China in Preparation for a ‘Long’ Trade War with the U.S.

 

Current Issues and Policies No. 2018-24

December 19, 2018

Dr. Lee Seong-hyon

Director, Center for Chinese Studies, the Sejong Institute

sunnybbsfs@gmail.com

 

 

While the U.S.-China trade war entered a ‘90-day truce’ period, there are signs within the Chinese government that it is preparing for a long-term war. It might be preparing for the worst-case scenario, but in turn, it could be also construed as Beijing’s sense of seriousness in its relations with Washington. As a matter of fact, Chinese government officials, state-run research institutes, and journalists consecutively visited the U.S. in the last several months, met U.S. politicians, lawmakers, scholars in think tanks, and journalists, and perceived the gravity of the current state of play.

 China began to realize the U.S. is ‘enraged’ rather than ‘dissatisfied’ with China, a sense of ‘anxiety’ that the U.S. is feeling chased by China in terms of national comprehensive power, and even entails the ideological confrontation between liberal democracy and socialism. Particularly, the Chinese authorities realized that some people in the U.S. observe China entered the ‘path of dictatorship’ as the constitutional amendment paved the way for President Xi Jinping’s lifelong reign. One American podcast mocked, ‘now the U.S. views China like North Korea.’

 Beijing regarded the trade war with the U.S. as a ‘usual’ case that had been frequent in bilateral relations. That is, it viewed the temporary bilateral trade war for U.S. domestic political purposes and President Trump’s political spin for the midterm elections. Accordingly, Beijing believed that special envoy to the U.S. will relieve the discontent; but now comprehended that this method is no longer valid.[1]

 What’s more is that China canceled the special envoy’s visit to Washington a few days before the actual visit – Vice Premier Liu He of the State Council, a close affiliate of President Xi was expected to visit the U.S. This owes to the fact that even though it was clearly cognizant of his visit, the U.S. administration imposed new tariffs on Chinese goods worth $200 billion on September 24. Due to the imposition of tariffs, approximately half of Chinese export volume - $250 billion out of $505.5 billion – became subject to tariffs.[2]

 Overall, Beijing seemingly did not foresee the U.S. playing ‘hardball.’ On December 14, the Global Times/Huanqiu Shibao, the sister paper of Chinese Communist Party’s (CPC) mouthpiece People’s Daily/Renmin Ribao, published a confessionary editorial with the ‘Made in China 2025’ plan, ambitiously pursued by the Chinese government, as an example. “The objections to the "Made in China 2025" plan made by the US have been beyond China's expectations.”[3]

Within China, the meetings to prepare for a long-term standoff with the U.S. have become more frequently observed. It is worthy to point out the explanation of one Chinese figure who recently visited the U.S. as part of a delegation. According to him/her, three different views exist within the U.S. with regards to the perception of China.

The first group is the ‘hardliners’ consisting of conservatives and military people. The Chinese delegation sensed that these people have an adamant hardline view on China. They perceive China as a threat to the U.S. only for being the ‘world’s second power’ after the U.S. Thus, Beijing found no space to persuade or convince them and concluded that the efforts will be meaningless. It grasped how deep the wrath against China runs. And it also opines that these ‘hawkish’ figures encircle President Trump.

The second group is ‘liberals’ that reflects the U.S. Democratic Party’s conventional sentiment of China. As the name suggests, they value China’s attitude to ‘democracy’ and ‘human rights’ – the traditional values that the Democratic Party upholds. The ‘liberals’ are able to brook the fact that China is second to the U.S. in terms of military and economy. However, they can never tolerate one thing concerning China. That is, although China has emerged as a global power elevated by economic growth and endowed with responsibility, it still remains as a non-democratic country. Particularly, this fact - that even though the Clinton administration hugely contributed to China’s economic rise, such as applying most favored nation treatment to China and assisting China’s accession to the WTO, China is not a democratic country – tests the limits of liberals’ patience. In other words, the ‘liberal’ group’s sentiment of China could be summarized as disappointment and anger.

The third group could be dubbed as ‘capital-oriented’ group represented as Wall Street and Silicon Valley. From China’s point of view, this group is categorized as the most ‘practical’ people. They are aware that China plays an unfair trade game. However, despite such fact, they concluded that it is still profitable to do business with China (rather than not doing business with China) overall based on coldhearted calculations of cost and benefit. Consequently, the ‘capital-oriented’ group strives to maximize profits through economic interdependence with China. Beijing views that this group will not abandon China even when the U.S.-China relations are further strained.

The typical step that the ‘capital-oriented’ group made was U.S. electric car manufacturer Tesla’s announcement in June 2018 to construct a plant capable of producing 500,000 electric cars annually in Shanghai, and not the U.S. The predominant analysis is that Tesla made such move because of the trade war evoked by President Trump. In other words, Tesla decided to build the production plant in Shanghai to access the Chinese market, factoring in the fact that China introduced 40-percent retaliatory tariff on U.S. cars after the U.S. imposed high tariffs on Chinese goods. The market’s reaction to Tesla’s ‘unpatriotic’ behavior was intriguing. This day, Tesla’s stock prices rose by 2.9 percent when the market was open.[4]

Ironically, Tesla CEO Elon Musk, along with President Trump, criticized China for the barriers to the market such as tariffs. As the U.S.-China trade war looms large, he reversed his views completely. China is the largest electric car market for three consecutive years and accounts for 15-percent of Tesla’s total sales of electric cars – Tesla sold 17,000 electric vehicles in China. For Tesla, the Chinese market would have been indispensable – unable to abandon it because of the U.S.-China trade war. Although the specific amount of investment is undisclosed, the Chinese media reported as the largest foreign investment in Shanghai’s manufacturing sector. This is the nature of capital. Capital moves for profits beyond national boundaries and ideology.

China prospects that the ‘Silicon Valley’ will not be able to give up the Chinese market. Recently, the Chinese telecommunication equipment manufacturer Huawei’s CFO Meng Wanzhou was arrested for violating sanctions against Iran. There were interpretations that the U.S. government attempts to thwart Chinese followers in the 5G-telecommunication competition, vying for the so-called ‘neural network of the fourth industrial revolution’ such as artificial intelligence. One of the key factors in the ‘fourth industrial revolution’ is ‘big data’ which is directly proportionate to population – allowing collection of more big data with larger population size. China stores the largest data in the world. Moreover, China attracts multinational corporations as it has less strict regulations big data and privacy compared to the U.S.

The Chinese authorities will judiciously discern the groups that they could work with and groups that they cannot engage with. In other words, they will classify the three groups in terms of the possibility of persuasion. First, the ‘hardliners’ and ‘liberals’ are excluded as they are prone to have anti-China sentiments. Hence, China will strengthen ties with ‘capital-oriented’ group – the most ‘pro-China’ group among the three groups. At the same time, the Chinese authorities have had brainstorming sessions to prepare for the elongation of U.S.-China standoff surfaced as a trade war.

One of the ideas is the so-called ‘globalization without America (Fēi měi quánqiúhuà)’ strategy. It literally means that China will carry on with globalization without the U.S. This should not be misinterpreted as China’s isolationist strategy. The Global Times claimed that China should continue the globalization industrial policy in the editorial titled, “How should China adjust its industrial policy?” on December 14, 2018. It reads that the continuation suits Chinese interests. “Reform and opening-up is the only path China should follow. We have achieved successful results over the past 40 years, as will we do in the future.”[5]

As the U.S. tries to exclude China in the global value chain, China apparently responded that it will do business with ‘others except the U.S.’ Furthermore, it intends to further strengthen the network with ‘others except the U.S.’

Secondly, this strategy is to make ‘others except the U.S.’ on China’s ‘side.’ China divides the rest into three different regions, ‘three Northeast Asian countries (Korea, China, and Japan),’ Southeast Asia, and Europe. That is, it will enhance cooperation with countries in the three regions, dividing the world into three ‘battlefronts.’

In fact, China’s ‘new type of major power diplomacy,’ set forth at the 19th National People’s Congress, has made a number of achievements in 2018, except for the relations with the U.S. The ROK-China relations hopped on the path of recovery after the ‘THAAD issue’ and Japanese Prime Minister Abe met President Xi in Beijing. In May 2018, South Korea, China, and Japan held the trilateral summit in Japan. China also held a bilateral summit with India, which had encountered standoff at the border with China, in April in Wuhan and Prime Minister Modi visited China to participate in the Shanghai Cooperation Organization meeting held in Qingdao in June.

Along with these diplomatic accomplishments, China agreed to develop the resources in the South China Sea jointly with the Philippines, the country that had a territorial dispute with China, took a coordinated posture with Russia in September as it participated in a large-scale joint military exercise, and signed a $28.8 billion-worth currency swap deal with Indonesia. Internally, China evaluates that its diplomacy had a successful year in 2018 except for the U.S.-China relations.

Eventually, China manifested the strategy against the U.S. – joint coalition with other countries – as it entered the mid-to-long-term competition framework with the U.S. While the daughter of Huawei’s founder Meng Wanzhou’s arrest in Canada at the U.S. government’s behest led to distress, President Xi convened the CPC Central Committee Political Bureau on December 13. He said that ‘having a stronger sense of crisis in mind, the country should continue to seize the important period of strategic opportunity for development and manage its own affairs with firm confidence and initiative.’[6] President Xi’s comments imply that the current trade war, in the wider picture of power competition between the U.S. and China, will have long and deep ramifications. Will this strategy succeed?

Beijing seems to shift carefully toward optimism. First, in relations with Japan, the archrival in East Asia, Japan was the largest participant in China’s first import exposition held in Shanghai in November 2018. The Japanese corporations filled the void left by the U.S. companies which did not participate in the expo due to the trade war. Japan, home to global home appliances producers such as Sony and Panasonic, had their eyes in the Chinese market for a long time. Chinese people’s preference for Japanese home appliances has been consistent, regardless of the political situation, ranging from electronic rice cookers to a lid of a toilet seat. Accordingly, there are speculations that the Chinese government will open the market to Japanese household appliances once the trade war with the U.S. intensifies.

China sees South Korea and Japan as countries not easily influenced by ideology in the process of policy formulation and execution unlike the U.S. As such Beijing believes that it could entice South Korea and Japan to its side with economic incentives or even refuse to coordinate with the U.S. on encirclement of China. (This could be apparently Chinese thought on the state of play.)

Can China’s ‘globalization without America’ strategy succeed? Although it will engender difficulties for China in the short term, China forecasts that this strategy will succeed in the medium to long run. China exudes its confidence based on the idea that ‘time is on Chinese side’. While hard times may come to China for about five years, China understands that it will not only survive, but also thrive with greater strength. It rather sees that it is only a matter of time for China to have strength on par with the U.S. – as it ‘survived’ without trading with the world’s largest economy. That is, China intends to compete with the U.S. without dodging the situation and regard it as ‘growing pains’ necessary for China’s rise.

Obviously, China also has its Achilles’s heels, military strength, lagging far behind the U.S. Therefore, it will want to evade full-scale military clash with the U.S. While the fault lines between the U.S. and China – Senkaku/Diaoyu Islands, the South China Sea, and Taiwan – may heighten military tensions, China will downplay the situation to prevent tensions taking the collision course. Unless the U.S. and China engage in a military clash, the U.S. and China will take a long time to strike a balance in bilateral relations. That is, the issue should not be considered as a temporary disturbance.

At the conference marking the 40 years of reform and opening-up on December 18, President Xi stated that he will boost ‘communist rule’ and ‘economic reforms’ against the ‘unimaginable threats.’ In other words, China vows to expand its influence on ‘its neighbors’ through economic reforms, while strengthening CPC rule ideologically. This also is aimed at preparing for a long-term struggle with the U.S.

 

 

 

This article is based on the author’s personal opinion and does not reflect the views of the Sejong Institute.

 

*Translator’s note: This is an unofficial translation of the original paper which was written in Korean. All references should be made to the original paper.

 

[6] 增强忧患意识，继续抓住并用好我国发展的重要战略机遇期，坚定信心，把握主动，坚定不移办好自己的事。要保持战略定力. Renmin Ribao, December 14, 2018. p. 1. Xinhua News Agency, “Xi presides over meeting on economy, anti-corruption” December 13, 2018. http://www.xinhuanet.com/english/2018-12/13/c_137672180.htm