In trade war, the object is to have one's opponent to see it your way and make a deal
 LIn our binary world, divided between right and left, rigid and flexible, hawk and dove, this division exists everywhere most of the time except in the rarest of circumstances. So it is hard to know what's right thing to do because the time and place and so often dictates the best course to take.
In the Sino-American trade war, these two forces are again arrayed against each other. Taking the view of the American intelligentsia which perpetually resides on the left, the view is predictably dovish - a view typified by Cheng Li and Diana Liang, scholars of the politically liberal Brookings Institution in Washington.
While not openly hostile to US President Donald Trump, the Brookings scholars repeat the media refrain that a trade wars hurt everyone. Indeed, that applies to all wars, but it does not make some any less necessary or worth fighting. And whatever troubles they bring their final resolution if there is one, often brings lasting peace.
What brings such conflicts on in war or peace is a rising feelings of unfairness one side feels towards the other. Such situations, which often begin as acceptable, but later fester to the point when the aggrieved party is prompted to act.
Enter Trump, a US president like no other. He faces Chinese president, Xi Jinping, an authoritarian who is clearly no Deng Xiaoping, the man who led the opening up of China in the 1990s. Is this the irresistable force meeting the immovable object? The world trembles at the prospect. Thus, these two titans face each other, like gladiators in Ancient Rome's Colosseum with different weapons, with other gladiators in the arena who are lessor belligerents, hindering and helping each other as the battle shifts this way and that.
Less figuratively, trade wars and the issues that arise from them are invariably arcane and secretive. A seemingly petty side deal on ladies underwear, may resolve a hopeless impasse on aluminum and steel or just as easily cause one.
News of such encounters may come in scarifying headlines about tariffs on dairy and poultry, but like icebergs in polar seas what is visible is only an insignificant part of the whole.
It should also be realised that unlike gladiatorial contests each side does not seek the other's death because the result both seek is a viable trading relationship. While arguing for peace at all costs, the Brookings scholars make much of what they see as Trump's "let's make a deal" mentality that has governed his working life.
Said the Brookings scholars: "President Trump favours highly transactional exchanges, in which trade, security, and political issues are inter-linked bargaining chips. He has demonstrated this in the past by walking back on claims that China is a currency manipulator in exchange for cooperation with Beijing over North Korea, thus compromising on the economic front in pursuit of a security interest."
Of course, trade tension between the United States and China is not new. Since China’s ascension to the World Trade Organisation (WTO) in 2001, the two countries have brought as many as 35 disputes against each other. Yet, the recent series of events is different and threatens to escalate. Since the US imposed trade sanctions on China, stemming from Section 301 investigations earlier this year, many have thought of this as a “trade war”.
The factors that have prevented both sides from cutting a deal are not limited to the economic domain. Unless we assess the political and security issues playing out on the sidelines, one risk missing three factors crucial to understanding.
Although a trade war would hurt both countries, the country with the trade surplus is usually hit harder and thus is more likely to be driven to compromise, the Brookings scholars note.
"This was true of Japan in the 1980s, for instance. But only the first half of this equation is likely to be true for China. China has already begun feeling the pain and can expect more. The trade war not only affects key engines of China’s economic development, including the Greater Bay Area, the Yangtze River Delta, and the Beijing-Tianjin-Hebei Corridor, but also has broad implications for all economic sectors because of the country’s reliance on foreign trade. Stock markets have reacted negatively to the trade spat, with Shanghai entering bear market territory and Hong Kong dropping to a 10-month low.
"Further fallout could throw off Beijing’s delicate balancing act by leading to increased capital outflows and accelerating problems in the country’s shadow banking industry and its local debt management. Extended trade confrontation could also affect Chinese property prices - a tremendously sensitive issue for the Chinese public," they said.
By contrast, the US has a relatively strong and stable economy. To maximise pressure, China’s retaliatory trade actions have focused on specific industries and geographical regions in the United States.
The largest share of tariffs is assigned to agricultural and food products (38 per cent), thus heavily concentrating on counties that voted for Trump. However, because the US imports far more from China than vice versa, China’s ability to inflict pain through tariffs alone is limited.
Such costs to the Chinese economy - especially if they leak into the property sector - will place great political pressure on the Chinese leadership. President Xi will be judged for how he handles this trade war, and any major missteps could prompt a political crisis. Under the dire circumstances, the Chinese leadership will likely search for a solution other than compromise on the trade front.
Chinese media has diffused some of the pressure by attributing US actions to a “crazy” and “greedy” President Trump, buying some time for President Xi’s preferred tactic - negotiation. Also, to the benefit of the Chinese leadership, the Chinese public has come to view escalatory US trade actions as part of a “conspiracy” to undermine China’s rise. However, continued escalation by the US and the resulting political pressure in China may limit President Xi’s options. Lest Chinese leaders be seen as capitulating to US demands, rising domestic political pressure may leave them with no choice but to stand firm.
The Brookings scholars doubt China can count on US business leaders as allies, however much they dread a trade war. Though American companies oppose a trade war, they are disturbed by Chinese industrial policy, the stationing of Commnist Party officials in joint venture companies, as well as the new national security law, and other negative trends in China’s “state capitalist” system.
"These concerns are compounded by frustration over years of undelivered promises to open up the country. China, therefore, has few friends in the US.
It is the best hope of both sides to that each sees the value in each benefit. But don't be surprised if not all the whys and wherefores are made public because some of the compromises that must be made will involve the loss of face of one party or another and are less left under the veil and only known to future historians. We may not like what goes into the sausage of a trade deal, but it is looks and smells okay, all that matters is whether it is edible long-term. |
