US-China trade war could end with a ‘big deal’ through baby steps towards mutual understanding

Robert Lawrence Kuhn says the US must accept China’s need to support technological development, while China should work with US policymakers who oppose tariffs but want the country to further open its markets and protect intellectual property rights

PUBLISHED : Thursday, 30 August, 2018, 5:02am
UPDATED : Thursday, 30 August, 2018, 6:15am

The first step in ending the US-China trade war is for each side to grasp thoroughly the other side’s arguments and ways of thinking as well as its positions and lists of demands.

From China’s perspective, why did Trump start the trade war? Was it just the trade deficit or were there deeper reasons, like thwarting China’s rise?

Usually when there’s a dispute, there’s disputation about which side started it. This time, there’s no debate. China said it would not fire the first shot, accusing the US of starting “the biggest trade war in economic history”. (Some, however, say China started the trade war years ago, and that the US is only now, finally, starting to fight back.)

Let me offer some critical balance and call out misunderstandings on both sides. Regarding US confusions, for Trump, the conflict has always been about US trade deficits with China, about US$375 billion in 2017. But a country’s exports and imports are not like, say, a real estate company’s revenues and expenses. Trade balances are complex. Some Chinese products are produced by foreign-owned companies in China, including American companies, which capture profits from goods counted as Chinese exports.

The trade deficit includes the cost of intermediary products, like displays and chips for iPhones, which are produced in other countries; the Chinese assembly cost constitutes only a small fraction of the full cost attributable to the trade deficit.

Watch: The origins and impact of the US-China trade war

US won’t talk to China about trade war right now, Trump says

The deficit doesn’t include America’s US$38.5 trade surplus in services, such as travel, Chinese tourists and students in the US. Moreover, a trade deficit means Americans are enjoying a higher standard of living with better products at cheaper prices, financed in part by China buying US government debt. I’m not saying a trade deficit is sustainable; I am saying a trade deficit is not simple.

Regarding China’s misconstruals, the conventional wisdom is that the US is panicked by China’s rise and seeks to contain China and maintain US hegemony. While this narrative feeds easy-to-stoke nationalism, it does not fit the facts.

There is broad American consensus, even among groups that remain divided on almost every other issue, that China has taken economic advantage of the US

A large majority of American policymakers and analysts, Republicans as well as Democrats, have no such anti-China bias. Almost all believe that Trump’s tariffs are wrong-headed and mutually harmful, but, as much as they reject Trump’s tariffs for economic reasons, and dislike Trump for personal reasons, almost all still support getting tough with China. It might prove useful for Beijing to discern why.

There is surprisingly broad American consensus, even among groups that remain bitterly divided on almost every other issue, that China has taken economic advantage of the US via unfair and often illegal practices, such as by keeping its own markets closed while championing globalisation for others, stealing intellectual property through cyber-theft and other nefarious means and by forcing American companies to hand over propriety technology to Chinese joint ventures as part of the price for accessing the world’s largest market.

In addition, the consensus is that China unfairly subsidises industries of the future, including artificial intelligence, robotics, aerospace, ocean engineering equipment, new energy vehicles and biomedicine, under its “Made in China 2025” plan.

“Enough’s enough,” say American experts, who have come to believe that China must change its economic behaviour, and that perhaps Trump’s tariffs may finally get China’s attention.

Watch: What’s the beef with the ‘Made in China 2025’ strategy?

Why Trump should focus on US services, not goods

In Beijing, at the outbreak of the duelling tariffs, there was talk that the trade war with the US is a real “war” that China must prioritise winning.

But what does it mean to “win” a trade war? The only way anyone wins a trade war is for it to end, and for this to happen, each side needs to believe it won, or at least convey to its citizens that it won.

Of late, China is changing the atmospherics. While Trump throttles up personal vitriol, threatening tariffs on all US$500 billion plus of Chinese imports and blaming China for North Korean intransigence on denuclearisation, China has toned down the media bombast.

Politically, before the US congressional elections in November, neither side has incentive to compromise. But it would be a mistake for China to bank on a weakened Trump. It bears repeating: although most American experts believe that Trump’s tariffs are ill-conceived and self-damaging, a broad, anti-China consensus has been building in Washington, the like of which I’ve not seen in my 30 years tracking China.

As trade war worsens, American perceptions of China drop

US trade war hit list: China’s loss is also Asia’s loss

What to do? First, the US should recognise that China will never succumb to foreign pressure. But China will continue to reform, and that’s the key.

China is already making significant progress in IP protection; though far from ideal and geographically uneven, the national process to respect and enforce IP is irreversible. There is less industrial espionage, including cyber-theft, and reduced pressure to transfer technologies in joint ventures, which was always a commercial decision anyway.

That’s three of the “big five” US concerns, leaving only the first, opening of China’s markets, and the last, China’s support for future technologies under “Made in China 2025”.

Could the stage be set for a “big deal”? China would further open its markets and do so earnestly, specifically, persuasively, and rapidly, and the US would accept Chinese government support (carefully circumscribed) of future technologies.

Chinese economists tell me privately that much of what the US wants China to do, China should do anyway. China’s own continuing development depends on greater opening of its markets. Greater competition would force good Chinese companies to improve and bad Chinese companies to exit – both of which would upgrade China’s economy, increasing productivity.

Tech sector hopes to focus US attention on China’s cybersecurity law

The US might appreciate that China must transform its industry or remain trapped in middle income. Why should China renounce a programme to enhance its industrial capacity and efficiency? If the US imagines “Made in China 2025” as being so potent, the US can do likewise – or even better.

China is seeking to optimise domestic development to benefit its people, not trying to replace the US as the global leader. Moreover, as the world’s second-largest economy, engaged with every country on Earth, it is simply impossible for China to maintain Deng Xiaoping’s almost 30-year-old maxim to “hide one’s capabilities and bide one’s time”.

China might appreciate it is no longer the developing country it was when entering the World Trade Organisation in 2001 and looser rules allowed it to protect nascent industries. China might seek common ground with mainstream US policymakers and experts who vehemently oppose Trump’s tariffs – and who do not oppose China’s rise – but who now genuinely feel that China should open its markets faster and protect intellectual property rights better.

Each side might recognise its own misunderstandings.

First, baby steps.

Then, the “big deal”.

Robert Lawrence Kuhn is a public intellectual, international corporate strategist and investment banker, and China expert/commentator. He is the author of How China’s Leaders Think and he is co-creator (with Adam Zhu) and host of CGTN’s “Closer to China with R.L. Kuhn” and “The Watcher” commentaries