Kimberly Ann Elliott
If the U.S.-China trade war develops into a broader cold war, as some observers fear, it will be nothing like the actual Cold War. Between civil war in Russia after World War I, the Great Depression in the United States and then the cataclysm of World War II, America and the Soviet Union never had a chance to develop a significant economic relationship before things hardened into a stark East-West divide. When Washington adopted a containment strategy that blocked most trade with the Soviets, including technology transfers, it had relatively little impact on either economy.
The situation with China today is radically different. After normalizing diplomatic relations in the 1970s, Washington gradually lifted most restrictions on trade and technology transfers. By the time President Bill Clinton came to office in the 1990s, many American policymakers viewed economic engagement as a tool to promote political as well as economic liberalization in China. In 2000, the Clinton administration used this argument to convince Congress to extend what is known as “normal trade relations” treatment to China, paving the way for freer trade between the U.S. and China and for Beijing to join the World Trade Organization. The thinking was that rising incomes, along with increased exposure to economically open and democratic societies, would create pressures on the Chinese Communist Party to loosen its grip.
Since that time, China’s role in the global economy has exploded. It is by far the world’s largest exporter of merchandise and the second-largest importer of both goods and services. In recent years, it has also emerged as the largest exporter of intellectual property-related services among middle-income developing countries. According to data from the United Nations Conference on Trade and Development, China is among the top two or three countries as both a source of and host to foreign direct investment, depending on whether Hong Kong is included.
Bilateral trade relations between China and the U.S. have also boomed. China is now America’s third-largest trade partner, behind Mexico and Canada, and it is a major supplier of U.S. consumer goods. According to the Retail Industry Leaders Association, China supplies 85 percent of all toys sold in the United States, 41 percent of all imported apparel and 72 percent of imported footwear. It is also the “predominant source” for consumer electronics.
But economic success and WTO membership have not produced significant, sustainable political reforms in China. To the contrary, after some signs of loosening up in the early 2000s, the Chinese government under President Xi Jinping has cracked down on dissent and is trying to reinforce party control of the economy. It has created a highly intrusive surveillance state, especially in Xinjiang province, where the authorities have also detained an estimated 1 million ethnic Uighurs, who are mostly Muslim, in what Beijing calls “reeducation centers.” Human rights groups say they are akin to concentration camps. In Hong Kong, perhaps as many as 2 million people poured into the streets earlier this month to protest an extradition bill that they fear would lead to China prosecuting political opponents. In addition to these human rights concerns, China’s military buildup, cyber espionage and aggressive policies asserting ownership of contested islands in the South China Sea are all raising red flags among the national security and foreign policy communities in Washington.
So too is the broad consensus that China poses significant challenges for the global economic system, despite the fact that China has been a boon for consumers worldwide. Until recently, the business community in the United States and elsewhere mostly declined to criticize Chinese policies because multinational corporations desperately wanted access to this large and rapidly growing market. That attitude has changed as China’s industrial policies helped its own, often state-backed entities become major competitors to Western companies in more and more areas, from cell phones to solar panels. Large Chinese firms dominating key technologies, such as telecom giant Huawei’s race to control next-generation, 5G wireless networks, is also raising concerns about Beijing potentially manipulating its economic power for geopolitical advantage.
In perhaps the biggest mistake of his presidency so far, Trump opted for a go-it-alone strategy on China.But while there may be more consensus that Washington needs a tougher policy toward China, the question remains how to respond effectively and without undue costs for the American economy. So far under President Donald Trump, the costs are piling up. After starting out saying nice things about his “good friend” Xi, Trump has taken a tougher stance, imposing tariffs on imports from China and restricting trade with Huawei on national security grounds. Washington has also increased its scrutiny of Chinese university students and foreign investments in the U.S.
If the much-anticipated meeting between Trump and Xi that is supposed to take place during this week’s G-20 summit in Japan doesn’t go well, the administration could deliver on Trump’s threat to expand the tariffs to cover all or most of the consumer goods imports that were previously spared. The U.S. Trade Representative’s office received thousands of comments from businesses detailing the costs such a move would inflict on them, as well as on consumers who will face higher prices on almost everything when they do their holiday shopping later this year.
Rural communities in the U.S. with limited resources are particularly concerned that the restrictions on using Huawei’s telecommunications equipment could make it too costly for them to expand wireless access. American technology companies that sell to Huawei, meanwhile, fear losing an important revenue source in the short run and facing stronger competitors in the long run as Huawei develops alternative suppliers.
Like so much of Trump’s trade policy, is there a coherent strategy here? In perhaps the biggest mistake of his presidency so far, Trump opted for a go-it-alone strategy on China. Other countries, including close U.S. allies in Europe, share Washington’s concerns about China’s trade policies and would have been happy to form a common front demanding reform from Beijing. Instead, the White House insulted those close allies and alienated them by imposing tariffs on their exports too.
Trump’s inconsistency and impulsiveness only make matters worse. Take the back-and-forth on the potential threat posed by more advanced Chinese technology. After quickly reversing himself on a ban of technology exports to Chinese telephone maker ZTE last year, the White House did something similar with Huawei. The Trump administration first announced that American firms that do business with the U.S. government would have one year to wind down their business with Huawei. But then it undercut that signal to Beijing by extending the period to three years because of the potential costs to U.S. business. Then, to confuse the matter even more, Trump suggested that concessions involving Huawei might be part of an eventual trade deal with China—even though Huawei’s technological dominance supposedly poses a national security threat.
Unless there is another shift in the wind, Trump and Xi will meet this weekend in Osaka and hopefully calm things down. Yet no one expects a final agreement to emerge, so the global economy will likely suffer from the ongoing uncertainty. Still, if the two leaders can at least get the negotiations restarted and avoid further escalation in the trade war, everyone will breathe a sigh of relief, given how much higher the costs could rise.
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