tariff will have a counterpart on the Chinese side. This is the most reasonable response.
These Chinese counter-tariffs will obviously hurt American companies exporting to China and hopefully that will bring some common sense back into the White House. Political pressure from the US companies affected should play a role in working toward an end to this trade war, especially as we come closer to the mid-term elections in November.
When there are differences between nations, they should resort to existing mechanisms which were created specifically for such eventualities. And they have proven their effectiveness time and time again. Unfortunately, the US government will not realize the futility of its current approach in dealing with China before November.
The author is a strategic adviser to both private and public sectors on China-related matters. He has advised a number of financial institutions on their China strategy.