Towards an understanding of the Genesis of a Trade War between Two Global Peer Rivals

 

 

I am writing this post within the context of rising tensions between the United States of America (USA) and the Peoples Republic of China (PRC). These “cold war” tensions revolve around the rise of the PRC as a competitor to the USA in terms of the economic, technological, military advances made by the PRC in recent decades. This coupled with the issue of Taiwan could be leading the USA and its allies to the brink of a “hot war” with the PRC.

In this post I want to review the main events that have resulted in the international trade crisis between the USA and the PRC as they have evolved since the USA first commenced its “engagement” with the PRC in the early 1970’s.

This is a very complex history; one in which the USA and the PRC leveraged the strengths of each other to achieve their respective national interests within the framework of what the USA perceived to be the neoliberal globalist project. The PRC offered a low wage, highly educated and disciplined workforce that attracted capital from the USA to open up factories in the PRC and supply chains to get the goods manufactured in the PRC to markets in the USA. As a result of this the population in the PRC was lifted out of poverty with a growing middle-class. In this context corporations in the USA, as well as the European Union (EU) saw limitless potential to make profits by investing in the PRC in order to produce and sell their goods and services to Chinese consumers.

All seemed to be going well in this neoliberal framework. The neoliberal principles of comparative advantage seemed to be operating to the benefit of capitalists in the USA. A lot of the productive, manufacturing and investment capacity left the shores of the USA and set up in the PRC.  Ever increasing profits were made by corporations based in the USA from investments in the PRC.

Workers in the USA during this period, while enjoying cheaper consumer goods imported from the PRC experienced the closure of factories and stores, unemployment and stagnant wages in their own country. Dissatisfaction with this state of affairs, as well as other social and political factors amongst the population in the USA began to grow and was expressed at the ballot box with the election of Donald Trump to the office of President of the USA.

Taking advantage of investment and positive trade balances with the USA and the EU the PRC accumulated so much wealth that the USA became a debtor to China, as well as Japan.  The USA holds more debt with Japan with China in second place. Much of this debt, amongst other factors is needed by all the levels of government in the USA in order to help maintain the levels of investment in social infrastructure in the USA needed to maintain infrastructure and social services in the USA.

The PRC in the meantime was busy not going down the neoliberal path that the USA thought it would do. However, the PRC has been operating and being guided by a different set of values that eschewed the neoliberal model and challenged the global economic position of the USA and the $US dollar. The PRC has developed a form of state capitalist system and mixed economy where a strong government, in the form of the Communist Party of China (CPC) sets the strategic direction of the nation. This system comprises of a private capitalist sector, a state capitalist sector; both sectors managed by the CPC.

There is no doubt that this model has been successful in making the PRC a wealthy and influential economic actor in an increasing multi-polar global environment.  The PRC’s Belt and Road initiative is a case in point and the PRC’s involvement within the BRICS group of nations and the Shanghai Cooperation Organisation (SCO) are also cases in point.

Over the last decade all of this growth unnerved the USA forcing it to take extreme corrective action to limit the economic and increasingly more powerful military juggernaut that that is the PRC. What follows is a review of this corrective action taken by successive administrations in the USA that has manifested itself in the form of a titanic trade war between the USA and the PRC that has global consequences.

In this post I will discuss the genesis of this crisis and the evolution of the trade conflict up until 2019. Along the way I will endeavour to place this conflict with an overriding ideological conflict between the USA and PRC of which the trade war is a manifestation of.

I use as the basis of my review reporting and commentary published since 2019 concerning this rivalry. I will begin with an Explainer published by the South China Morning Post (SCMP) on April 13, 2020 entitled: What is the US-China trade war?

The authors of this article (hereafter referred to as the SCMP reporters) wrote that the trade war between the USA and the PRC commenced in July 2018 as a result of the trade dynamics between the USA and the PRC turning in favour of the PRC.

By way of providing context the SCMP reporters wrote that the USA and the PRC are the two biggest economies on the Globe. After the PRC joined the World Trade Organisation (WTO) in 2001 the level of its foreign trade with the world grew rapidly.

In terms of the PRC’s bilateral trade with the PRC, the trading was skewed in favour of the PRC resulting in the USA experiencing an ever-increasing trade deficit with the PRC. This trade shortfall continued until it became a political issue in the 2016 USA presidential campaign. The SCMP reporters wrote that by 2018 the trade deficit with the PRC was US$378 billion up from US$103.1 billion in 2002.

With respect to the 2016 presidential campaign the SCMP reporters pointed out that presidential hopeful Donald Trump said that he would work to reduce the burgeoning trade deficit with the PRC. Mr. Trump at the time asserted that the trade deficit was attributed to the “trading practices” of the PRC. These practices he claimed included intellectual property theft, involuntary transfer of technology and difficulties USA companies in gaining access to the PRC market. The PRC was also accused of putting in place an unlevel playing by favourably subsidising Chinese companies. Please refer to the following SCMP article written in 2019 for more detail concerning the access American companies access to Chinese consumers: Will the US-China trade war improve access for American firms seeking to tap 1.4 billion people?

The SCMP reporters put together a US-China trade war timeline according to which the trade war commenced on the July 6, 2018, when the USA placed 25% duties on imports from the PRC. These imports included motor vehicle, computer hard disks and aircraft components. The PRC then retaliated with its own 25% tariff on 545 categories of goods such as agricultural products, cars and aquatic products originating from the USA.

Throughout the rest of 2018 the tit-for-tat tariff and tax war escalated. The USA imposed 25% tariff on iron and steel products, electrical machinery and railway products. The PRC then retaliated by placing 25% tariff on goods originating in the USA such as motorcycles, bourbon and orange juice.

Then on December 1, 2018 at the G20 summit of that year held in Argentina the leaders of the USA and the PRC, President Trump and President Xi Jinping agreed to a trading ceasefire. Both sides agreed to suspend tariffs on certain goods categories on each other.

Then on May 10, 2019 the war flared up again after trade negotiations broke down and tariffs were further increased on certain goods on both sides of the divide.

Things took an ugly turn on May 15, 2019 the USA’s Department of Commerce added the Chinese telecommunications company Huawei to that department’s “entity list”. This list bans companies in the USA from selling products to Huawei. The PRC then announced its own unreliable entities list.

There were many actions listed in the SCMP timeline which I have not mentioned. Sometimes the USA and the PRC would exclude items from the tariff war, other times actions regarding tariffs would be delayed. At other times each nation would make trade deals to suspend tariffs and purchase additional goods and services from each other.

In January 2020 the PRC and the USA signed up to a “phase one” trade agreement. As a part of this deal the PRC agreed to purchase an extra US$200 billion worth of goods and services from the USA between 2020 and 2022. In return the USA agreed to suspend tariffs on around US$162 billion of Chinese goods as well as a halving of the existing 15% duty on imports valued at US$110 billion.

Amidst all these retaliatory trade actions a subsequent and consequential milestone in this struggle has been the election of President Joseph Biden who took office in January 2021.

On July 18, 2023, the China Briefing team wrote a detailed assessment of the ups and downs of US-PRC relations, in the form of an article entitled US-China Relations in the Biden-Era: A Timeline that covers the period since the election of President Biden up until the present.

So, the trade and diplomatic tensions continued to ebb and flow right up until the present day where the tensions are further intensifying under the administration of President Joseph Biden. With the trade war raging over the strategically important technology sphere, specifically semiconductors and the materials and manufacturing processes used to produce microchips.

I contend that the above-described trade war is a symptom of the existential struggle between two different economic models; neoliberal capitalism on the part of the USA and “Socialism with Chinese characteristics” on the part of the PRC.

Further to the genesis of the crisis I will outline an article published in the National Interest on June 5, 2019. The topic of the article concerned: The Growing U.S.-China Conflict: Why, and Now What?

This article takes a more high-level strategic, geopolitical analysis of the tensions between the USA and the PRC and suggests a way forward.

The author of this article was Zhiqun Zhu, Professor of Political Science and International Relations at Bucknell University. Professor Zhu related how the President of the USA at the time (2019) President Trump was escalating the trade war between the USA and PRC, citing, by way of example the raising tariffs on all Chinese imports into the USA on top of the barring of Huawei from operating in the USA on national security grounds.

Concerning the USA and the PRC Professor Zhu asked: “Why has the relationship deteriorated? What exactly went wrong? And how can the two powers step out of the dilemma?”

In trying to answer these questions Professor Zhu considers the historical and what I see as the ideological context leading to the escalation of tensions that predates President Trump by many decades.

Since 1972, when President Richard Nixon visited the PRC until around 2018 the foundational consensus in the USA was for “engagement” with the PRC. This was based on the view that it was in the interests of the USA to work with an open and prosperous PRC.

Professor Zhu wrote that despite some setbacks in the relationship such as the Tiananmen incident there was a hope that the PRC through engagement would evolve into a nation that would adopt values like the USA and thus be integrated into the “liberal international system” led by the USA. The PRC developed economically very quickly. By 2019 China had become the second biggest economy in the world.  On top of this fact what unsettled and threatened the USA consensus on the PRC was that the PRC was still governed by the CPC which controlled the direction of the economy through “one-party authoritarianism”. As such this was perceived to be a “grave challenge” to the USA.

The relationship with the PRC transitioned into being considered a “challenge” in the second term of President Barak Obama. This new approach to the PRC, labeled as a “pivot” or “rebalance to Asia”, was mainly sponsored by Secretary of State Hilary Clinton. Ms. Clinton was vociferous in her condemnation of the human rights record of the CPC. This contrasted with the approach of President Trump whose nationalist economics placed emphasise on challenging the PRC’s competition in the economic and technology spheres.

Apart from this historical development a second reason, according to Professor Zhu for the competitive tensions is due to the changes in the international system which from the perspective of politicians and security officials in the USA was very frustrating.   During the administration of President Trump, the rhetoric became more “hawkish”. This manifested itself in accusations of espionage on the part of the PRC and even characterisations of the relations as a “clash of civilizations”.

The USA had to accept that the PRC had emerged as a “peer rival”. The PRC it was perceived had a long-term plan to challenge the continued dominance of the USA of the international system.

A third challenge, according to Professor Zhu is the PRC’s transition to being a global power. Writing in 2019 Professor Zhu observed that the strategy of the USA appeared to be one of retarding the development of the PRC, by winning the trade war with a view to prolong the dominance of the USA. Both the USA and the PRC face the challenges their competition has generated and adjust.

In the USA consumers were bearing the burden of the rise in tariffs on Chinese goods. The PRC understands that the USA will continue dominate the international system. However, with the PRC quickly closing the dominance gap Professor Zhu correctly foresaw “…. more shadow boxing in U.S.-China interactions.”

In this context the PRC continued to close the gap with the USA and the question Professor Zhu

Professor Zhu, suggested an answer. Perhaps the USA could desist from seeking world “global supremacy, especially in its traditional spheres of influence”.  Instead of containing the PRC cooperate with the PRC. This would require the USA to start thinking “out of the box” and dropping its “knee-jerk” opposition to and work with the PRC, as an equal partner in a transparent relationship. Perhaps the USA could cooperate to implement the PRC’s global spanning Belt and Road Initiative (BRI).

The intensification of the competition between the USA and the PRC is also pushing the rest of the world into uncertainty. Professor Zhu saw the importance of third parties by writing:

“Bystanders often see things more clearly than players. As Singaporean foreign minister Vivian Balakrishnan remarked in Washington recently, the United States should accept China’s rise and allow China to have a greater say in shaping global rules in order to avoid a prolonged clash.”

Professor Zhu related how President Obama with reference to the defunct Trans-Pacific Partnership had said that the USA ought to be writing the trade rules and not the PRC. In contrast to this attitude Professor Zhu recommended that the USA should constructively cooperate in the writing of the trade rules as well as other international rules that would bring about a “…. more just and reasonable international system, in which both powers will play a constructive leadership role”.

Professor Zhu was writing in 2019 and instead of heading the kind of the advice offered by the Professor the USA under the administration President Biden, in order to prolong the USA’s hegemony and Liberal leadership is more aggressively challenging the PRC. In my next post concerning the rivalry of the USA and the PRC I will continue my review of what has happened since 2019 especially after the coming to power of President Biden. The increase in tensions in terms advanced computer chips, the regulation of Chinese investment in the USA the increasing debt owed by the USA to the PRC coupled with the closer ties between the PRC and Russia are all factors contributing to the intensification of the rivalry in the last several years.