Asia Advisory

Trade and Tribulations

Date: September 25, 2019

Are the United States and China engaged in a cold war lite? The shift in US-China relations towards contestation, rather than cooperation, has expanded. Many within the US administration increasingly view China as an existential threat, from muscular militarism in the South China Sea to strategic competition in emerging technologies. The ongoing trade war with China is the most recent feature of this new cold war. President Trump’s aggressive trade policy is now part of a broader US policy push aimed at containing China.

China is currently standing at a crossroads as it seeks to spur new growth momentum, expand militarily and attain a preeminent place in the global order. The US’s response to this is to game the system by imposing sanctions and tariffs. The rationale for the US led trade war rests on Washington’s accusations that China’s economic rise is closely linked with industrial espionage, technology theft and currency manipulation which has helped fuel its export led growth.

President Trump has imposed higher tariffs on at least $250 billion on Chinese imports which includes food, technology and automobiles, steel and much more. Trump has threatened to further increase tariffs on Chinese goods to as high as 30 per cent on the $250 billion imports already in place by October. Trump also said the remaining $300 billion of imports would be taxed at 15 per cent if trade talks fail.

US has also sanctioned Chinese technology giants. On 1^st December 2018, Huawei CFO, Meng Wanzhou was arrested on US orders in Canada. The Trump administration has put Huawei on an ‘Entity List’ which forbids US companies from trading with it based on unproven claims of transferring data and working for the Chinese government. Huawei is the world’s leading telecommunications supplier and second largest phone manufacturer. Meng’s arrest is a culmination of years of suspicion on Huawei by the US Intelligence. The main concern highlighted by US authorities is that Huawei embeds backdoor entrances into their equipment at the behest of the Chinese government.

But it’s the accusation of intellectual property theft that’s been central to US complaints on China. A recent paper for the pentagon stated the US ‘should advocate for aggressive protection of US technology intellectual property rights in an effort to slow down China’s telecommunications ecosystem expansion’. The US accuses China of shielding Chinese companies from foreign competition by pumping them full of subsidies. The US itself has heavily subsidized its own industries despite WTO rules.

In May 2015, a strategic plan was issued by the then premier of China, called ‘Made in China 2025’. A state led policy of Beijing, it aims to catch up with and then surpass western technological prowess which China has been able to get away with by means of forced technology transfers in order to let foreign companies enter the Chinese mass market.

One core component of the plan was foreign investment and acquisitions. As part of the plan and a key component, China has been encouraging companies to invest into semiconductor firms to gain access to their technology. Chinese acquisition in the US peaked at $55.3 billion in 2016. Beijing’s acquisitions in the US remain a concern for Washington. China clearly grasps the importance of information warfare. With Chinese acquisition of US assets, it can leverage its influence in policy decision making in the US.

In retrospect, American tech giants like Google, Facebook and Amazon have done the bidding of the US National Security state. Why Huawei? Because it is the world’s leading organization for 5G wireless technology and China is way ahead of the curve and will likely be the world leader in 5G.

As the trade war escalates, the prices of goods, services and inputs are rising. Economic uncertainty is rising which ultimately leads to shrinkage in investment which then results in reduction of growth in productivity in turn reducing the rate of economic growth. What happens then is that wages are lower than they would otherwise be, which then triggers a fall in the standard of living. These are all inevitable consequences of these tariffs.

Perhaps some countries stand to benefit from this trade war too. A Bloomberg report cited several companies and academics that the trade war impact was far greater than the Trans-Pacific Partnership for Vietnam. Similarly, Taiwan is tempting computer companies to come back, Malaysia is looking forward to revitalizing its electronics industry it has lost to China.

For other economies, the main source of concern is uncertainty in terms of global growth. That actually limits a series of investments in different economies. Looking into this from the European perspective – the EU has recently signed agreements with Canada and South America, so there are countries that  may actually be gaining from trade diversion from this heightened conflict between China and the US.

Despite steps taken by the US to contain the rise of China in the global economic environment, China still is in a position to maintain its growing influence in the world economy. Both sides seem to be dug in at this point and to that extent the Chinese are willing to do a deal, one that is not necessarily to their liking but with some rules of engagement.

On Trade negotiations between China and the US, so far nothing substantial has come out of the meetings held between the officials of both countries. Trade negotiations or talks are scheduled to restart in the coming week but any agreement seems farfetched. It is very unlikely that China will budge on US demands. Some economists even suggest these negotiations could go on for years.