US-China Trade War is here to stay

Dumping Deng Xiaoping’s doctrine of “hide your strength, bide your time”, President Xi Jingping adopted an assertive mode which over time has transmogrified into confrontational approach. In reply to President Trump’s fresh round of 10% tariffs on $200 billion worth Chinese imports, China has announced new tariffs on $60 billion US goods. This tit-for-tat move of China, uncharacteristic of its state craft surprised business strategists and business pundits. Since opening of its economy 40 years ago, China having emerged as economic behemoth with its coercive policies is now second largest economy.

The premise of Trump’s uncompromising trade war stems from his deep belief that China’s unfair trade practices which includes violation of intellectual property rights, forced technology transfers and increased CCP’s (China Communist Party) intervention in MNCs functioning is hampering the competitiveness of American companies. Though President Obama lambasted China for its unfair trade practices in 2014, never initiated tough trade practices. US-China trade engagements prospered. From the beginning, Trump made no bones about his intentions to narrow the ballooning trade deficit with China. He advocated a muscular approach. Though America has openly expressed its disappointment with Chinese practices, Beijing hardly changed its ways. US Chamber of Commerce which believed that trade war is an inappropriate tool urged Trump administration to stay away from it. With trade dialogues calling for liberalisation of Chinese markets failed, trade war ensued. Having embraced “America First” doctrine and resolutely defended his protectionist approach to uphold American interests.

Several countries affected by Trump’s protectionist measures including America’s traditional allies, Latin American countries and India began silently resolving the crisis by holding talks with American representatives. China’s intransigence to trade talks with America is rather baffling. This certainly has cemented World’s perception of China’s growing arrogance and hubris. It is two months since trade wars there is no respite in sight. In the meanwhile, US is in talks with EU and Japan for pursuing action against China at World Trade Organisation (WTO) accusing China of taking advantage of its rules. Unabated trade war is now creating a vicious backlash within the US. Industrialists have already appealed to US Trade Representative to stop any further escalation as business of small and medium enterprises are impacted. While business in both countries are suffering, it is believed that US is trying to its import from other countries. Trump has signed free trade agreement with South Korea to export pharmaceuticals, automobiles and agriculture products. This move is believed to largely alleviate distress of American farmers affected by China’s tariffs.

The past two months of trade tariff wars is unravelling Chinese economy with over 7% of European companies in China have either moved out or planning to move out of China to South East Asian countries like Vietnam and Philippines to evade tariffs. While companies indicated that China could tide over this situation by opening economy and removing market access barriers Beijing hardly evinced any interest in bringing about economic reforms. As a result, investment front is taking the beating. Unlike developed countries like US, Japan, Germany where investments accounts for 20-25% of GDP, it is 44% for China. Investments flows touched a new low in August. Unlike in the past, China is unable to spend public money to stimulate economy. China debts which were under control even during the 2008 economic recession have suddenly bloated after its spent $1.88 trillion in 2016 to boost economy. Ever since, debt has steadily increased and as per Institute of International Finance, China’s debt-GDP ratio is 300%. IMF has indeed issued an alert to China to curtail lending. Since April, Chinese government has imposed restrains on lending. With trade war intensifying the cracks in the economy are widening. Economy has slowed down, thousands of jobs are lost, domestic demand fell, and production costs escalated.

In the process, even three-fourths of American companies operating in China are taking this hit.  But Trump administration contends that a limping Chinese economy might bring back manufacturing to America, one of the purported objectives of the trade war. While this seems to be far from reality as of now, the trade war is steadily expanding to many frontiers. Trump’s approach towards China is now gaining bipartisan support and American think-tanks, officials who began openly criticising China’s human rights violation, belligerence in South China sea, blatant infringement of Intellectual rights. America now alleges that China is directly influencing US politics before midterm elections. Trump took to twitter saying, “China is actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me”. Earlier John Bolton, National Security Advisor accused China of interfering US political process and soon the US Justice Department ordered Chinese state-owned media outlets are foreign agents. He disclosed that China carried out cyberattacks and stole records of over 22.1 million records of American government officials. Taking stock of Chinese operations in America, through the United Front Work Department (UFWD), Washington lashed out at China for penetrating Universities through Chinese Diaspora and influencing the political elite of the US.

In the meanwhile, China began to portray Trump as a hawkish leader obstructing economic growth of China through trade and investment restrictions and thus curtailing its rise as World Power. Trump is using this propaganda to boost his image as unyielding President and energising his electoral base for the upcoming mid-term elections in November. In its past two encounters with President Trump, China managed to have a way with him. After President Trump received a congratulatory call from President Tsai Ing-wen, China expressed its severe indignation, termed it as breach of protocol and extracted promised from America to honour “One China Policy”. Though Trump hadn’t publicly acceded to this request, he didn’t refuse to abide by it either. Trump issued notices to ban on ZTE in America for illegally selling technology to North Korea and Iran defying its sanctions, President Xi personally reached out to Trump forcing him to reverse his decision. Despite being a dominant power America gave in anticipating China’s cooperation towards denuclearisation of North Korea. Going by this precedent of Trump making some concessions, China expects America to blink first.

But much to the dismay of China’s unrealistic dreams having embarked on an escalatory stride, Trump is no mood for a reconciliation. Unlike earlier regimes, which avoided confrontations despite China’s malevolent intentions, America announced fresh sanctions on China’s Equipment Development Department (EDD) for purchasing arms and weapons from Russia under CAATSA (Countering America’s Adversaries Through Sanctions Act). In retaliation, China summoned US ambassador and cancelled military talks between Joint staff departments of both countries. For long successive American leaderships grossly misread Chinese intentions and evaded adopting a tough Chinese policy for a fear of backlash from its constituencies. Trump seems to have overcome this decadent hesitation. Despite appeals from Strategists, who argue that America shouldn’t over react to Chinese ascent and resist from indulging in new kind of Cold war, mutual escalation is here to stay.

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