Towards an Understanding of the Ideological and Practical Context of a Trade War between Tightly Coupled Global Peer Rivals

In my previous post Towards an understanding of the Genesis of a Trade War between Two Global Peer Rivals I wrote about the progression of the trade war between the United States of America (U.S.A.) and the Peoples’ Republic of China (PRC).

This trade war reflects the rising tensions between the U.S.A. and the 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.

The U.S.A. had appeared to be content to cooperate with the PRC as long as it perceived the PRC to be moving away from the communist path towards a more liberal democratic one. I wrote in my previous post that this perception by policy makers in the U.S.A had changed over the last decade. I wrote that the U.S.A could deescalate the conflict by looking at things differently, that is “think out of the box”.

In this post I will continue to elaborate on the evolution of a more confrontational thinking in U.S.A towards the economic rise of the PRC as a strategic rival since the election President Joseph Biden. Although things in overall terms continue look gloomy there are some glimmers of a positive trend emerging.

The predominant narrative is one that characterises the U.S.A as initially having had essentially good intentions in its engagement with the PRC in the hope that Chinese society and economy would operate within the Liberal Democratic world view. However according to this narrative, it is the PRC or more specifically the Communist Party of China (CPC) that is eschewing liberal democratic values and slipping into more autocracy bent on world domination instead.

I will elaborate more on this narrative by reviewing an article that was published in POLITICO in late 2022. The article explains the key features of this narrative and how the U.S.A has continued to take an even more confrontational track with the PRC. The POLITICO article 'A sea change': Biden reverses decades of Chinese trade policy explains the change in the approach the U.S.A has taken with respect to its strategic relationship with the PRC.

The author Gavin Bade, writing on December 26, 2022, in one sentence summarised the collapse of the historical engagement the U.S.A has had with the PRC as follows:

“After decades of U.S. efforts to engage China with the prospect of greater development through trade, the era of cooperation is coming to a screeching halt.”

Mr. Bade wrote that the actions, taken after the autumn of 2022 of policy makers in the U.S.A such as executive orders and pending legislative action that target the PRC’s high-tech industry are the “…culmination of years of debate spanning three administrations.”  Indeed, these actions not only signify a further escalation, on top of President Trump’s trade disputes that could put breaks on Chinese technological development further dividing the economies of the two countries.

Mr. Bade in his article goes on the explore the broader geopolitical and geoeconomic aspirations that policy makers in the U.S.A had, in the past for China. He writes about the “Capitalist peace theory”.  

Mr. Bade explained that after the end of the Cold War “Capitalist peace theory” assumed technological and economic development as “largely as a good in itself”. In the view of this theory developing countries in absorbing investment from industrialised nations would naturally develop more advanced industries. This was considered a good thing as it would not only increase incomes, boost the middle class which would then lead to democratic reform and hence peaceful relationships between trading partners.

So according to Mr. Bade the U.S.A was happy enough to transfer various technologies to other less developed countries where such technologies would be produced. This transfer included semiconductors and high-end microchips which can be considered to be important for the security of the U.S.A. Thus, the Capitalist peace theory condoned such transfers as a good thing.

However, the Capitalist peace theory lost its hold according to Mr. Bade when the policy makers in the U.S.A realised that the PRC was not going to bend to the neoliberal ideology of the U.S.A. He expressed the collapse of the Capitalist Peace theory story, with respect to the PRC as follows:

“But China’s slide back to authoritarianism threw a wrench into that narrative.”

In the context of this “slide”, on the part of the PRC Mr. Bade refers to security officials at the Pentagon and National Security Council (NSC) saying that the PRC was “weaponizing” its industrial development; this was a “hedging” strategy on the part of these officials. This contrasted with the broad approach adopted by capitalist peace theorists after the end of the cold war by the U.S.A towards the PRC which was one of “peace through trade”. Mr. Bade observed that the consensus on engagement between the two groups of officials began to dissolve in 2014 or 2015 when in American eyes “political liberalization” was not occurring and as well as this the PRC was evolving economically.

The dissolution of this consensus was compounded by the perception on the part of security officials in the U.S.A that the CPC was planning to “strategy to dominate critical industries of the future like rare earth minerals, semiconductors and solar panels.”

The CPC’s release of the “Made in China 2025” strategic plan was cited as evidence of the PRC aiming to make Chinese companies globally dominant and the Chinese economy ever more self-sufficient. This strategy involves large subsidies to 10 industrial sectors critical to the Chinese economy achieving self-reliance.

Mr. Bode continued his analysis by writing that the Made in China 2025 strategy in conjunction with “aggressive” Chinese lending practices to developing countries sounded the “alarm bells”. The fear of the NSC was that reliance on the PRC for one’s economic and military growth risks the U.S.A. being subjected to espionage on the part of the Peoples’ Liberation Army (PLA).

In this respect Mr. Bade quotes Liza Tobin, the China director of the NSC between the years 2019 and 2021 as saying at an American Enterprise Institute (AEI) event that PRC leaders having been “…. quite clear where they want to be in the coming years in terms of gaining market share in all of the strategic technology sectors that will dominate the future of the world economy.”

In the context of this perception of the PRC Mr. Bade made reference to the so called “protect agenda”; a new strategy arising from within President Biden’s administration. This strategy had generated a succession of executive actions. In October 2022 the Commerce Department proclaimed new regulations that severe the ability of Chinese firms to manufacture advanced computer microchips. Referring to future Mr. Bade pointed out that these new rules would soon be followed by executive orders that will put in place a federal authority that would control how U.S.A companies invest in the PRC. He emphasised that this is the “…. first time the federal government will exert such power over American industry”. This move will be accompanied by an executive order to place restrictions on the ability of Chinese software applications, like TikTok collect data from the American subscribers of such applications.

Mr. Bade then turned our attention to the second part of President Biden’s strategy, namely the “promote agenda”. Under this agenda the Government of the U.S.A. will play an increased role in promoting American competitiveness. This will involve a significant increase in the role of government through the CHIPS and Science Act and Inflation Reduction Act both of which were signed into effect, by President Biden in the August 2022. Under this legislation subsidies to the tune of hundreds of billions of dollars are earmarked for the production of microchips. As well as these subsidies new rules that oppose U.S.A. companies that cooperate with Chinese chip manufacturers.

The recent emphasise on protect and promote signify that there has been a fundamental change in the approach that the U.S.A. has been taking to challenge the PRC’s technological progress and as a result the economic development of the PRC. Mr. Bade contrasts what policy makers in the U.S.A in the past were content for the PRCs development to be a few generations behind that of the U.S.A. Today, when it comes to the PRC’s development especially when it relates to microchips and computers security circles in the U.S.A. would like to see such development of the PRC almost halted.

Mr. Bade quotes Jake Sullivan’s characterisation of past policy to maintain “relative advantages” over adversaries and the present approach as a “… sliding scale approach that said we need to stay only a couple of generations ahead. That is not the strategic environment we are in today…. Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

Mr. Bade writes the initiatives to limit Chinese technology signifies a “… a shift from the optimistic stance toward technological development that defined American policy for decades.”

As an aside I would like to point out that the protect and promote strategies by policy makers in the U.S.A. indicates a move away from the strict tenets of neo-classical economics. These strategies, as they involve significant government intervention in the U.S. economy run counter to the notion of minimal government intervention in the economy to promote industry in specific key areas. It is clear that neoliberal thinking is being challenged by the rise of the PRC and the PRC’s continued Marxist-Leninist form of government.

Instead of thinking out of the box and adopting ways to cooperate with the PRC policy makers in the U.S.A. have been moving in a radically different direction. As Mr. Bade describes in his article policy makers in the U.S.A. are adopting a position of economic nationalism as represented in the Chips America Act and Inflation Reduction Act. Both these acts, by the way are just as nationalistic as are the sentiments behind the PRC’s Made in China 2025 strategy.

The collapse of the capitalism for peace narrative is one aspect of the challenge for the U.S.A. This challenge is one that also pulls the U.S.A. towards the PRC. This is the apprehension associated with the level of debt the U.S.A has with the PRC.

I want to now discuss the trade war from the perspective of the PRC. There is very little discussion of what the PRC’s experience and perceptions are regarding the trade conflict. So, the question is what is the view of the PRC regarding the Trade War with the PRC?

On July 30, 2023, American ABC NEWS network published an article entitled:  China doesn’t want a trade war with the US but will retaliate against further curbs.

The article was written by SIMINA MISTREANU of Associated Press who reported that the PRC’s Ambassador Xie Feng to the U.S.A as saying:

“China's ambassador to the United States says it does not want a trade war but will retaliate against any further U.S. restrictions on technology and trade.”

The Ambassador was critical of the curbs President Biden’s administration had placed, last year on microchips and the equipment that fabricates these chips. This act was described by the Ambassador as an effort to “contain” the PRC.

Ambassador Xie is reported as saying that the PRC is not shrinking from competition with the U.S.A. He questions the U.S.A.’s form of competition which “is not fair”.  The U.S.A. wants to “win by keeping China out”. A case in point is the U.S.A restraining sales of US technology to the Huawei telecommunications company on the basis of security concerns.

All this was said in the context of the PRC having recently (June 2023) imposed export restrictions on the U.S.A. importing two vital metals needed for the manufacturer of chips and solar cells. These curbs came on top of the PRC earlier this year placing restrictions on items sold to the PRC manufactured by Micron Inc the biggest manufacturer of memory chips in the U.S.A.

Despite these actions on the part of the PRC the ambassador stressed that that the PRC does not want to go down the “tit for tat” path in a technology trade war. Ambassador Xie said: “We want to say goodbye to the Iron Curtain, as well as the Silicon Curtain.”

Ms. Mistreanu wrote that: “Xie said China is ‘eager’ to have a ‘stable, healthy relationship’ with the U.S.”

So, we can see that both sides have been operating in a tit for tat spiral of retaliation and distrust with both the PRC and the U.S.A. providing their own rationalisations. However, there are signs that both protagonists are trying to tone the tensions down.

Ms. Mistreanu writes that Washington and Beijing are “…. trying to patch up their relationship”. This deterioration is seen through a series of incidents early in 2023 such as the Chinese spy balloon, trade tensions, human rights violation U.S.A actions and the PRCs “claim” to Taiwan and the South China Sea.

Examples of the attempts to improve relations are separate visits to the PRC of officials of the U.S.A over the last few weeks. John Kerry in a recent trip to the PRC in the role of U.S special envoy on climate completed discussions with PRC office holders on combating climate change through cooperation between the U.S.A and PRC.

Then there is Treasury Secretary Janet Yellen’s recent trip to the PRC in June of this year. This was preceded by Anthony Blinken’s controversial trip the purpose of which was to reestablish communication channels between the U.S.A and the PRC as well as resuscitating the talks between their respective military organisations.

Ms. Yellen’s visit is the most interesting. In my next post I will look more closely as to the reasons this visit happened and what it means in the context of the debt the U.S.A has with the PRC. This debt of the USA owed to the PRC may be one of the main factors, in terms of their bilateral relationships that may be binding both nations as opposed to a factor that is dividing them.

I refer you to a story by Agence France Presses (AFP) news agency 30 July 2023. Decoupling from China 'an illusion'. According to this report the Finance Minister of France, Bruno Le Maire last weekend speaking in Beijing said that western nations severing economic connections, to reduce “their reliance” on the PRC is "an illusion”.

The Minister Le Maire emphasised that France still has the determination to “to become more economically independent in certain sectors.” AFP reported him as saying that in adopting the notion of “de-risking” France is not assuming that the PRC is a risk; rather it is that France wants to be more independent on certain “components” such as microchips.

AFP also reported that the U.S.A. “…. advocated de-risking from China” quoting Secretary Yellen as saying in her recent trip to the capital of the PRC that a decoupling of the economies of the U.S.A. and the PRC would be “virtually impossible”.

AFP points out that the PRC has responded quoting the Premier of the PRC Li Qiang as saying that the notion of de-risking is a “false proposition”.

In summary, Capitalist peace theory and the hopes on the part of the U.S.A. that the PRC would be transformed by neo-liberal values have been dashed. We see that when it looked as though the PRC would not travel down the same path lined with these values the PRC was labelled as authoritarian and its motives became suspect in the minds of the USA and its allies. This narrative was even more threatening given the rise of the PRC as an economic and military power in its own right.  In this context we had the prospect of a total trade war between the USA and its allies against the PRC. The war commenced with general tariffs on manufacturing and agricultural products and then went on to impact trade in high technology and telecommunications components.

The policies of the U.S.A. shifted from Capitalist peace theory and peace through trade to the combined protect and promote agendas. More recently, the realisation has dawned on the policy makers in the USA and Europe that when it comes to economic interests, the ideological values aspect is not so important after all. There is the realisation that these Western powers still need the PRC to ensure their own economic wellbeing. The western narrative now is that western economies need to reduce their reliance and "de-risk" their economic activities as a total economic decoupling from the PRC it has been now admitted is an “illusion”.