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Beijing

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America’s Trade War with China

The United States could probably extract major concessions from China in a carefully managed confrontation on trading issues, because the Chinese don’t want a trade war with their best export customer. But the US can’t win the trade war that Donald Trump is planning to wage, and it kicks off on Friday.

That’s when the first chunk of Trump’s new tariffs on Chinese exports to the United States – a 25% import tax on $50 billion of Chinese goods – actually goes into effect, and Beijing retaliates with similar tariffs on $50 billion of American exports to China. That’s just a drop in the bucket in terms of the size of either economy, but it’s also just the opening salvo in the war.

Trump has already said that Chinese retaliation would be ‘unfair’, and that if China goes ahead he will slap a 10% levy on an additional $200bn of Chinese goods. (He subsequently reduced that amount to $100 billion, but who knows?) And China has already said that it would respond with measures of a “corresponding number and quality” if the US goes ahead with that.

This is where the real tit-for-tat escalation starts, and it’s hard to see how it can be stopped. Trump is trapped by his own pugnacious rhetoric, and China’s President Xi Jinping is trapped in two ways.

One is that Trump has already imposed big new tariffs on exports to the United States by the European Union and by America’s closest neighbours, Canada and Mexico. They have all responded by imposing similar tariffs on American exports of equal value.

Xi can hardly do less, even if China’s real interests might be better served by not responding in kind to the new US tariffs. He would not wish to be seen as weaker than Justin Trudeau.

On 21 June in Beijing, according to the Wall Street Journal, President Xi Jinping met a group of chief executives of American and European multinationals and assured them that China would definitely strike back at US trade tariffs. “In the West, you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” Xi reportedly said. “In our culture, we push back.”

The other factor weighing on Xi’s decisions is that Beijing is starting to see American trade policy as part of a deliberate attempt to stop China’s emergence as a great industrial and technological power and a real peer rival to the United States. After all, there are undoubtedly people in Washington who would like to do exactly that.

Trump himself does not think in geo-strategic terms, but the Chinese may well see his actions on trade as inspired by those who do. If they come to that conclusion, their willingness to go all the way in a trade war may be greater than the financial experts think it is.

China’s exports to the United States amount to about 40% of its total exports, whereas only 5 percent of US exports go to China, so an all-out trade war between the two countries would obviously hurt China more. President Xi, however, is far more able to ignore the resultant job losses and higher prices than Trump is – especially because the Americans who were hurting worst would be his own political ‘base’.

Or, alternatively, China’s heavily indebted economy may turn out to be even more fragile than it looks – in which case a trade war could drive the country into a deep recession (with unpredictable political consequences at home), and drag the whole world economy down with it. That wouldn’t be much fun either.

There’s a reason that trade wars went out of fashion after the Second World War, and it wasn’t just because international trade tends to enhance prosperity overall. Back when trade wars were the normal way of doing business internationally, in the 16th-19th centuries, the European powers spent almost half their time at war.

The first great era of free trade, ca. 1870-1914, was also the ‘Long Peace’, when no European great power fought any other for almost half a century. That peace was destroyed by the First World War (so free trade does not prevent all wars), but the trade wars of the 1930s certainly deepened the Great Depression and facilitated the rise of fascism and a second world war.

And then came the Second Long Peace, from 1945 to the present, when once again free trade (or at least free-ish trade) reigns and the great powers never fight one another directly.

I’m not saying that Trump’s assault on free trade is going to lead us back down the path to great-power war again. Many other factors go into making such a catastrophe possible. But he may be putting one of the key factors back into place.
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To shorten to 725 words, omit paragraph 7. (“On 21…back”)

Trump and China: The “Madman” Strategy

“When two elephants fight against each other, the grass always suffers,” said Yu-Fang Lin of the National Policy Foundation, a Taiwan-based think tank, in an interview with the Washington Times. He was talking about the famous phone call between Taiwan’s President Tsai Ing-wen and Donald Trump on 2 December. If the US and China get into a military confrontation, Lin suggested, it is Taiwan that will be crushed.

The Chinese Communist regime was outraged by that phone call, the first direct conversation between an official of the Taiwan government and an American president or president-elect in almost four decades, but it kept its fury in check.

Beijing made an official complaint to Washington, but China’s Foreign Minister Wang Yi dismissed the call as a “petty trick” by Taiwan. The Chinese leaders, as puzzled as everybody else by the Trump phenomenon, were soft-pedaling the issue and hoping against hope that the president-elect wasn’t looking for a fight.

The alternative was just too frightening to contemplate. Yu-Fang Lin called it the “madman” strategy: Trump making himself “appear to be very dangerous and hostile and very unpredictable to scare the (Chinese) leaders” into concessions on various issues. Within days, however, Trump gave Lin’s theory wings.

In an interview on Fox News last Sunday, the president-elect threatened to destroy the entire foundation on which US-Chinese relations have been based since 1979. “I don’t see why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.”

The rabidly nationalist Global Times, a tabloid attack dog linked to the Chinese Communist Party, said Trump was “as ignorant as a child.” The official response was more polite, but equally severe.

“The Taiwan issue concerns China’s sovereignty and territorial integrity, and involves China’s core interests,” said Foreign Ministry spokesman Geng Shuang. “If (the ‘One China’ principle) is interfered with or damaged, then the healthy development of China-US relations and bilateral co-operation in important areas is out of the question.”

The key phrase here is “out of the question.” If Trump is going to play the “madman” card, then China will not negotiate anything. And if he urges Taiwan along the road to formal independence, then (as the Global Times put it) China may have to consider arming America’s enemies or taking back Taiwan by force.

The “One China” policy dates back to 1979, when the United States broke its formal diplomatic relations with Taiwan and transferred them to the People’s Republic of China. It was an “agreeable fiction” that allowed Washington to have its cake and eat it too.

In terms of both trade and military strategy, it was far more important for Washington to have diplomatic relations with China (current population 1.3 billion) than with Taiwan (22 million). However, it was politically impossible for the US to just abandon the Taiwan regime, which it had backed in the Chinese civil war and continued to support after that regime lost the war and retreated to the island of Taiwan in 1949.

And so the “One China” policy. Everybody agreed that China could not be divided, but Taiwan could keep its de facto independence so long as it accepted that China must one day be reunited. The United States would break diplomatic relations with Taiwan, but could go on trading with it and even selling it arms. And everybody lived happily ever after, more or less.

China bent over backwards to get this deal, because at the time it was still a very poor country trying to open up trade ties with the West, and it was also mired in a military confrontation with the old Soviet Union. That confrontation is long over and China is no longer poor, but it has meticulously observed the terms of the deal for 37 years. Now Trump is threatening to cancel the deal if he cannot get better terms from Beijing.

What Trump wants, he says, is for China to stop devaluing its currency, cut tariffs, stop building a “massive fortress” in the South China Sea, and help to curb North Korea’s nuclear ambitions. He has also promised to “bring American jobs back from China,” perhaps by imposing a huge tariff (45 percent) on Chinese exports to the United States.

This is totally unrealistic. China stopped deliberately devaluing its currency years ago, and is now actually selling dollars in an attempt to stop its decline. And those “American jobs” are never coming back. Instead they are disappearing in China, where automation is predicted to eliminate 77 percent of jobs in the next 20 years. Does he actually understand this? Who knows?

Threatening to cancel a deal if he can’t get better terms may have worked for Trump in business, but it’s not just money at stake here. It’s Chinese territory, the very notion of national unity, “core interests”, as Beijing puts it. The Chinese regime won’t yield on this because it can’t, and if Trump pursues his “madman” strategy we are all in for a rough time.
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To shorten to 725 words, omit paragraphs 13 and 14. (“What…knows”)

War in the South China Sea?

“If the United States’ bottom line is that China has to halt its activities, then a US-China war is inevitable in the South China Sea,” said an editorial in the Global Times last week. The Global Times is an English-language daily paper specialising in international affairs that is published by the People’s Daily, the Chinese government’s official newspaper. So we should presumably take what it says seriously.

But really, a US-Chinese war in the South China Sea? Over a bunch of reefs that barely clear the water at high tide, and some fishing rights and mineral rights that might belong to China if it can bully, persuade, or bribe the other claimants into renouncing their claims? The GDP of the United States is $16.8 trillion each year, and China’s GDP is $9.2 trillion. All the resources of the South China Sea would not amount to $1 trillion over fifty years.

Great powers end up fighting great wars. Counting a pre-war arms race, the losses during the war (even assuming it doesn’t go nuclear), and a resumed arms race after the war, the long-term cost of a US-Chinese war over the South China Sea could easily be $5 trillion. Are you sure this is a good idea?

Yet stupid things do happen. Consider the Falklands War. In 1982, Britain and Argentina fought a quite serious little war (more than nine hundred people were killed, ships were sunk, etc.) over a couple of islands in the South Atlantic that had no strategic and little economic value.

Maybe that’s not relevant. After all, Argentina had never been a great power, and by 1982 Britain was no longer really one either. The war in the Falklands was, said Argentine writer Jorge Luis Borges, “a fight between two bald men over a comb.” Yet it is a bit worrisome, isn’t it? It didn’t make strategic or economic sense, but they did it anyway.

Let’s look at the question from another angle. Who is the messenger that bears such alarming news about a US-Chinese war? The Global Times, although published by the Chinese Communist government, is a tabloid newspaper in the style of the New York Post or the Daily Mail in Britain: down-market, sensationalist, and not necessarily accurate.

But it has never published anything that the Chinese authorities did not want published. So the question becomes: WHY did the Chinese authorities want this story published? Presumably to frighten the United States enough to make it stop challenging the Chinese claims in the South China Sea. This is turning into a game of chicken, and China has just thrown out the brakes.

Would Beijing really go to war if the United States doesn’t stop overflying the reefs in question and carrying out other activities that treat the Chinese claim as unproven? Probably even the bosses in Beijing don’t know the answer to that. But they really do intend to control the South China Sea, and the United States and its local friends and allies (the Philippines, Vietnam, Malaysia, Brunei, and Taiwan) really will not accept that.

The Chinese claim truly is astonishingly brazen. The “nine-dash line”, an official map published by the Beijing government in 1949, claims practically ALL the uninhabited reefs and tiny islands in the shallow sea as Chinese territory, even ones that are 700 km from the Chinese coast and 150 km from the Philippines or Vietnam.

Since the islands might all generate Exclusive Economic Zones of 300 km, China may be planning to claim rights over the entire sea up to an average of about 100 km off the coasts of the other countries that surround the sea. It hasn’t actually stated the details of that claim yet, but it is investing a lot in laying the foundations for such a claim.

It’s as if the the United States built some reefs in the middle of the Caribbean Sea, claimed them as sovereign territory, and then said that the whole sea belonged to the US except for narrow coastal strips for Cuba, Mexico, Venezuela, etc.

China is actually building islands as part of this strategy: taking low-lying reefs and building them up with enormous quantities of sand, rock and cement to turn them into (marginally) habitable places. Then it acts astonished and offended when other countries challenge this behaviour, or even send reconnaissance flights to see what the Chinese are up to.

The veiled threats and the bluster that accompany this are intended to warn all the other claimants off. It’s been going on for years, but it’s getting much more intense as the Chinese project for building military bases all over the South China Sea (it denies that that’s what they are, of course) nears completion. So now the rhetoric steps up to actual warning of a Chinese-US war.

The Global Times is right, whether its writers know it or not. If China keeps acting as if its claims were universally accepted and unilaterally expanding the reefs to create large bases with airstrips and ports, and the US and local powers go on challenging China’s claims, then there really could be a war. Later, not now, and not necessarily ever, but it could happen.
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To shorten to 725 words, omit paragraphs 11, 12 and 13.

Breakthrough on Climate Change

When news got out that US President Barack Obama and China’s President Xi Jinping had reached an agreement on climate change, the American blogosphere lit up with negative comments. “The problem is, Obama probably means it,” wrote Jazz Shaw of the major conservative political blog Hot Air, “while China is almost certainly just yanking the world’s collective chain yet again with a bit of lip service as they seek better trade arrangements.”

But Jazz Shaw has got it exactly backwards. It’s the United States that cannot be trusted to keep its commitments, because the American political system is mired in a perpetual civil war and at the moment it is the climate-change deniers who have the upper hand. Whereas the Chinese will probably keep their word, because there are no denialists in China and the government is genuinely terrified of climate change.

The Obama-Xi deal is not wonderful, but it is the first step in the right direction that the world’s two biggest emitters of carbon dioxide have taken together. Obama promised that the US will reduce its greenhouse gas emissions to at least 26 percent below the 2005 level by 2025. Xi promised more vaguely that China’s emission would peak by 2030 or earlier (and, by implication, then start to decline).

That looks a bit lopsided, of course, but any deal that takes account of current realities is bound to look like that. China is still a poor country, and it is racing to grow its economy fast enough to preserve political stability. That means it has to generate a lot more energy fast.

China is installing a great deal of clean power (around half the world’s new solar energy plants last year, for example), but just to keep the lights on it has to go on building lots of fossil-fuel plants as well – and most of them burn the dirtiest fuel, coal. Official policy is driving the number of new coal-fired plants down, however, which is one reason why Xi thinks he can keep his promise that emissions will stop growing by 2030.

Obama, by contrast, presides over an economy that is already very rich. The average American citizen still consumes twice as much energy as the average Chinese, but total US energy consumption stopped rising years ago. Making 26 percent cuts in American energy use over the next ten years is not a huge challenge; it only requires a reduction of about 2.6 percent a year.

So the American and Chinese commitments in the new deal, while asymmetrical, are not unequal in terms of the political and economic burdens they impose. The real difference lies in the likelihood that the two sides will stick to the deal over the next 10-15 years as they have promised. China probably will. The United States probably won’t.

The Chinese regime knows what global warming will do to the country if it is not contained. A study commissioned by the World Bank about a decade ago, but never published (quite likely at China’s insistence), concluded that if average global temperature rises by 2 degrees C, China will lose about 38 percent of its food production.

As in all predictions of this sort, that number may be wrong by five or even ten percentage points, but that doesn’t really matter. Even a 28 percent loss of food production would mean semi-permanent famine in China. The regime would not survive that, and much of the growth that has been achieved by great sacrifice in the past three decades would be lost.

Beijing takes climate change VERY seriously. Even though the regime must also keep the economic growth going if it wishes to survive, it knows that it must start making real concessions on emissions in order to facilitate a global deal.

Xi did not set this target of capping Chinese emissions by 2030 without a great deal of discussion and debate within the regime. Having made the promise, he will keep it. So will his successors, at least so long as the Communist Party goes on ruling China. Whereas Obama will be gone in two years, and cannot bind his successors to keep his promise in any way.

Indeed, even in the past six years he has never got any legislation on climate change through the Republican-dominated House of Representatives. Instead, he had to resort to issuing executive orders through the Environmental Protection Agency (EPA) to make even modest improvements like raising the fuel efficiency of US-made cars.

Now the House has voted to repeal the EPA’s authority to regulate greenhouse gases under the Clean Air Act, which would strip even that power from him. The new Republican majority in the Senate will probably do the same. Obama could veto such a law, but all the Republicans have to do is attach it to the budget and they would set up a confrontation that would shut the US government down again.

The Chinese know this, of course, but they are so desperate to get matters moving on the climate front that they are willing to take a chance that the deal will survive.
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To shorten to 725 words, omit paragraphs 10, 12 and 13. (“Beijing…deal”; and “Indeed…again”)