China-US trade: a long-term battle of system versus system

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US Treasury Secretary Steven Mnuchin was in Beijing this past week with the rest of Team Trump for trade talks with China. Photo: Reuters / Jason Lee

President Donald Trump’s economic heavy hitters including US Treasury Secretary Steve Mnuchin, along with US Trade Representative Robert Lighthizer, Commerce Secretary Wilbur Ross, White House trade adviser Peter Navarro, and National Economic Council head Larry Kudlow, have just wrapped up meetings held in Beijing this week.

The currently dysfunctional US-China trade and economic relationship was long in the making and is the handiwork of successive administrations – with an assist from many an American CEO. This long-term situation indicates that shuttle diplomacy and a magic formula of sanctions and tariffs on the US side, or “market opening measures” on the Chinese side, won’t fix things – no matter how this week’s talks were spun.

An American businessman who has spent several decades in the People’s Republic of China, speaking on condition of anonymity to Asia Times, offered his perspective on the current difficulties between the PRC and the United States, and the prospects for resolving them.

A 15-year fight?

“China and the US are in Round 1, bobbing and weaving around, in a 15-round, 15-year fight,” he said. “This a major reason term limits for [President Xi Jinping] were abandoned. China sees this as a 15-rounder with the US: Why change boxers in the middle of the fight?

“So far, Xi has proven – or propaganda has persuaded – that he is the ‘Great Han Hope.’ At best, Trump has six rounds left before we change boxers.  The CPC [Communist Party of China] is betting that:

  1. “Trump will not be able to mobilize support for taking on China for more than another round or two [because of midterm elections this year and presidential elections two years later]; and
  2. “The next US fighter who will succeed Trump in Round 7 (at the latest) will be no match for the battle-hardened ‘Great Han Hope’ … and in any event, he will be undermined by a weary American public seeking a reset with China.

“By the very nature and mission of the CPC, there is nothing in their self-view, national view or worldview that will allow an acceptable behavioral change. The very nature of China, plus the addition of a CPC regime, is driving what is becoming a permanent state of contention with the US. America will never have the ‘normal’ relationship with China that it is has with most other nations.

‘It tears at America’s psyche that our relationship with one nation should be different from our relationship with all the rest. The CPC has accepted this reality. The US has not’

“It tears at America’s psyche that our relationship with one nation should be different from our relationship with all the rest. The CPC has accepted this reality. The US has not. So far, the CPC has taken full advantage – to their decisive competitive advantage.

“This is not Chinese skulduggery but America’s inability to understand China … or in reverse, our ability to misunderstand China by assigning our own cultural expectations on what they should be, or will be, with our understanding, patience, largesse and engagement.

“There is nothing the CPC can do, by its very nature, to materially ‘open up’ China to American business that would be considered an acceptable outcome to the US. China’s learning to live with high import duties for Chinese goods entering the US, and restrictions on Chinese investment in the US would be an acceptable ‘present’ condition.

“American understanding of who the CPC is, how they manage China and their objective to eventually displace American capitalism and global influence, is really the precursor to arriving at an acceptable outcome with the CPC.”

The businessman noted that PRC capitulation to Trump on trade is highly unlikely: The leadership is buoyed by the Chinese population’s economic experiences.

The Chinese ‘snowflake’ generation

He explained: “If one is aged 50 to 70, they lived during China’s most tumultuous period of post-1949 destructive movements… Most of these people, including China’s current leadership, literally ate grass…. They will do it again if they have to, before giving in to a trade war.

“If one is age 40 or below, and particularly 30 and below, one has only known increasing abundance and consumerism. The Great Leap Forward, Cultural Revolution and Tiananmen Massacre have been blacked out in China.

“[This generation] needs to be constantly adored, fed, clothed, entertained and sent on overseas tours when they are not at their nominal state-owned-enterprise jobs. The CPC takes credit for their good life – as indeed it should. These younger folks have no idea what trade is. Nor do they care. For many, ‘Trade War’ could be a Shanghai rock band.

“Will there be a Chinese generation clash in the midst of trade war? No.

“The CPC, using its two-tiered monetary system and self-managed foreign-exchange rate, have created a degree of insularity in China’s domestic market from the effects of a trade war. China’s domestic market, and ‘snowflake’ lifestyle, can survive in a somewhat altered, but not grass-eating, state for the next three to five years.”

Forex the Achilles heel

“However, the real damage to China will be internationally where their intake of foreign currency could be reduced,” the source continued.

“China has to take in one dollar for every dollar it spends abroad. If China’s annual foreign-exchange income is reduced, let’s say 20% a year, it means they have 20% less foreign exchange to fund their international ambitions. If the 20% reduction stays in place for five years, let’s say, that is an aggregate loss of 100% of funds available to fuel its overseas programs, investments, acquisitions and so on. This means they are losing ground globally.

“This will set up some interesting psychological situations for the CPC that will force them into making choices … perhaps not the choice they want … or not the choice we want.”

So the outlook is grim over the short term, but not necessarily over the long term – if America has the patience to see that far forward.

Moreover, the businessman noted that the US has plenty of tools – economic, diplomatic and military – to shift Chinese behavior. Not to mention its unmatched soft power – the sheer attractiveness of the American system that has many successful Chinese keen to move their assets and offspring (ideally, with a Green Card) to the United States.

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