China-US relations

Why China-US trade conflicts won’t end in war – no matter how loud the threats

Patrick Mendis and Sheng Cui say with China-US economic and investment relations strengthening by the day, points of disagreement could well be resolved by finding more ways to cooperate for mutual benefit, notwithstanding the warnings of tariffs and other punitive measures

PUBLISHED : Friday, 15 September, 2017, 1:35pm
UPDATED : Friday, 15 September, 2017, 7:13pm

August was a noisy month for both Washington and Beijing. The Trump White House opened an investigation into China’s intellectual property policies. Meanwhile, the Chinese government launched an anti-dumping probe into some rubber imports from the US and several other countries. With the scent of a “trade war” in the air, have Sino-American economic ties arrived at a turning point? The situation looks less bleak from the macroeconomic perspective.

China and the US are connected by trade, investment and people-to-people exchanges. From the meeting in Florida between US President Donald Trump and his Chinese counterpart Xi Jinping, it appeared the two leaders have something in common. Like Trump, Xi has consolidated his “decisive role” on economic and national security.

China and US can avoid trade war - if Beijing stops ‘appropriating our technology’, says Steve Bannon in Hong Kong

In January this year, then president-elect Trump invited Alibaba Group Executive Chairman Jack Ma to Trump Tower for a meeting. Despite his China-bashing rhetoric, Trump lavished praise on Ma, calling him a “great, great entrepreneur and one of the best in the world”. In that meeting, Ma offered to help create one million American jobs by bridging US small businesses and Chinese consumers through Alibaba’s e-commerce platform.

The strategy of Alibaba – owner of the South China Morning Post – is only the tip of the iceberg in China’s engagement with the US in trade and investment. In the past decade, Chinese foreign direct investment to the US has increased rapidly. By the end of the second quarter of this year, for instance, Chinese FDI in the US reached a total value of nearly US$135 billion. It was 111 per cent higher than the total figure in 2015, even though the pace of Chinese growth has been slowing. Currently, Chinese investments can be found across 46 states in the US, mainly focusing on real estate, hospitality, information technology and renewable energy.

Here are the American companies most at risk in a trade war with China

Over the past three decades, China has also been one of the most important FDI destinations for the US. In the past quarter of a century, there has been over 6,700 individual FDI transactions from the US to China, with a total value of US$228 billion. By 2015, 29 out of 31 provinces and regions in mainland China were recipients of American FDI. Shanghai, Beijing and Jiangsu took the lead.

This commercial and investment engagement is now threatened by economic and trade protectionism, as current Chinese policies relating to market access and security issues are obviously unacceptable to US companies.

Meanwhile, negotiations for a bilateral investment treaty are languishing. Under the treaty framework, American companies would have a greater opportunity to expand their businesses in China. As for Chinese companies, a robust treaty would also ensure they receive more transparent and fair treatment by the US government. When Xi met president Barack Obama at the G20 Summit in Hangzhou in 2016, they acknowledged the strides made in the treaty’s negotiations, and both sides committed to pressing on to reach a reciprocal and high-level treaty. Yet, now, in view of the Trump White House’s apparent effort to revisit its China’s trade policy, the negotiations seem to have been caught in the changing calculus of geopolitics and economics in the US government, as various factions in the Trump administration, including the economic nationalists and globalists, fight for the upper hand.

Watch: Xi launches his globalisation strategy at the Belt and Road forum in May, 2017

Trump now appears to be more focused on commercial interests and national security than human rights. Meanwhile, Xi has issued “American-like” messages of defending free trade and investment on multiple occasions. “No one will emerge as a winner in a trade war,” the Chinese leader said at the World Economic Forum meeting in January.

China’s pledge to open its market for trade and investment must be honoured on the ground

China has pledged to introduce “a new open economic system” to encourage foreign investment. The State Council issued two statements this year to announce loosening restrictions on foreign investment in industries. This is good news for the US companies in the service industry, as the statements suggested the Chinese government is easing entry for foreign companies in finance, telecommunications, the internet and transport. A recent example is J.P. Morgan, which in the past 12 months obtained licences in China for corporate bond underwriting and stand-alone asset-management.

As the Chinese middle class grows, the demand for American products – particularly safe foods, dietary supplements, and nutritious agricultural crops – increases significantly. It may be a possible solution for Washington to address the balance of trade issues by exporting more to China – as illustrated by the most recent trade agreements – rather than just imposing the reported 45 per cent tariff to restrict Chinese imports into the US.

The US and China can beat the trade deficit with a treaty, not all-out war

Trump’s infrastructure plan would also offer plenty of opportunities for both countries to cooperate in investment opportunities, as demonstrated in American railroad construction in the 19th century. Chinese companies’ advantages of quality and cost control could be of use in Trump’s infrastructure programmes.

A trade war is imminent, but not inevitable. Can mindsets change before it’s too late?

Commerce-friendly China has consistently shown the willingness and openness to build a sustainable trade and investment relationship with the US. With a “dealmaker” president in the White House – surrounded by Wall Street investment bankers and corporate advisers – it is quite possible to see both countries expand their economic cooperation for mutual prosperity, particularly as the White House has now decided to get involved in China’s Belt and Road Initiative, which was once avoided by the Obama White House.

In fact, the ongoing investment and trade probes have more symbolic than practical implications, and brings into sharper focus the emerging co-dependency of the two major economic powers.

Patrick Mendis, a former visiting professor of Peking University’s School of International Studies, is an associate-in-research at the Fairbank Centre for Chinese Studies at Harvard. Sheng Cui, an alumnus of Peking University, is an MPA student in international policy and management at New York University’s Wagner Graduate School of Public Service