Will the U.S.-China Trade Dispute Affect the Security Issue of the North Korean Nuclear Problem?

No. 2018-21 (April 6, 2018)

Lee Tai-hwan (Senior Research Fellow, the Sejong Institute)

thlee@sejong.org

As the trade dispute between the U.S. and China is inclined to a trade war, more and more people have expressed concerns about its spillover to the South Korean economy. As such, people have taken more interest in whether this will influence security issues such as denuclearization and the DPRK-U.S. summit.

While the trade dispute surrounding the trade imbalance between the two leading global powers are nothing new, China’s hardline response to the U.S. imposition of tariffs has enlarged the incident to a warlike situation. On April 3, Washington announced the list of 1,300 items worth $50 billion to impose 25 percent tariff for Chinese goods. This mainly targeted products that are part of the ‘Made in China 2025’ program, Beijing’s project to foster 10 core industries, which includes high-tech medical machinery, biopharmaceuticals, aeronautics, automated machinery,  telecommunications facilities, high-tech chemicals, maritime engineering, electronic automobiles, LEDs, semiconductors, etc. In response, the Chinese Ministry of Commerce immediately issued a statement indicating its strong condemnation and opposition to this measures and stated that it will carry out retaliatory measures commensurate with Washington’s tariffs and bring the issue to the WTO in pursuant to the organization’s dispute settlement procedures. Subsequently, the ministry announced that China will apply 25 percent tariff on 106 U.S. goods amounting to $50 billion. The Korea International Trade Association estimates that this recent events will affect from $0.19 billion to $36.7 billion worth of South Korean export, depending on how this tit for tat unfolds, postulating three different scenarios – a compromise at the current state, China’s acceptance to increase in imports of U.S. semiconductors, and  a full-fledged trade war.

The problem at stake is how long this confrontation will continue and whether this U.S.-China trade dispute will affect the security surrounding the Korean Peninsula.

First, some view that as the U.S.-China trade confrontation could be characterized as a competition for the economic hegemony, it will be protracted. They opine that it is inevitable to compete with China in the process of restructuring the international economic order and of China’s enhancement of competitiveness of manufacturing sector through the ‘Made in China 2025’ program. While this may have been plausible to a certain degree, the international community has not entered such stage. China prefers free trade over trade protectionism that heads for a trade war as it embarks on a new journey after planning the economic restructuring plan in the long term. The U.S., although it wants to contain China, also intends to relieve the trade imbalance rather than an endless competition, pursuing practical benefits. President Trump also tweeted that it is not in a trade war with China. At the same time, he mentioned the issue of trade deficit and intellectual property rights to yield concessions from Beijing, demanding the overhaul of the trade imbalance rather than a full-scale trade war.

Then, why has the U.S.-China trade dispute suddenly heated now? This dispute can be attributable to the structural and political factors of the trade imbalance. The structural factor is nothing new. The problem of time is more relevant to the political factor. China has recorded a trade surplus of more than $340 billion vis-à-vis the U.S. in 2016. Comparing this number to that of Japan and of South Korea, which recorded $68.8 billion and $27.6 billion, this is a structural problem that cannot be ignored.

Even though the U.S. and China had exposed serious fissures in trade matters as the U.S.-China Comprehensive Economic Dialogue collapsed in July 2017, this did not escalate further because of China’s domestic politics with then-upcoming the 19th National Congress of the Communist Party of China (CPC). However, the Xi Jinping government stands in a different position now as it secured political stability, paving the way for President Xi to rule indefinitely through the ‘lianghui (National People’s Congress and the ’ passing of constitutional amendment which includes the removal of presidential term limits. When President Xi visited the U.S. in April 2017 for the first summit with President Trump, China pledged to provide several concessions to the U.S. in return for the U.S. postponement of trade offensive against China including the agreement on the 100-day plan. Washington agreed to the 100-day plan as an opportunity to President Xi, considering China’s domestic politics prior to the 19th CPC Congress. In response, Xi endeavored to save Trump’s face, signing $253.5 billion worth agreements when Trump visited China last November. The U.S. tightened the sanctions against North Korea by pressuring China, and China cooperated with the U.S. President Trump began to demand the comprehensive amelioration of the trade imbalance with the expectation that China will concede to the U.S. this time, with the midterm elections coming up in November this year.

The Xi leadership, in the second term, may address this matter in a more stable position after the lianghui closes for 2018 with a long-term outlook. While it could implement hardline measures against the U.S. not to show its back, Beijing is likely to have negotiations with the U.S., saving face for the Trump administration in the long-term. It will be difficult to extend the dispute for long, as both countries will suffer once this continues to escalate. Premier Li Keqiang posed a conciliatory gesture, signaling a possibility of compromise as he vowed to ease market access last March – abolishing the obligation for foreign companies in China to transfer technology to protect intellectual property rights and lifting restrictions to foreign investments. Also, People’s Bank of China indicated that it will open the $27 trillion domestic processing market for foreign companies. This is an acceptance of U.S. credit card companies, Visa and Mastercard.

Although it is difficult to expect visible effects as these pledges take time to be applied on the ground, it demonstrated China’s room to reach a compromise.

If the trade dispute continues, the U.S. will also bear the economic cost. If China imposes tariffs on soybeans, the agricultural regions in the Midwest that voted for Trump will suffer first. The 20 major American firms operating in China including Apple and Intel makes $158.4 billion in revenue per annum. It the trade war between the U.S. and China is protracted, these companies are also likely to suffer. In some cases, they could leave the Chinese market like the case of Google in 2010. Therefore, the U.S. will attempt to reach a compromise at some point.

Thus, it seems unlikely that the trade war between the U.S. and China persists and influences issues in security. Nevertheless, a few elements should be noted for some time.

First, President Trump refrained from waging a trade dispute with China as part of the pressure campaign against North Korea by pressuring China in 2017and President Xi bolstered the pressure on North Korea in cooperation with the U.S. Now with the DPRK-U.S. summit around the corner, China held the summit talks with North Korea out of the blue, expanding its leeway, while dispelling concerns of reduction or exclusion of China’s role in the Korean Peninsula affairs. North Korea also found some breathing space. After the Kim-Xi meeting, there have been reports that the sanctions have loosened such as North Korean workers being reemployed in China. As Beijing have collided several times against Washington over the sanctions on North Korea at the UN Security Council, the two sides could again be on a collision course over North Korea’s denuclearization. The U.S., having the goal to maintain international sanctions and pressure against North Korea, could associate the ‘trade’ card in the North Korean issue as a measure to prevent China from leaving the sanctions regime. Still, it is noteworthy that the U.S. also cannot escalate confrontations further with China regarding security as the summit with North Korea is scheduled to take place.

Second, the Trump administration initiated a trade war with China, not only as a measure to comply with the election campaign before the midterm elections. Taking the National Security Strategy report announced early this year into account which defined China as a strategic competitor, Washington could be strategically approaching China as to keep it docile. We need to keep an eye on how this strategic consideration of the U.S. unravels and what strategic initiative President Xi proposes at the Boao Forum, held on April 8 to 11.