Trade War with China

Beijing is a free-riding superpower on the rise, the U.S. a weary titan no longer willing to invest in the system it built after WWII.

Relations between the United States and China will determine the world’s destiny in the twenty-first century. Unfortunately, the world’s two superpowers are headed for confrontation on multiple fronts thanks to divergent views on globalization, Asia-Pacific security, and democracy. While Donald J. Trump is not to blame for this long-building strategic, economic, and political confrontation, his policies have sharpened Sino-American rivalry and guaranteed that relations will get worse before they get better. Together, China’s rise and Trump’s reactions threaten to bury the liberal international order the United States helped to create in the aftermath of World War II. This pessimistic but unavoidable conclusion emerges from a week’s worth of conversations between Chinese and American analysts in Beijing and Shanghai.

For decades, most American commentators argued that globalization

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, opening its markets and liberalizing its politics. China has indeed transformed. Its gross domestic product now rivals America’s, and its middle class is 400 million strong. But much of its

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to U.S. trade and investment and intellectual property theft continues with impunity. In January 2017 at Davos,

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China as the leading champion of globalization, in contrast with the crimped, insular protectionism of Donald Trump’s “America First.” It was a pretty story. But it ignored China’s continued resistance to exposing itself to the free flow of capital or its industries to foreign competition. Indeed, Xi has embraced a “Made in China 2025” agenda

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for the foreseeable future.

Regionally, China is moving assertively to become the dominant geopolitical force in Asia.

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that “China will never seek hegemony or engage in expansion.” Its long-term ambition is to dismantle the U.S. alliance system in Asia, replacing it with a more benign (from Beijing’s perspective) regional security order in which it enjoys pride of place, and ideally a sphere of influence commensurate with its power. China’s Belt and Road initiative is part and parcel of this effort, offering not only (much-needed) infrastructure investments in neighboring countries but also the promise of

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in Southeast, South, and Central Asia. More aggressively, China continues to advance

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over almost the entirety of the South China Sea, where it continues its island-building activities, as well as engaging in provocative actions against Japan in the East China Sea.

At home, meanwhile, China’s totalitarian system becomes more entrenched by the day, as the surveillance state increases its digital reach, as domestic space for independent civil society shrinks, and as citizens navigate an

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in which “

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” scores will determine their life prospects. If any American idealists remained, the scales fell from their eyes this month, when Xi Jinping

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on how long he can serve as China’s president. While Donald Trump himself may envy Xi’s unlimited authority, Xi’s consolidation of power is diametrically opposed to fundamental principles of liberty at the heart of America’s national identity and longstanding aspirations for the world.

On the heels of its nineteenth party conference, the Chinese Communist Party (CCP) is giddy and triumphalist. As China’s economy surges ever onward, the regime seeks to grab the lead from the United States

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like artificial intelligence (AI) and the

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that will power the internet of things. Xi is cementing the CCP’s control over China’s destiny, even as the United States descends into political turmoil. “The Party is the highest force for political leadership and the fundamental guarantee of the rejuvenation of the Chinese nation,”

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to the National People’s Congress. “Chinese-style democracy shows advantages over Western model”, the Shanghai Daily explained this week, particularly compared to the United States, which has descended into the “isms” of “conservatism, isolationism, and populism.”

In a recent

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, two senior officials who served President Barack Obama, Ely Ratner and Kurt Campbell, describe the scale of America’s bipartisan disillusionment with China. The advent of President Trump has sharpened the strategic rivalry between the two countries. Last December’s

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China (alongside Russia) as a major “revisionist” power and a leading U.S. adversary. The Trump administration is moving to contain China. It is working with Congress to preserve America’s dwindling edge in AI and other dual-use technologies. And it has declared its support for a “free and open Indo-Pacific” order that (among other things)

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for the United States to work with major democracies like Japan, South Korea, Australia, and India—as well as non-democracies like Vietnam—to provide a counterweight to a rising China.

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But it is in the economic realm where Trump’s resistance to China—and America’s own status as a “revisionist” power—is most obvious. The president campaigned on the premise that U.S. trading partners, with China as lead offender, had played Americans for suckers, destroying U.S. manufacturing in the process. This week the

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that it would impose on China up to $60 billion annually in punitive tariffs for IPR violations, under Section 301 of the Trade Act of 1974. This comes on top of the administration’s plan to impose heavy duties on imports of steel and aluminum. Defenders of the rules-based trading system have

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run directly counter to the principles enshrined in World Trade Organization, bypassing its binding dispute resolution mechanism. Trump’s unilateralism signals his impatience with the process-oriented approaches of his two predecessors, George W. Bush and Obama, and his intent to focus on results—WTO rules be damned.

On one level, Trump’s approach to trade with China is reminiscent of Ronald Reagan’s get-tough strategy with Japan in the 1980s. Frustrated by Japan’s failure to open its economy, Reagan turned away from rules and towards outcomes, compelling Japan to negotiate a series of voluntary export restraints in critical sectors, including semiconductors. (The current U.S. Trade Representative, Robert Lighthizer,

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under Reagan and led some of these negotiations).

But two differences stand out in the two experiences, as my colleague Ted Alden has told me. First, Japan was a democratic ally of the United States and inherently more susceptible than China to American suasion. Second, Reagan was essentially a free trader who took this unilateral step in the interest of preserving the open trading system in the long run. Trump is nothing of the sort, increasing the risk that his steps will unleash a global trade war that he believes he can win. There is

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that the president has an endgame in mind, in which the U.S. returns to the multilateral fold.

Trump’s skepticism of multilateral trade agreements also ignores the geopolitical benefits that can redound to the United States from its participation. A case in point here is the Trans-Pacific Partnership. Not only was this a high-standard agreement that merited American support; it also has profound strategic implications by signaling U.S. staying power in the region, as a counterpoint to China. Trump’s decision to renounce it was a strategic blunder of epic proportions that continues to reverberate among U.S. friends and allies.

Despite the different perspectives that my Chinese and American interlocutors expressed this week, they agreed on one point: Sino-American relations are bad and likely to get worse during 2018. The two countries are proverbial ships passing in the night. China is an emerging superpower but has not yet embraced economic and geopolitical responsibilities by liberalizing its economy and investing in regional stability.

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to “win-win” scenarios and

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as “one community” with a “shared destiny.” And yet China continues to free ride economically while throwing its weight around with its neighbors.

The United States, for its part, is a weary titan, no longer willing to bear the burdens of global leadership, either economically or geopolitically. Trump treats alliances as a protection racket, and the world economy as an arena of zero-sum competition. The result is a fraying liberal international order without a champion willing to invest in the system itself.

The takeaway is a depressing one. The liberal international order is in intensive care in Asia and there is no doctor in the house. Geopolitical tensions and economic frictions will limit Sino-American cooperation and could well spill over into other regions (e.g., Southwest Asia) and topics (e.g., counterterrorism) where interests are more aligned. The overriding goal for both sides will be to manage the emerging bipolar balance and its strategic competition so that it does not become a full-fledged Cold (much less hot) War. To navigate this era, the United States will need prudence and wisdom—two qualities not generally associated with Donald Trump.

An early test will come in the next two months when the president is scheduled to meet with the North Korean leader Kim Jong-un. Prospects for success are low, given past negotiations with Pyongyang. Beijing’s willingness to press its ally—and to maintain clear lines of communication with Washington throughout—will shape U.S. perceptions of what it can and cannot expect from China.

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The U.S. government's latest tariff plan on imports from China contradicts its commitments that such a decision be based only on the World Trade Organization (WTO)'s Dispute Settlement Body (DSB), said Zhang Xiangchen, Chinese ambassador to the WTO, on Monday during a meeting here.

Zhang said what the United States had done in contradiction with its commitments made at WTO more than a decade ago, and that the United States had "explicitly, officially, repeatedly and unconditionally confirmed" that it would base a "Section 301" decision only on adopted DSB findings.

"Section 301" is a measure under the U.S. Trade Act of 1974 that allows the president to take all appropriate action, including retaliation, if an investigation finds foreign trade practices burden or restrict U.S. commerce or are unreasonable or discriminatory.

"According to the WTO rulings and the U.S. commitment, the U.S. shall by no means determine unilaterally based on a 301 investigation that other members have violated the WTO rules," Zhang said during a meeting of WTO's Council on Trade in Goods.

Last Thursday, U.S. President Donald Trump signed a memorandum that could impose tariffs on up to 60 billion U.S. dollars of imports from China and restrictions on Chinese investment in the United States.

The memorandum is based on a Section 301 investigation, launched by the Trump administration in August 2017, into alleged Chinese intellectual property and technology transfer practices.

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A Chinese Foreign Ministry spokesperson said here Monday that the United States should know that in the 21st century, global trade requires rules rather than power.

Foreign Ministry spokesperson Hua Chunying made the remarks at a daily press briefing, when commenting on U.S. Vice President Mike Pence's remarks that recent U.S. trade moves meant the "era of economic surrender is over."

Instead of saying the "era of economic surrender is over," it is better for the U.S. side to say that the U.S. economic intimidation and hegemony should be eliminated, Hua said.

She said that China has always complied with WTO rules and maintained a multilateral trading system with the WTO as its core and rules as the basis. It has always advocated that in a spirit of mutual respect, equality and mutual benefit, disputes including economic and trade friction should be settled through consultation.

Hua said that both China and the United States had been negotiating on economic and trade issues. And China has the confidence and ability to safeguard its legitimate interests under any circumstances.

"China hopes that the United States will make rational and cautious decisions and choices," she said.

U.S. President Donald Trump on Thursday signed a memorandum that could impose tariffs on up to 60 billion U.S. dollars of imports from China and restrictions on Chinese investment in the United States.

"China is willing to have consultations with the U.S. side guided by the principle of mutual respect and benefit," Hua said, noting that the the door to dialogue and consultation between the two sides has always been open.

China's Vice Foreign Minister Zheng Zeguang said on Monday that the economic and trade relations between China and the United States were essentially mutually beneficial and brought a lot of tangible benefits to the two peoples.

"We don't want to have a trade war, but we are never afraid of it," Zheng said, noting that China was fully determined and prepared to deal with such a situation to safeguard the national interest.

Zheng expressed his hope that the U.S. side would calm down and find a solution.

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A "huge" trade deficit with China is reportedly behind the U.S. administration's plan to slap tariffs on up to 60 billion U.S. dollars of Chinese imports and restrict Chinese investment.

But data sometimes lies, and could shield the bigger picture.

TWISTED DATA

What the United States claims to be a "record trade deficit" with China is an inflated figure.

According to U.S. Census Bureau data, the trade deficit with China ran to a record 375 billion U.S. dollars last year, while China's customs data showed the country's surplus with the United States stood at 1.87 trillion yuan (about 298 billion U.S. dollars).

The gap resulted mainly from differences in statistical approaches, such as whether or not to include transit trade in the calculations, according to Zhang Monan, researcher with China Center for International Economic Exchanges.

Such discrepancies have inflated the U.S. calculation of its trade deficit with China by about 20 percent every year, according to Minister of Commerce Zhong Shan.

The United States is home to many multinational companies that have a global supply chain, but the current total value statistical method has distorted reality, analysts said.

An iPhone, for example, uses components made in different countries around the world and is only assembled and manufactured in China, but the calculation of trade statistics attributed most of the value to China.

"In this case, China is taking the blame for others," Zhang said.

She added that most of the profits actually went to U.S. companies but the value of the products was reflected in Chinese exports, resulting in inaccurate statistics.

What's more, when talking about the deficit with China, the United States always played down trade of services, according to Tu Xinquan, professor at the University of International Business and Economics.

Data from China's Ministry of Commerce showed that the country has a service trade deficit with the United States, and the gap has been widening.

Official data showed China's service trade deficit totaled 255.4 billion U.S. dollars last year, with the United States as a major contributor. From 2006 to 2016, China's service trade deficit with the United States increased by more than 30 times.

MADE-IN-U.S. DEFICIT

Statistical differences aside, the fact that the United States is not only running a trade deficit with China, but many other countries means the root cause of the imbalance is the U.S. economic structure, which features low savings and high consumption.

In the past decades, U.S. businesses transferred their manufacturing bases to countries with cheap labor and low costs, which helped drive up their profits and benefited consumers.

In a world whose prosperity has been built on the free flow of trade and investment, price-sensitive consumers largely decided the directions of trade, either for exports or imports.

"China has been a major market where the United States enjoyed its fastest export growth, and an important cause of the trade imbalance is the fact that many U.S. goods are less competitive in the Chinese market," said Long Guoqiang, deputy director of the Development Research Center of the State Council.

Solutions to the U.S.-China trade deficit do not come from cutting imports from China, but from U.S. enterprises making their products more competitive, he said.

Joe Kaeser, CEO of Siemens AG, held the same view.

"I believe people should not confuse the lack of competitiveness with unfair trade. If companies lack competitiveness, they need to invest in innovation and people development in order to catch up," he told reporters at the China Development Forum in Beijing.

As China has repeatedly stressed, the trade imbalance between the two countries is mainly a result of different economic structures, industrial competitiveness, and international division of labor, and China has never sought a trade surplus as the flow of trade is determined by the market.

Another factor that has often been overlooked is that U.S. control of high-tech exports to China contributed a lot to trade deficit with China, Minister Zhong said earlier this month, quoting one U.S. research report which estimated a 35-percent fall in trade deficit with China if the United States relaxed export restrictions.

UNWAVERING IN OPENING UP

When handling economic ties with other countries, a trade surplus is not what China seeks. Faced with setbacks in economic globalization and free trade, China has continued to be unwavering in opening up its economy.

Take the opening up of the service sector for example. Even though China holds a big service trade deficit with the United States, it has been taking big steps to further open the sector, and more measures are in the pipeline.

Vice Minister of Commerce Wang Shouwen said on Sunday that China will widen market access in finance, telecom, heath care, education, and elderly care for foreign investors, and will ease restrictions on foreign holdings in financial businesses including banks, brokerages, and funds.

"We will unveil timetables and roadmaps to open up sectors including finance, new energy vehicles, and gas stations," Wang said while addressing the China Development Forum in Beijing.

"We have as always supported free, fair trade," he said.

China has opened 120 industries related to service trade for foreign investors, surpassing the goal of 100 industries set when China joined the World Trade Organization nearly two decades ago.

In free trade zones, the government has fully liberalized many sectors closely watched by foreign investors, including credit ratings, accounting, e-commerce, power batteries, and railway traffic equipment, Wang said.

China has also cut red tape in foreign investment with many approval procedures simplified or scrapped, and more favorable policies can be expected, according to the vice minister.

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KIENCHIN said:

If it is good enough for the POTUS it is good enough for me, I will take the two together

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Soybean farmers in Iowa are concerned about a possible trade war between the United States and China, which will see no winner, an official of the Iowa Soybean Association (ISA) said.

Last Thursday, U.S. President Donald Trump signed a memorandum that could impose tariffs on up to 60 billion U.S. dollars of imports from China, the latest unilateral move that is likely to cause trade retaliation.

"We were disappointed to see that these actions have been taken. Of course we did not want to see any kind of trade disruptions," Grant Kimberly, marketing director of ISA, told Xinhua.

PRIME MARKET

Global soybean imports are expected to reach 151 million tonnes this year, of which China will import 97 million, or 64 percent, according to Peter Meyer, senior director of agricultural analytics at S&P Global Platts.

The United States provides close to 60 percent of the global soybean production and Iowa provides approximately 39 percent of China's soybean needs.

"China is our number one market and it's our most important market. It's a market that the U.S. soybean industry has been working in and been involved with long-standing relationships over 35 years when ... (it) first established office in China back in the 1980s," Kimberly said.

China is also the second-largest purchaser of U.S. pork.

A retaliatory tariff on U.S. agricultural products would hurt U.S. farmers at a time they are already struggling financially. Earnings are expected to fall 6.7 percent this year to 59.5 billion dollar, the Department of Agriculture projects. It would be about half of the nation's 2013 record high earnings.

"U.S. farmers would be very concerned that a trade war would be a negative. It would reduce prices (for) farmers. We're already in a downturn in the U.S. agriculture economy. So that would make things worse," Kimberly said.

NEGATIVE IMPACT

Kimberly thinks the import tariffs announced by the Trump administration would dent the U.S. agricultural market, and domestic soybean prices could suffer the most.

"It already has a negative impact. We've already noticed that soybean prices have dropped from where they were about a month ago, that's partially due to trade war fear," he said.

The official said farmers will soon go to the field as the spring planting season starts. If prices remain weak, that might influence the types of crops they would grow. "They may choose to not grow as many soybean acres if the prices are not looking as positive long-term," he pointed out

Kimberly, who owns a farm of over 4,000 acres (16.19 sq km) in Des Moines, pre-sold some of his crops at the Chicago agricultural futures market as a hedge to get a better price.

"But I have not sold all. So if we do have a ... trade war, the market will probably go down and that will affect my income," Kimberly's father Eric Kimberly told Xinhua.

Iowa and U.S. agricultural officials have long warned the White House about the negative implications for the soybean industry if sanctions and tariffs are imposed. In just five years, farm income in the United States has declined 50 percent while crop prices have dropped 40 percent.

REASONABLE SOLUTION

The Chinese embassy in the United States said "any disputes and differences between the two countries should be solved through dialogues and consultations."

The Chinese ambassador, Cui Tiankai, said there is great potential for China-U.S. cooperation "but the key is that both sides have to take a cooperative and constructive approach; a confrontational one will not help anybody."

"Our message is that nobody wins in a trade war, especially when food and nutrition is involved. So ... hopefully both sides will come together and work out a solution that's beneficial to both sides," Grant Kimberly said.

As the two largest economies in the world, the United States and China must work together and get beyond trade disputes, he said.

"We as an industry continue to voice our concerns to the U.S. administration and make sure that they realize that we want to maintain free and fair and open trade between our two countries," he said.

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B.I.B. said:

So, who is telling the truth.POTUS or Stormy?

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KIENCHIN said:

S

Stormy of course, she has no reason to lie, not on world wide TV.

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