The last thing Beijing needs at this time is a trade war

Under US President Donald Trump, relations with China have a dramatic edger. There was a touch of Trump’s prime time show, The Apprentice, in the flourish with which he declared that he would extend a lifesaver to the Chinese telecom giant ZTE which was on a death watch after the impositions of US sanctions by his own administration. That touch was there in first snubbing in February, and then welcoming to Washington this month, Liu He, China’s Vice Premier and economic czar.

Now after a week of negotiations between a Chinese team led by Liu and an American one by Steve Mnuchin in Washington, the two countries appear to have a deal. China is now committed to buy more US agricultural and energy products aimed at reducing the yawning trade deficit between them. ZTE’s fate remains unknown as of now. Trump’s boast on instructing his department of commerce to help the beleaguered Chinese giant led to a barrage of criticism that his action was cocking a snook at the law.

The joint statement issued on Saturday has spoken of “meaningful increases in US agriculture and energy exports”. China’s trade surplus with the US was a record $375 billion in 2017. In all this, we do not know what part of Trump’s dealings with Kim Jong Un are a side-scene, but as is evident, the twists and turns are theatrical.

Trump’s handling of the ZTE issue clearly reveals his taste for staged about-turns. The US Commerce Department issued crippling sanctions against the company whose products are dependent on US components and software. The action was perfectly legal since the ZTE knew what it was up to when it exported its products to countries like Iran and North Korea which were under American sanctions.

Reportedly, Xi Jinping himself took up the issue of the company with Trump who tweeted on May 13 that Xi and he were working together to give a life line to the company and that the US Commerce Department had been instructed to get it done. In targeting ZTE, the US discovered a weapon whose potency it was probably not aware of, and now it also has Huawei in its crosshairs, and this is something that is giving Beijing sleepless nights.

The joint statement has only alluded to what many believe is the real problem: The American belief that China is using state-owned companies to promote the forced transfer of technology and cyber espionage to undermine the US technological lead. It has said that “both sides attach paramount importance to intellectual property protections and agreed to strengthen cooperation.”

Both sides are aiming for something more than just trade. The US wants to thwart China’s technological ambitions as much as Beijing wants to foster them. The US delegation that went to China earlier this month, clearly signalled that it was not in it for just the trade. They wanted Beijing to not only reduce the its trade balance, but open up markets and protect intellectual property. Further, they demanded that China not use the WTO mechanism to delay action.

Meanwhile China also has longer term aims. It is working on a two-track plan, one that seeks internal reform and a wider opening up to the world, and another to build up critical industries to prevent ZTE-like situations in the future. In a recent meetings and speeches, Xi is sounding the theme of China taking charge of its own technological destiny. The Chinese see the current battle as similar to the one they had to fight when the Soviets abruptly cut off aid in the 1960s. They see the American actions as aimed to block their “Made in China 2025” policy. In their view, it is about the US seeking technological hegemony and thwarting China’s rise.

The US has been conscious of the Chinese strategy of technology acquisition. Now a new American bill is being mooted to expand the powers of the Committee on Foreign Investment in the United States (CFIUS) to target Chinese tactics more effectively.

The Europeans, too, are waking up to the challenge though somewhat late.

Almost everyone is agreed that China would be a loser in a trade war with the US because its positive trade balance does not leave it with enough products to impose retaliatory tariffs on. More important, it confronts structural issues relating to its growing massive fiscal deficit, declining exports, dependence on US exports, its mountain of debt, the distrust it has generated in foreign enterprises.

Economic reform is, therefore, vital for China, and the process is finally underway following Xi’s consolidation of authority. The last thing Beijing needs at this time is a trade war. China wants to work along a policy “with Chinese characteristics”. But the US under Trump is in no mood to accommodate them beyond a point. But Washington, too, must realise that a trade war could be mutually ruinous. There is more leverage is to be had by effectively shaping the Chinese reforms rather than creating conditions that could prevent them from taking place.

Hindustan Times May 23, 2018