US President Donald Trump’s new tariffs on US$200 billion of Chinese imports will come into effect on September 24. In addition, Trump has also threatened more tariffs, on US$267 billion of goods – almost all Chinese imports – if China does not comply with US demands. Meanwhile, US Treasury Secretary Steve Mnuchin has invited his counterparts to attend yet another round of trade talks in Washington, but China’s interest in participating has waned. How do you deal with someone who pats you on the back and steps on your toes at the same time?
Despite this pressure, China is unlikely to succumb to US demands. The typically Chinese response would be to draw out the trade war to gain bargaining power.
The US has the upper hand now. After all, its economy is growing briskly, the stock market is at an all-time high, unemployment at an all-time low and capital investment robust. However, investor sentiment is notoriously fickle and the new tariffs could turn this ebullient mood on its head very quickly.
The 10 per cent tariffs on US$200 billion of new Chinese imports will target about 40 per cent of consumer goods, raising prices for consumers when it hurts most – around the Christmas shopping season.
Businesses will also suffer. According to the American Chambers of Commerce of Beijing and Shanghai, which surveyed hundreds of US companies operating in China, more than 60 per cent of them have been negatively affected by the earlier round of US$50 billion in tariffs and 74 per cent expect “a negative impact” from the new US$200 billion in tariffs. US executives are also taking a wait-and-watch approach to committing to new capital investments.
Watch: Trump threatens tariffs on nearly all Chinese goods
If the trade war drags on, six months from now the picture could look very different.
Trump’s stiffer tariffs are meant to pressure China into capitulating to a whole host of US demands, including stronger intellectual property protection, its main gripe. This is a fair point, as the trade rules penned 20 years ago that allowed China to join the World Trade Organisation are probably incongruous with the Chinese economy today and should be reviewed in earnest.
The trade war may have inadvertently strengthened the Chinese resolve to resist foreign intervention while emboldening its leadership
However, the way Trump has gone about getting China to concede will backfire. The bullying tactics are reminiscent of how China was humiliated by foreign powers a century ago when the country was weak and the government corrupt. But that was then and this is now. The country is no longer weak and its corruption is under control.
If China caves in, it will have been humiliated by the last remaining Western power in the 21st century, as if all efforts to expunge that part of the national psyche have been for naught. Also, Xi Jinping, the paramount leader in a Confucian society, will be keen to avoid being shamed by the US in public view, a scenario that would also be totally unacceptable to the Chinese leadership and people.
In fact, the trade war may have inadvertently strengthened the Chinese resolve to resist foreign intervention while at the same time emboldening its current leadership, which bills itself as the guardian of the “Chinese dream”.
The US may also be unwittingly drawn into a game that it started but can't finish gracefully simply because of its misreading of the Chinese character.
Chinese people and Westerners don’t always act the same way. The Chinese tend to seek balance in all things, evident everywhere in their architecture, food culture, mannerisms, relationships and politics. They would also rather talk than risk confrontation.
They prefer to have win-win solutions over “winner takes all” and to solve common problems before dealing with differences. The rationale is that a person who takes an extreme position in a contest is likely to lose his balance, giving his opponent the advantage. He may look tough in the beginning, but will lose in the long run.
The Chinese think in terms of centuries instead of decades or – as in Trump’s case – every two years
Time is also on China’s side. Chinese people are long-term thinkers and keen readers of history. They think in terms of centuries instead of decades or – as in Trump’s case – every two years.
They are experts in using delay as a tactic to deal with confrontation, as in Mao Zedong’s famous protracted war against the Japanese invasion, or using softness to overcome brute force, as in Sun Tzu’s The Art of War.
If the opponent is too strong, the Chinese would dodge and stage guerilla warfare, such as their current moves to frustrate US supply chains.
Trump’s world is very different. In this world, simple solutions are good for complex problems and only the tough can win. This was how he ran his business empire in the past and how he manages the government now. The winner takes all, the loser has to yield.
Watch: Chinese hope for swift end to US-China trade war
At this point, conventional wisdom suggests that China will be the loser. Indicators such as a dramatic decline in the stock market and a weakened renminbi suggest a weakened China will soon cave in.
If the US gets into a protracted trade war with China, it could end up hurting itself more than China
This is unlikely as the Chinese take the long view and they know how to wait out a disadvantageous situation. Plus, history shows that when times are tough, the nation can pull together for a higher purpose, rather than falling apart.
In the past two decades, China has deftly managed the 1997 Asian financial crisis and the 2008 global financial crisis. In both cases, after the initial hiccups, the Chinese economy continued to expand, while others have faltered. Similarly, the current trade war may in the end make it stronger.
If the US gets into a protracted trade war with China, it could end up hurting itself more than China. When the US stock market falls because its corporations suffer from earnings declines, and its citizens fret about paying higher prices, there will be a better balance of power, and then China will negotiate seriously. This type of behaviour is deeply ingrained in Chinese culture and traditions, and it is being replayed once again in front of us.
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