A Trade War – Or the Taming of China (#276)

The United States and China are currently locked in an escalating ‘trade war’... But, it’s more than just issues of trade and tariffs. Over the past decades as China gained in economic and military strength, and flaunted the rules of international commercial engagement, and as the developed countries struggled with loss of manufacturing jobs to emerging markets, especially to China, a geo-political power struggle started to take shape which has now grown into open rivalry and become a test of economic and military domination with the established Western powers, particularly with the U.S.

Over the term of his Presidency, Trump has escalated the years of simmering tensions into a unilateral declaration of ‘trade war’ that encompasses the challenge to its supremacy by China, both in economic and military power, and the dominion over the global trade routes in the disputed South China Sea.

China’s ascendency from an impoverished, over-populated, communist mega-mess of a Country, left behind by modernity to self-inflicted isolation and severe under-development changed in the late 1970s and early 1980s, when China’s leader and reformer Deng Xiaoping loosened former Chairman Mao’s ideologically enforced political and economic straight-jacket, and adopted principals of the free-market economies, within its otherwise intolerant communist political ideologies – as Deng Xiaoping labelled it, ‘socialism with Chinese characteristics’.

On January 1st, 1979, the U.S. recognized China and brought it into the global mainstream. China had also opened up to international trade, and later was accepted as a member of the World Trade Organization; and the rest as they say is history. [For the purpose of this OPED, the above is a highly simplified account of China’s emergence from its political, social and economic morass.]

In the period of three plus decades China transformed itself from ‘a messy communist non-entity’ (in terms of economic and military significance globally) on the International stage to the World’s second largest economy and a bona fide emerging ‘Super Power’ – economically, and militarily.

The transformation was stunning in its speed and scope. Not only did China build more cities, highways, bridges, airports, power plants, and every other kind of infrastructure a modern nation requires, but it did it on a scale and speed that had never been done in human history.

And more than that, China beat the biggest and best manufacturers and exporters in the World, to become the manufacturer and exporter to the World, with rapidly rising trade surpluses that resulted in some of the biggest foreign currency reserves, superseding every other major nation.

From a poor, turmoil wracked, backwater communist country, China became the predominant manufacturer and exporter country, with huge savings-reserves, turning it into one of the biggest investor in, and lender to the U.S., and to the World.

China acted as a Bank to the U.S. Government, in its years of massive foreign borrowings, and helped America to live way beyond its means by running huge deficits which were, to a large degree, funded by China and Japan.

China did all that by being exceptionally hardworking, disciplined, innovative, and also by not playing by international (Western) rules to a large extent.

In its rapid climb, China did everything to tilt the playing field of international trade and development in its favour by exploiting the World’s greed for its vast underdeveloped market of 1.3 Billion people, and by exacting a heavy price from all foreigners who wanted to tap into it. And that greed for China’s business still makes most countries hold back from ostracizing it, for its many misdeeds.

And if foreign companies wanted to exploit the cost cutting benefits of China’s vast labour pools and its formidable manufacturing capability, to produce their goods cheaply and efficiently in China for the sale to the rest of the World (Apple being a high profile example of that, as are innumerable others) China again exacted a heavy price. Some of China’s heavy handed business and trade practices over the past decades have been:

While the exact economic impact of ‘trade surpluses’ are more complicated than Trump’s simple assertions, but its no mystery as to how much China has benefited by trading with the U.S. and the other ‘rich’ Western countries. Over the last three decades or so, China has benefited from its tilted trade relationships with the U.S. and the other Western countries, amounting to Trillions of dollars, which has lifted it from global backwaters to its current preeminent status. And now it has intimidation powers.

While the ability to manufacture cheaply in China has benefited international corporations greatly with significantly higher profit margins over the years, yet the price has been borne by the workers of the ‘home’ countries in very significant job losses over the years, and in wage stagnation as businesses moved manufacturing offshore, to save on wages and other related costs.

The cheap goods from China have flooded World markets to the benefit of the American and the global consumer, and in doing so, has also benefited the World in reducing the general inflation rate, resulting in historically low interest rates as have been seen currently, and over the past decades.

Additionally, the profligate governments of the West, especially the U.S., have used China’s huge dollar reserves as a piggy bank to fund their massive and growing annual deficits. China is one of the prime lenders to the U.S. government (including Trump’s), and the largest foreign holder of U.S. Treasuries (U.S. Government Bonds).

But the open arms welcome into the international community of China, in the 1970’s, has now become a problem for the West and particularly for the U.S. China’s extraordinary commercial success has not ‘opened up’ China to Western democratic values, and transparent judicial system of laws, as the West and America had been hoping for, but instead has emboldened China’s communist regime, with its huge accumulation of wealth, to become a far more authoritarian, controlling and belligerent government, that thought it fair game to use whatever means it deemed appropriate, and necessary, to gain commercial advantage, as it grew wealthier and more powerful.

China has also used its great wealth to become a modern military super power. Very systematically, China has been modernizing its Military, Navy, Air Force, and is investing heavily in its Missile and Nuclear technology.

It is now no longer the third World supplicant looking to the wealthy Western Powers for work and business, but a confident and aggressive 'Super Power' that is challenging the most powerful nation on Earth, the U.S., economically and militarily.

And Trump has picked up the gauntlet, which previous administrations were reluctant to do because of a host of issues, not the least of which were heavy lobbying by American multi-national corporations that were making serious money globally, by taking advantage of China’s awesome low cost manufacturing capabilities.

In having that capability China is deserving of its huge success. But on the other hand, it has also been playing unfairly, and on that Trump is right (even though it would have been better if he had worked in concert with America’s Western Allies, rather than going it unilaterally. But then that would not have been Trump.) China’s hand on the scale of international trade has been tilting the playing field heavily in its favour, to the long term detriment of America and the other developed exporting countries.

If China wants to be a full-fledged member of the international community then it must play by the rules of international trade, including having laws that protect foreign investment and personnel on its soil, along with all the other rules that other countries live and transact by, including laws that ensure China’s compliance to international law (Yes we know, often times America does not play by international rules either, but in business, it does a lot more so than China, and in fact under the Trump administration, it claims systemic discrimination from all its trading partners; which is not quite true.)

But that is where China has baulked, reneging on any changing of the rules that force it to comply to international standards, on the rights of intellectual property, technology transfers, trade secret theft, a government that is more powerful than it is now, and in fact it’s used to pushing others around claiming current and historic biases against it.

And it’s counting on the short attention span and the relatively low threshold of pain that Western countries and people have become known for (rightly or wrongly). On its side, the government has almost absolute control of its people and they are used to pain inflicted by their own government throughout their recent history. So now as the financial markets tumble and uncertainty grips the financial and commercial community, the question really is, will Trump and his administration, and the American people, have the fortitude, commitment, and stamina to tame China into compliance and the International Order, or will it be able to outlast the current pressure and continue to operate by non-compliance, and play by its own set of rules?

Past performance does not favour Trump, but then he might surprise China.