Trade war was never an option but conflicts will continue

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It would appear that the much-feared US-China trade war has been averted, in light of the recent joint statement issued by the world’s two largest economies. In it the two sides agreed that China would reduce trade surpluses with the US; buy more US agricultural and energy products; expand trade in manufacturing goods and services; encourage two-way investment; and continue dialogue.

The fact of the matter is that a US-China trade war was never an option because of the huge risk it would bring to both countries. Sadly, however, ideology, particularly in the US, will likely keep the conflict alive.

Why a trade war is not an option

If one were to examine the US-China economic relationship thoroughly, President Donald Trump’s threat of a trade war with China and claim that he can win it is more fantasy than real. Large numbers of US brands – from Apple iPads to Ivanka Trump shoes – are designed in the US but produced in China, indicating the two economies are “joined at the hip.” So if Trump were to follow through with his threat of imposing tariffs on US$150 billion worth of Chinese “imports,” consumer prices in the US could go up to that of the tariff rate or higher. His daughter Ivanka might be the first to curse him.

Trump’s promise that jobs would return to US soil would be hollow. One, US firms would likely relocate to other low-wage countries. Two, even if the jobs were to return, they would likely be short-term because companies would automate and innovate to remain competitive, given relatively high US wages and stringent environmental and labor standards.

China is also the world’s supply-chain hub, according to the International Monetary Fund, producing most of the parts needed by US manufacturers such as Boeing and General Motors to complete the production process. According to Boeing, Its 737, 777, 747, 787 and 767 planes all use parts produced in China.

Moreover, many US states and cities vow to continue forging closer economic ties with China with or without Trump’s blessing. Alaska Governor Bill Walker, for example, is leading a large delegation to China, seeking trade and investment opportunities. In this regard, Trump’s trade war with China might not turn out the way he expects in that under the US constitution, state rights are prominently enshrined.

Trump’s U-turn on banning the sale of US semiconductors and chips to the Chinese technology giant ZTE might be to protect US firms rather than a “concession” to China. For example, not able to sell 60% of their production to ZTE, US companies such as Qualcomm, SanDisk and Skyworks stand to lose a big chunk of business, which could force them to reduce production and lay off workers.

Political theater?

In light of the deliberations mentioned above, there is reason to believe that Trump’s trade-war threat is more political theater than real, a message he probably sent Xi Jinping during their private conversations.

To seek re-election, Trump must fulfill his 2016 campaign promises. What’s more, his supporters and opponents alike are convinced that China is the “bad guy,” cheating and “eating America’s lunch.” Thus getting “tough” on China could bring him huge political dividends.

Trump might also be aware that China would not concede to his unrealistic if not ridiculous demands – reducing the trade deficit by US$200 billion by 2020, not proceeding with the “Made in China 2025” industrial policy, not retaliating against tariffs and dropping its technology-transfer requirements.

However, in keeping with the US tradition of blaming someone else for the problems it causes, Trump will blame China if a deal is not struck during Commerce Secretary Wilbur Ross’ visit to China next week.

Rocky US-China relations ahead

US-China conflicts over trade (and geopolitics) may be far from over, for a number of reasons.

One, China and the US appear to have different interpretations of the May 19 joint statement.

Chinese Vice-Premier Liu He, who headed the Chinese delegation, said China would buy from the US as long as the products “pleased” Chinese consumers, implying that US goods must be competitive in terms of price and quality and consistent with China’s industrial strategy. He also stated that China would be buying from other nations to sustain the country’s long-term economic health and stability.

The head of the US delegation, Steven Mnuchin, on the other hand, said the US expected China to buy huge quantities of agricultural products and natural gas.

The demands that China drop technology transfer as a condition of doing business and the government terminate the “Made in China 2025” industrial policy are unlikely to be met.

Two, there are powerful or influential constituencies in the US that are wary of China’s rise or gain from an adverse US-China relationship.

The renowned US scholar Graham Allison is said to have drafted a State Department report complaining that China uses “debt diplomacy” to gain influence in the Asia-Pacific region. Whether the insinuation is true, Allison opined that China and the US might not be able to escape the “Thucydides Trap” in his book Destined for War: Can America and China Escape the Thucydides Trap?

Allison is not alone on the issue. Another prominent scholar, Chicago University’s John Mearsheimer, shared Allison’s view, suggesting China’s rise would not be peaceful. Indeed, many US think-tanks – the Council on Foreign Relations, the American Enterprise Institute, and others – are sending similar messages, that China is “aggressive” and “neocolonialist.”

The US neoconservative or anti-China crowd, some of whom hold senior positions in the Trump administration, might be determined to make China an enemy, if for no other reason than making their rhetoric a self-fulfilling prophecy. Peter Navarro was reported to have had a heated dispute with Mnuchin on how to deal with China. John Bolton has said he wants a “two-China” policy or at the very least increased official government and military exchanges between the US and Taiwan.

Donald Trump himself has hinted that he might follow through with his anti-China rhetoric. For example, he repeated his accusation that China has been “ripping off” America for years. Another example is the expectation that he will blame Xi Jinping if his summit with Kim Jong-un scheduled for June 12 in Singapore is cancelled.

It does not seem to matter that it was United States’ insistence that a US-South Korea war exercise involving more than 100 jet fighters and bombers and more than 12,000 soldiers was responsible for Kim  canceling a high-level meeting scheduled between South and North Korea.

Another contentious issue that will keep US-China conflicts open is the intention by the US Congress, identifying China as a “pre-eminent threat,” vowing to hold meetings on Chinese influence in the US over the coming months. With this mindset, any attempts to sell technological goods to China and Chinese investments in the US will be barred, making deficit reduction more difficult.

History will tell that the US does not allow any nation, friendly or otherwise, to challenge its global dominance or take actions that are not in America’s interest. For example, Trump threatened sanctions against European nations if they continued to do business with Iran. The US  is even threatening Germany and Russia if the two nations proceed with building the Nord Stream 2 gas pipeline.

US-China conundrum

China must have done something right for the US to be so upset with it. The demonization of China has been relentless, blaming China for everything that goes wrong in America, rising poverty, losing manufacturing jobs, the list goes on.

Trump even tried to blame China for the possible cancellation of his June 12 meeting with Kim Jong-un, suspecting Xi Jinping had something to do with the North Korean leader’s change of heart on rapprochement between Pyongyang and Seoul.

But blaming China will not solve America’s problems, nor will it deter the Asian giant’s rise without risking a nuclear holocaust. Therefore, the US has no choice but to negotiate with rather than mount a “regime change” plan against China.

In short, a war (trade or military) is very unlikely between the world’s two largest economies. But their relationship will be rocky, zigzagging between cooperation and competition.

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