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What comes next in the US–China trade war?

Published 20 May 2019

The escalation of tit-for-tat tariffs between the United States and China is now in the danger zone. Surely, reason will ultimately prevail. At least that is the common refrain in the echo chamber, especially in light of the dark history of earlier trade wars.

While it is likely that a deal will be struck on or before the upcoming G20 Osaka summit in late June, I fear any such agreement is likely to be superficial and offer little or no fundamental resolution to the deep-rooted conflict between the world’s two great powers.

The deal is likely to be superficial because it will probably focus on the least consequential aspect of the dispute — the bilateral US–China trade imbalance. This is the lightning rod in the debate, the culprit behind what US President Donald Trump calls the ‘carnage’ of job losses and wage pressures.

Yes, in 2018, the United States had a US$419 billion merchandise trade deficit with China, accounting for fully 48 per cent of its massive overall merchandise trade gap of US$879 billion. But what Trump — and most other US politicians won’t admit, Republicans and Democrats alike — is that the United States ran trade deficits with 102 countries in 2018. This reflects a profound shortfall of domestic saving that is likely to get worse in the years ahead, owing in large part to the reckless tax cuts of late 2017 approved by none other than Congress and the President.

Consequently, to the extent that the coming deal features the absurdity of a bilateral fix for America’s multilateral trade problem, it will achieve very little in addressing the so-called structural issues that lie at the heart of this conflict — namely allegations of intellectual property theft, forced technology transfer, cyber hacking, and unfair industrial policies orchestrated by China’s state-owned enterprises. It is important to stress the word ‘allegations’ in describing the structural conflict. Most of the charges are, in fact, based on flimsy evidence that would not be admissible in a US court of law.

But the false narrative begs the far deeper question: What happened to the strategic engagement that has long been the glue binding the US and Chinese economies together?

A deep-rooted relationship problem traceable to paranoia in both nations is at work. The bipartisan US view is that it is all China’s fault. China, in the words of a Trump Administration white paper issued last June, is thought to pose an existential threat to the very future of US prosperity.

The Chinese view is equally defensive — underpinned by perceived threats of a US containment strategy. From the Asian ‘pivot’, to the Trans-Pacific Partnership, to Trump’s tariffs, China’s leaders are consumed by their own existential fears that the United States is taking dead aim on China’s aspirational 2049 centenary goals for economic development and rejuvenation.

The charges and counter-charges are an outgrowth of a long-simmering mutual distrust that borrows a page from the classic script of codependency. Both nations depend on the other to support economic growth — something that China as an export-led economy has long recognised. But this point is dismissed by Washington politicians,  despite America’s reliance on low-cost consumer products from China, massive Chinese purchases of US Treasuries, and China’s significance as America’s third largest and most rapidly growing export market.

The problem with codependency, whether it is with humans or economies, is that it is a very reactive and ultimately dysfunctional relationship. When one partner changes the rules of engagement, the other feels threatened, and conflict arises. While both dynamic economies are always changing, the shifts under way in China are by far the most profound — from manufacturing to services, from exports to consumption, and from imported to indigenous innovation. The United States, by contrast, clings to the hubris of its superior growth model.

Ironically, the United States was more comfortable with the ‘Old China’ and now feels threatened by the ‘Next China’. America’s aggressive reaction to these threats is a manifestation of the conflict phase of codependency.

So what comes next? The risk is a quagmire with no easy way out. Despite a superficial deal focusing on the bilateral trade imbalance, the structural conflict over technology is likely to endure. This points to what can be called an economic cold war — a protracted period of charges and counter-charges, including tariffs and other sanctions, that will sap the vitality of both combatants.

Resolution ultimately comes only by strength from within. For China that means successfully implementing reforms that promote the economic rebalancing it has long sought. For the United States that entails rebuilding the domestic saving it needs to restore competitiveness by investing in infrastructure, productive capacity, and human capital. With that shared strength comes a renewed opportunity for constructive engagement.

Is that really asking too much of the world’s great powers?

Dr Stephen Roach is a Senior Fellow at Yale University’s Jackson Institute of Global Affairs and a Senior Lecturer at Yale’s School of Management.

This article was first published by East Asia Forum on 19 May 2019. This article was republished with permission.