This is Truly a Trade War

By William R. Hawkins

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The trade negotiations between the Trump administration and the People's Republic of China (PRC) are not rooted in commercial disputes. Though media discussions are dominated by issues about opening markets for U.S. exports limited by Chinese policy, the real issue is national security and the need to keep the balance of power tilted in America's favor. Business is the means, not the end. Comparative national capabilities in industry and technology determine military potential, and financial strength supports economic development and diplomatic influence. China's rapid growth has moved the country from the seventh largest GDP in 1980 to the second largest today with the world's largest manufacturing capacity. Beijing's rise threatens to overturn world politics in the same way Germany did when it overtook Great Britain at the end of the 19th century. It was only because the U.S. economy surpassed the industrial might of Germany that the world wars turned out as they did.

Though China's growth rate has slowed from 10% to about 7%, it is still moving at twice the rate of the U.S. economy even with the boost given to it by President Donald Trump. China needs to be slowed down, which means ending the massive flow of capital and technology that has built Beijing's capabilities and which have then been supported by the trade deficit. Americans sent a net $419 billion to China last year by buying their goods, keeping their factories open and their workers employed. Americans bought almost five times the value of goods from China as American-based producers sold to China. Over the last ten years, Americans have sent to China over $3 trillion net via the deficit in goods. Yet this is only the tip of the iceberg. It has been the transfer of technology and its diffusion across the Chinese economy that has empowered the regime, giving it the resources to build military strength and the confidence to adopt an aggressive foreign policy.

The tariffs imposed by President Donald Trump are justified by the U.S. Trade Representative's (USTR) "findings of its exhaustive Section 301 investigation that found China’s acts, policies and practices related to technology transfer, intellectual property and innovation are unreasonable and discriminatory and burden U.S. commerce." Chinese regulations force joint ventures which give majority control to Chinese "partners" of American firms. PRC policy also mandates technology transfers, facilitate "the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer... [and] support cyber intrusions into U.S. commercial computer networks." Beijing's claim it is "opening up" means feasting on the fruits of American innovation.

The Trump team has not limited itself to tariffs. It has been waging a major diplomatic campaign against the use of Huawei's 5G technology in the next generation of digital systems. Huawei wants to build a "fully connected world" but has raised concerns about whether a Chinese-built system will have built-in hacks. Huawei is the world's largest telecom firm, its rapid rise heavily subsidized by the government. Its low prices indicate an objective of control more than profits. It was founded in 1987 by Ren Zhengfei, who had worked for the Information Technology Unit of the People's Liberation Army. On May 15, President Trump declared a national emergency and issued an executive order prohibiting U.S. companies from using telecom services that are solely owned, controlled, or directed by a "foreign adversary," meaning Huawei. The administration has also threatened to curtail sharing information with foreign governments if data would be transmitted through a Huawei network.

The Secretary of Defense's annual report to Congress on The Military and Security Developments Involving the People’s Republic of China 2019 lays out the economic component of Beijing's "comprehensive national strategy." The report sees China's leaders "focused on realizing a powerful and prosperous China that is equipped with a 'world-class' military, securing China’s status as a great power with the aim of emerging as the preeminent power in the Indo-Pacific region." The economic role in this expansion includes "China has mobilized vast resources in support of defense modernization, including 'Made in China 2025' and other industrial development plans, as well as espionage activities to acquire sensitive, dual-use, or military-grade equipment." Key to this mobilization is the effort "to align civil and defense technology development to achieve greater efficiency, innovation, and growth. In recent years, China’s leaders elevated this initiative, known as Civil-Military Integration (CMI), to a national strategy that incentivizes the civilian sector to enter the defense market." International projects that expand Chinese trade and investment will also yield strategic gains. As the report states, "China’s advancement of projects such as the 'One Belt, One Road' Initiative (OBOR) will probably drive military overseas basing through a perceived need to provide security for OBOR projects." 

In short, Beijing thinks seriously about international economics. It rejects out of hand liberal theories about global interdependence that permeate Western discourse and provide cover for transnational business interests who care little about higher national strategy. As the Pentagon report states, "China leverages foreign investments, commercial joint ventures, mergers and acquisitions (M&A), academic exchanges, the experience that Chinese students and researchers gain from studying in foreign nations, state-sponsored industrial and technical espionage, and the manipulation of export controls for the illicit diversion of dual use technologies to increase the level of technologies and expertise available to support military research, development, and acquisition." Beijing has targeted key sectors such as aerospace and shipbuilding but also pharmaceuticals, rare earth elements, and the tool and dye industry to wipe out foreign competition and gain control of vital supply-chains.

While the term "trade war" has often been overused and exaggerated, when applied to the Great Power rivalry between China and America, the term has standing. Unfortunately, American politics is not as unified and determined to maintain national preeminence as is the Chinese dictatorship to gain it. Petty concerns about whether consumer prices might go up due to tariffs are only part of the problem. It's lobbying by Wall Street behind the scenes that pushes the case for appeasement. In his book Appeasing Bankers, Cornell professor John Kirschner argued, "The preferences of finance, especially since they are not felt with equal force in all states, affect the balance of power between states and influence the pattern of international conflict."

In China, finance is under state control and serves state interests. Four of the world's ten largest banks are Chinese state-owned entities, with the Industrial and Commercial Bank of China number one. Along with other state-owned or guided institutions they will provide the capital for the OBOR. They will not object to Beijing's assertive policies in the South China Sea, or to its support for Iran, or to hikes in the military budget. Kirschner notes, "Typically, but not exclusively, the financial community will be aligned with conservative political parties" in the West. American conservatives are also the ones who most favor a strong military and an active foreign policy in defense of American preeminence. The need is to keep the "capitalist" and "national security" wings united behind programs that generate both wealth and power, the twin foundations of Great Powers.

President Ronald Reagan achieved this to bring down the Soviet Union by leveraging superior economic might Moscow could not match without adopting reforms that collapsed the regime. Controls had kept U.S.-Soviet trade to a minimum. President Trump is trying to do the same, but in different circumstances. He has to reverse decades of foolish policies based on a fantasy view of the world. President Trump has explicitly said that his tariffs will compel American firms to move operations out of China. But the real message is that business ties to Beijing are no longer politically tenable. Conservatives must help the general public focus on the larger stakes of the contest with China. America can prevail because it is still stronger. Washington can use its advantages to contain Beijing before it becomes a true peer rival.

William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former Republican staff member on the U.S. House Foreign Affairs Committee.