U.S.-China Trade War: Implications and Outlook

 

Current Issues and Policies No. 2018-17

December 12, 2018

Dr. Lee Seong-hyon

Director, Department of Diplomacy Strategy Studies, the Sejong Institute

seonghyon.lee@sejong.org

 

 

• Why the U.S. continues the trade war that ‘damages both sides’

• Hopes that the situation will disentangle in a short-term will rather increase the risk

• South Korea should have a ‘plan B’ in geoeconomic and geopolitical terms

 

After the Trump-Xi meeting that was at the global limelight during the G20 summit in Buenos Aires, Argentina, one figure who served as the chairperson of South Korean National Assembly’s Committee on Foreign Affairs, Trade, and Unification said his forecast of the situation to the author - “the U.S. and China will seek a compromise in the end. Trade war harms both sides.” His assertion was that the two countries will opt for a ‘rational choice’ to avoid the collision course from the logic of economic theory.

A senior fellow at a prominent economic research institute in South Korea thought otherwise. He said, “from the people who study economics like us, it is rational for the two sides to come up with a compromise. But the ongoing situation does not follow the economic logic. Frankly, people within my institute are confused. It may be the shortcomings of scholars like us who were only educated with economic theories.”

             If the ‘economic theories’ cannot unambiguously explicate the trade war between the U.S. and China, it denotes that other factors are in play. These ‘non-economic factors’ have a significant influence even to the extent of unnerving the essence of the trade dispute, a supposedly economic issue. Widening the prospects, the essence of U.S.-China trade war may not be ‘trade’ after all. In other words, this trade war may be the tip of the iceberg known as the U.S.-China structural confrontation which surfaced recently.

Avoiding to hastily drawing to conclusions, the situation begs the question of why the U.S. ‘waged a trade war against China’ despite the fact that ‘it is detrimental to both sides.’ Here lie the interesting points. Because the U.S. began the trade war, China will have provided the reason. What did China do wrong in the U.S. view?

Several discussions have already unfolded regarding this matter. The exemplary case is the ‘Made in China 2025’ slogan that the Chinese government proclaimed. At first, it appeared as yet another slogan of the Chinese government stressing technology innovation. Germany had the ‘Industry 4.0’ strategy to revive the manufacturing sector. South Korea also promoted industrialization through slogans such as ‘mass-production-export-construction’ or ‘globalization’ in the process of economic growth. It underwent the process of technological innovation and the worldly-renown corporations such as Samsung and LG emerged in the industrialization process. China’s Made in China 2025 may also be understood in the same context. Hence, on one side, it could be viewed as China’s manufacturing sector upgrading its level beyond the extant role of ‘world’s factory.’

Contrarily, the Made in China 2025 program turned out to be an ambitious national project - and not a simple slogan. ‘Made in China 2025’ was first coined by Premier Li Keqiang during the lianghui (National People's Congress, NPC and the National Committee of the Chinese People's Political Consultative Conference, CPPCC) in March 2015 and officially announced in May of the same year. It aimed to transform China from a ‘large manufacturing country’ to a ‘manufacturing powerhouse’ within a decade - by 2025 - and to surpass the frontrunners in the manufacturing sector, Germany and Japan, by 2035 - having a specific deadline and goal. And it aims to become the global leader in manufacturing state-of-the-art products by 2049. Although it did not explicitly state it, China’s goal is to surpass the U.S.

The year 2049 marks the centenary for the founding of the so-called ‘modern China’ after the CPC won the civil war against Kuomintang. President Xi proclaimed to build a ‘modern socialist power’ by 2050 at the 19th CPC National People’s Congress with such schedule in mind. This also has its roots on the zeitgeist of President Xi’s ambition - achieving ‘the great rejuvenation of the Chinese nation’ and being the leading military and economic power in the world.

The core of the ‘Made in China 2025’ program is manufacturing cutting-edge products and services and it is an ambitious plan to compete and exceed the industries that the U.S. dominates such as IT, aeronautics, advanced materials, artificial intelligence, and life sciences. The sense of competition that ‘China will have what the U.S. has’ has been Mao’s instinctual motive to develop nuclear weapons and China’s purchase, renovation, and deployment of an aircraft carrier from the former Soviet Union in 2012 signaled the prelude to preparations for the hegemonic competition with the U.S.

The fault line extends to the fifth generation telecommunication industry, referred to as the ‘neural network of the fourth industrial revolution’ such as artificial intelligence. On the arrest of CFO Meng Wanzhou of China’s leading telecommunication equipment manufacturer Huawei alleged for the violation of sanctions against Iran, U.S. Senator Ted Cruz posted “Huawei is a Communist Party spy agency thinly [veiled](sic) as a telecom company” on Twitter. Democrat Senator Mark Warner called the Huawei as an agent of the Chinese government and “a threat to [U.S.] national security.’ These comments, irrespective of the facts, represent the U.S. threat perception against China.

China either has hacked U.S. state-of-the-art technology or demands U.S. enterprises that do business in China to transfer core technology (de facto forced technology transfer) in the process of upgrading its industry. Washington believes that China’s longstanding goal to become a power ‘superior to the U.S.’ by 2050 through ‘technological rise’ - absorbing U.S. state-of-the-art technology like a black hole – is to fulfill the ‘Chinese dream’ of ‘the great rejuvenation of the Chinese nation’ that President Xi proclaimed. That is, the U.S. perceives ‘Made in China 2025’ plan as a strategic goal that contains ‘ill-suited motives’ that puts the economic and industrial development as a vital means for China’s rise as a hegemon in the future - not a simple slogan of industrial policy.

In other words, from the U.S. perspective, China audaciously prepares for a ‘hegemonic competition’ rather than a simple competition of technological innovation in the cutting-edge technology. The cutting-edge technology such as drone, AI, and facial recognition technology could be applied to military technology such as surveillance satellites and unmanned surveillance planes. As a matter of fact, China recently has underscored the ‘civilian-military cooperation.’ Moreover, the U.S. views that China acquired these technologies through illegal cracking, espionage acts, and conditions such as technology transfer for foreign companies which aims to do business in the Chinese market and not through fair competition.

In his speech at the Hudson Institute last October, Vice President Mike Pence began his criticism against China, “I come before you today because the American people deserve to know… as we speak, Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States.” In sum, China poses a threat to the U.S. system. He allocated the whole 40 minutes of the remark on China, condemning several issues meticulously - point-to-point.

             South Koreans had not recognized the significance of Vice President Pence’s such address. Nonetheless, this address is prepared with a wide range of coordination across the departments within the Trump administration. Some experts in the U.S. even view the address as the ‘inflection point’ in U.S.-China relations. That is, the U.S.-China relations will be differently reshaped ‘after’ Vice President Pence’s remarks. 

For the U.S.-China trade war to end, China just has to accept U.S. demands. However, this is not that straightforward. First, China has intentions - and wishes - to take measures mobilizing Chinese capital. In other words, if China could assuage the U.S. by ‘large-scale purchase of U.S. goods,’ China is willing to do so. However, the problem is whether the U.S. will be satisfied with such measures from China.

According to the former Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell who served in the Obama administration, three different viewpoints intricately exist in the U.S. regarding the trade war with China - beyond the conventional dichotomy of ‘hardliners’ and ‘softliners.’ The first group holds the view that the U.S. could reach a compromise with China when China ‘massively purchases’ U.S. goods - as the Chinese side would wish. The second group argues that the U.S. should set the ‘rules’ to wholly rectify China’s ill-behaved and unfair practices. The third group asserts that the U.S. should seize the opportunity to block China from ever challenging the U.S. hegemony again by fundamentally and fastidiously deterring China’s ‘technological rise.’

It is noteworthy that the wariness against China and anti-Chinese sentiments have been expanded and heightened across the aisle in the U.S. Congress. This has increasingly become a ‘zeitgeist’ that represents the U.S. society.

A series of measures symbolize such trend: the U.S. universities have tightened its visa review process for Chinese students; there are moves to shut down the Chinese-government-sponsored ‘Confucius Institute’ in the U.S.; the U.S. government has bolstered its supervision and management on Chinese investment, acquisition, and merger of U.S. leading-edge firms and collaboration with universities; and the Canadian government arrested Huawei’s CFO recently by the U.S. request.

The background of all this lies the fact that China has narrowed the gap with the U.S. in terms of overall national power. The Chinese economy, once one-eighth of the U.S. economy two decades earlier, rapidly enlarged to three-fourths of the U.S. economy by the inauguration of the Trump administration. The U.S. National Intelligence Council (NIC) forecasted that it is only a matter of time for China to become the world’s largest economy between 2030 and 2035 when the current projection continues.

This concern is not limited to the economy. Militarily, the U.S. manifests its alertness against China conspicuously. The U.S. National Security Strategy published in December 2017 already indicated China as a ‘revisionist’ state that challenges U.S.-led international order. In the Nuclear Posture Review issued early February this year, the part about China begins with the following statement. “Consistent with Chinese President Xi’s statement at the 19th Party Congress that China’s military will be “fully transformed into a first tier force” by 2050, China continues to increase the number, capabilities, and protection of its nuclear forces.” Cutting to the chase, the U.S. senses that China pursues not only an economic rise but also military rise.

Comprehensively, the U.S.-China trade dispute is an economic issue; but many point out that the friction has spilled over to other realms as time passed by. Even if the two sides come up with a temporary compromise, the U.S. pressure on China will continue across various sectors. It is also notable that Vice President Pence’s landmark speech appeared a month before the Trump-Xi meeting at the G20 summit. Here, Brookings Fellow Ryan Hass’s comment is worth mentioning, “It also signaled that the White House does not believe a de-escalation on trade is achievable or desirable in the near term.”

The U.S. demand includes the reform of Chinese state-owned enterprises, which are the ‘bloodline’ for the Chinese Communist Party. One Chinese scholar’s diagnosis seems telling - “reform of state-owned enterprises is like saying the communist party to slit your wrist and commit suicide.” Coincidentally, state-owned enterprises have enjoyed higher standing in the Xi Jinping era, adding suspicions to the U.S. side.

The followings are implications to South Korea. First, if this U.S.-China trade war that we witness today is indeed a hegemonic competition - and not simply a ‘trade’ dispute and it should be heedful of this fact. Second, U.S.-China hegemonic competition will be a fluctuation of mid-to-long-term confrontation rather than short-term disruption. That is, Seoul should not regard the issue as something that ends soon. Third, it should be poised to respond to the geoeconomic and geopolitical risks and the repercussions ensuing the deterioration of U.S.-China relations. As China strongly warned of ‘serious consequences’ if Canada does not release her when Canada arrested the chief financial officer of Huawei Technologies by the U.S. request, the bilateral confrontation may have a third country at the crosshairs as well.

This also applies to South Korea. Middle powers such as South Korea may have difficulties ‘positioning’ themselves between the U.S. and China. South Korea already suffered serious ramifications by the THAAD deployment issue - a typical case. The ‘Belt and Road Initiative,’ actively driven by China and disdained by the U.S., may be a potential tribulation for the South Korean government. The idea of ‘middle power’ does not denote an opportunistic approach between the U.S. and China. As the Peloponnesian War bespeaks, the great powers will not abandon the old habit of compelling states lying in the middle to ‘pick one side.’ Mindful of the point that its strategic flexibility and leeway will narrow, South Korea should preemptively prepare for the incidents to come in 2019.

 

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.