More than tariffs: China sees trade war as a new US containment tactic

As both sides stand firm, fears that a spiralling conflict could result in dangerous and unforeseen consequences

PUBLISHED : Sunday, 19 August, 2018, 11:03pm
UPDATED : Tuesday, 21 August, 2018, 12:29am

For nearly two weeks, China’s top leaders disappeared from public view as they gathered at a secluded beach resort in eastern Hebei province this month. Though the heavily guarded gathering in Beidaihe was secret, their agenda was likely dominated by the trade war with the United States – and the emerging view that the nations’ escalating tensions go beyond trade and economic disputes.

There are signs of a new resolve that sees the trade conflict as part of Washington’s design to temper China’s rise to greater power. While Beijing is willing to continue engaging the US – it has dispatched commerce vice-minister Wang Shouwen to the US for talks this month – the earlier optimism of finding a quick solution has been replaced by a grittier determination.

Observers said Wang was unlikely to achieve any breakthroughs other than paving the way for more negotiations.

“Trump is very confident now, and China should not appear weak,” a former Chinese trade official said, referring to US President Donald Trump. “China has to appear confident and stand firm, resisting the maximum challenges by Trump. Making too many concessions at an early stage will only push Trump to be more provocative.”

Leading up to and during the Beidaihe meeting, state media published a series of editorials and commentaries casting a harsher light on Sino-US relations. A signed commentary published by party mouthpiece People’s Daily on August 10 said the Trump administration had continued the “engagement plus containment” approach to China, hoping to significantly reshape China’s development in America’s image.

“A review of the trade negotiations with the US shows the American government has been inconsistent, ambivalent and capricious,” it said. “But the behind-the-scenes logic is pretty clear – it is never just about narrowing trade deficits, but to contain China in much broader areas.”

Another commentary by the overseas edition of People’s Daily on August 12 said the US was seeking hegemony, and China should be determined to fight.

Watch: Feeling the effects of the US-China trade war

Cheng Li, a China expert at the Brookings Institution in Washington, said that along with trade, a long list of security and other disputes with the US had posed a political dilemma for Chinese President Xi Jinping.

“If it’s only on the economic and trade front, the Chinese leadership would be willing to compromise,” Li said.

The escalating trade tensions had not only hit key engines of China’s economic development – including the Greater Bay Area, the Yangtze River Delta and the Beijing-Tianjin-Hebei Corridor – but also had clear implications for the Chinese stock market and even property prices, Li said.

“That really undermines Xi’s power base – the middle class, which is the most important stabilising force in China – and therefore we began to see criticism and challenges from the intellectuals and the public about Xi’s foreign policy,” Li said.

US confidence in its trade war with China may be misplaced

Li and Stapleton Roy, a former US ambassador to China, both said that while there was no evidence that Xi’s all-powerful status was being threatened despite rising criticism over his approach to the US, he might have faced unprecedented pressure during the Beidaihe meeting.

According to Roy, Xi would have been presented with two key challenges at Beidaihe – “the confrontation with the US and the resistance in China to the direction which the party is moving in trying to restore complete party control over everything”.

Observers pointed out that Beijing’s attitude towards the US began a delicate shift after the Trump administration billed China as a strategic competitor and rival power in December.

“That’s a big blow for China,” Li said. “For Beijing, everything can be discussed as long as it was treated as a possible partner or a friend. But many things can’t be negotiated as enemies.”

Fast-changing dynamics over North Korea and especially the dramatic change of attitudes towards China among American businesses are also important factors at play in the US-China relationship. Many US business leaders are critical of China’s restrictions on foreign companies, especially in the car industry, and policies that favour state-owned companies.

Because of these concerns about trade practices and economic behaviour, most US business leaders who disagreed with Trump’s tariffs were unwilling to speak up on behalf of China, Li said.

Warm, high-profile welcome for Taiwanese president in the US

Washington’s recent actions promoting ties with Taiwan, the most sensitive issue in Beijing’s relationship with the US, also appeared to have pushed Xi towards a more hard-line approach on the US, observers said.

“Both sides constantly misunderstand each other,” Li said. “The US underestimates the sensitivity of the Taiwan issue for Beijing due to various reasons and Beijing’s determination to [use] force if necessary. China also underestimates America’s willingness to push China back by force if China resorts to its military means.”

In what has been described as a “breakthrough” by Taiwanese media, the president of Taiwan, Tsai Ing-Wen, was allowed to give a speech as she travelled through Los Angeles last week – a high-profile example of Washington’s recent moves promoting ties with the self-governing island.

The view that Trump’s underlying strategy is to contain China is shared by Wei Jianguo, a former deputy commerce minister.

“The trade war is going to be a long and uphill battle,” Wei said. “Trump actually subscribes to the prevailing view that sees China’s rise and our industrial development policy, such as ‘Made in China 2025’, as a major threat to the US and his ‘America first’ strategy. That’s why curbing China’s further rise out of America’s fear and misperceptions about China will make the trade war last much longer than expected.”

That view even seems to be supported by several senior Trump administration officials, including Commerce Secretary Wilbur Ross and top economic adviser Larry Kudlow, who have warned that Beijing should not underestimate Trump’s determination to continue the trade war to exact changes from China.

“We have to create a situation where it’s more painful for them to continue their bad practices than it is to reform,” Ross said on August 2, adding that Trump will keep turning up the pressure on China as long as it refuses to level the economic playing field.

Watch: Biggest trade war in economic history begins

Indeed, it appears the US administration is in no hurry to end the conflict.

On August 7, the US released the list of US$16 billion worth of Chinese goods that will be subject to 25 per cent import tariffs from Thursday. China responded immediately with a vow to impose retaliatory duties on an equivalent value of imports.

Before this most recent action, Trump had asked US Trade Representative Robert Lighthizer to consider raising the proposed tariffs on US$200 billion of Chinese goods from 10 to 25 per cent. Trump has also said he would consider imposing tariffs on all US$500 billion of Chinese imports.

Against the backdrop of such dramatic escalation, resolution appears a distant prospect.

Claire Reade, a former assistant US trade representative for China affairs, said she believed there was “no deadline” for the US to re-enter formal talks.

“[Trump] believes you have to turn the screws until it hurts enough for China to come up with something good,” said Reade, who served in the George W Bush and Barack Obama administrations and is now with the Washington law firm Arnold & Porter, advising clients on governmental issues in the US and China.

“I don’t think he is interested in doing something for the short term if he doesn’t get a good enough response out of it.”

China’s trade surplus with US drops to US$28 billion as tariffs start to bite

But looming on the horizon is an event that some say could exert substantial influence over Trump’s approach to China: the midterm elections.

Roy, the former US ambassador to China, said the administration would look at everything that happened between now and November 6 in terms of the impact on the midterms. “The biggest concern for Trump is to not lose the midterm elections, and he’s going to put his own survival ahead of everything else,” Roy said.

American farmers, normally a reliable Republican voting bloc, are also starting to feel the trade war’s effects. The price of US soybeans has plummeted, prompting the administration to announce a US$12 billion emergency farm bailout in late July.

Watch: US soybean farmers hope for an early end to trade war

“As this trade dispute goes into the October-November time frame, that’s when it will ratchet up the maximum amount of pressure from the agriculture community,” said Chad Hart, an agricultural economics professor at Iowa State University.

“China can’t necessarily go out and find all of the soybeans they need outside of the US.

“The US can’t find enough soybean customers to replace everything they would lose if China were to stop buying.”

China expert Derek Scissors said there was little reason to believe the trade war would cause farmers to shift their traditional allegiances. “Farm states are Republican states, and they’re Trump states,” said Scissors, a resident scholar at the American Enterprise Institute, a Washington think tank.

In addition, he said, farmers did not tip the electoral balance to Trump in 2016. He won “on the back of industrial workers”, Scissors said, referring to his critical victories in Ohio, Michigan, Pennsylvania and Wisconsin. “That’s the overwhelming political calculation here. It’s not farmers.”

A recent poll published exclusively by CNBC suggests that Trump’s support in farm states is resilient, and even on the rise in some parts of rural America.

With those bearing the brunt of the trade war standing firm, Trump seemed to have the support he needed if he continued the trade war, said Jorge Guajardo, former Mexican ambassador to China.

“Inasmuch as the other trade fronts – Nafta, EU, Japan – are at peace, or not a worry, I don’t think that he’ll feel too much pressure to put an end to the China trade dispute,” said Guajardo, now a senior director at McLarty Associates in Washington, which counsels private sector clients on international trade.

Washington lawmakers have also expressed agreement with Trump’s China policy. “There is bipartisan support for the way he is confronting China,” Guajardo said. “I think he’ll be on pretty solid ground to continue with the China front before, during and after the elections.”

As part of a wider strategy to slow China’s economic and technological rise, the trade war joins other recent moves by the US to rein in China’s global influence.

On August 13, Trump signed the annual defence spending bill that included the Foreign Investment Risk Review Modernisation Act (FIRRMA), a new law that, while not mentioning China by name, is considered an effort to curb Chinese investment into US industries that have a bearing on national security.

Some analysts have voiced concerns that the law could, without adequate oversight, be used to further an economically protectionist agenda in the name of national security.

Chinese firms hit by trade war get help as banks are told to lend more

Meanwhile, legislation is pending that would step up US investment in the Indo-Pacific region in response to China’s “Belt and Road Initiative”, the multibillion-dollar pursuit of development initiatives in Asia and beyond.

Like FIRRMA, the bill – the Better Utilisation of Investments Leading to Development Act (BUILD Act), which would double the spending cap of US overseas investment agency to US$60 billion – does not directly reference China, but it was described by the House Foreign Affairs Committee as offering “an alternative to predatory development finance models offered by China and others”.

A co-sponsor of the bill, Representative Ed Royce, said before its passage in the House that the US should offer a more transparent and debt-sustainable model of investment to counter that of China, whose “development practices have often left countries worse off”.

The Chinese ambassador to Washington, Cui Tiankai, has tried hard to put a positive spin on the fraught US-China relations, but nonetheless admitted that bilateral ties were in “uncharted waters”.

“For those arguments that we are in different boats, should ride in different boats, even have a head-on collision, they are not supported by facts,” he said late last month. “It does not serve the good of anyone. The common challenge is to navigate this boat through the uncertainties or uncharted waters.”

But unfortunately, said Cheng Li of the Brookings Institution, “we are not moving in that direction”.

Chinese State Councillor and Foreign Minister Wang Yi also expressed frustration over the suspension of trade talks, but said the timing of their resumption was uncertain because of the retaliatory actions on both sides.

“How can talks take place under this pressure?” he said after a meeting with US Secretary of State Mike Pompeo in Singapore on August 3, Reuters reported.

The two countries were effectively in the middle of a new cold war, Li said.

“Although it’s not very likely at the moment, we need to be careful about the risk of escalation from a trade war to a real war,” he said, especially over contentious issues such as Taiwan and the South China Sea.

“We should not have illusions because we’ve never seen the danger of a military conflict or a limited hot war running unusually high between our two countries for a long time.”

But a realisation of such potential dangers might help both sides to get back to the negotiating table, Li said.

China can end the trade war by conceding defeat to Trump

Beijing remains flexible on the resumption of talks, according to Li, as long as the US doesn’t exaggerate political and security concerns over China, treat Beijing as an enemy or overplay the Taiwan card.

The best-case scenario, Li said, was for Xi and Trump to have a direct conversation, which might produce a temporary truce or even a dramatic turnaround.

“Trump and Xi can always pick up the phone and talk to each other,” Li said. “We should never underestimate the importance of such direct exchange between top leaders.”

After several meetings in 2017, the two have yet to meet in person this year, and have not had a telephone conversation since Trump’s Singapore summit with North Korean leader Kim Jong-un in June. They are likely to cross paths at the Group of 20 meeting in Argentina, which begins on November 30.

US and Chinese negotiators were making plans for new talks with a goal of ending the trade war before that meeting, The Wall Street Journal reported on Friday, citing unnamed officials from both nations.

Beijing blames trade war on US fears over ‘unprecedented opponent’

“It’ll be relatively easy to end a full-fledged trade war, but it would be a lot more challenging and probably require some drama for the two countries to restore their once friendly relationship,” Li said. “We have no idea how to achieve that. The best we could do is to carefully manage our differences and avoid further escalation. We’ll have to wait for the right moment to repair the estranged relationship.”

Others see additional complexities in the power dynamic.

Reade, the former assistant US trade representative, said prospects for face-to-face dealings by the nations’ leaders were complicated by the two men’s personalities. Xi would not set himself up for potential embarrassment, she said, and Trump “looks at everything in terms of win/loss”.

Trump would “only stop with strong statements about the fact that ‘we won,’” she said. “Which means that China lost.”

Additional reporting by Laura Zhou and Wendy Wu