27 06 2019

The US trade war against China will change history (1)

The British-French burning and looting of the imperial palace in Beijing in 1860 during the second opium war. The British-French burning and looting of the imperial palace in Beijing in 1860 during the second opium war. Émile Bayard - http://www.lessignets.com/signetsdiane/calendrier/sept/21.htm http://www.transasiart.com/voyageurs/voyageurs03/srs03dpalikao.htm

The ongoing trade war that the US has unleashed against China will change the history of the 21st century, independently of whether an agreement is eventually reached between the parties or not. It signals the decision of the US to prevent China from growing into an economic superpower, using whatever means it has at hand. But this is an extremely dangerous and futile policy. China has more than four times the population of the US. As it develops, its economy will inevitably surpass the US. There is nothing the US can do to prevent that, so they will have to find out how best to live with it. Unfortunately, this is not how an important part of the US establishment sees it.

As history evolves, power relations change, former big powers fade and others surge to take their place. It is difficult for the dwindling power to accept this reality, particularly for a superpower that has been dominating the world since the second world war, and in particular after the implosion of the Soviet Union in 1990. Other big powers have been through this and have had to learn to live with it. This is the case of Spain, which was the dominating European power 500 years ago with an extensive colonial empire in South America, the Caribbean, Africa and Asia. They were defeated by the surging British Empire and received the final blow by the US in the Spanish-American war in 1898. It was the case of Britain, the master of the world a little more than 100 years, and which was gradually and relentlessly supplanted by the US, culminating with the second world war and the loss of its empire with the liberation of its colonies in the early 1960ties. France has been a declining power for the last two hundred years, and has been in gloom since it lost its war against the liberation of Algiers in 1962. Japan and Germany have had to accommodate themselves to a humble role as US vassal states after their defeat in the second world war. The loss of imperial status has been particularly hard for Britain to digest and the reality seems not to have sunk completely in yet, as the “special relationship with the world’s only remaining superpower has helped to maintain the illusion of it still being a world power.

There is little acknowledgement in the US establishment of the fact that its continued dominance of the world is absolutely inconceivable in the longer term. They are willing to go very far to deter, contain and – if necessary – destroy any rival power. We are not talking about a legitimate defensive policy – no country is presently threatening the US homeland. But there are lots of threats to the US worldwide dominance in different parts of the world, far from its native shores. Since President Putin came to power in Russia, much of the attention in the US has been focused on Russia. This is of course ridiculous. Its 145 million inhabitants constitute less than a third of the population of the EU, less than half of that of the US and a tenth of that of China or India. It is an important power in the regions close to its borders. But it has no chance of becoming a world power as the Soviet Union was, and there appears to be a clear understanding in Russia that it would not be able to sustain a renewed arms race with the US. Instead, it has opted for an asymmetric strategy, ensuring that it can’t be knocked out by a nuclear preventive first strike and will maintain enough strike-back capacity to deter any attack on the country. So it is an important power in a multipolar world, but not an important threat to continued US world dominance outside Russia’s socalled “near abroad”.

China is a different story. China has more than four times the population of the US and even if it still is only a middle income country, it is, because of its sheer size an economic heavyweight. China’s GDP in current US dollars was in 2017 only 63% of that of the US and 72% of that of the EU. But this underestimates the size of the economy. Calculated in purchasing power parity, i.e. what can be bought for the money, the Chinese economy was in 2017 17% bigger than the US economy and 9% bigger than the EU economy. If we look at other economic indicators, we get the same picture. China’s exports of goods was in 2017 46% bigger than that of the US, and if we include trade in services (where the US is stronger), China’s export was still 3% bigger. China produced two and a half times as many cars as the US in 2018, and it produced half of all mobile phones exported to the world market (the US less than 4%). China will during the next couple of decades become a formidable rival to continued US world dominance, first in East Asia and later on in other parts of the world.

'I don't want my grandchildren to live in a world dominated by the Chinese', said former foreign secretary and presidential hopeful Hilary Clinton in 2016. There is no risk that China in Hilary Clinton’s grand children’s lifetime will become the master of the universe as the US is today. There are many other emerging powers: India, Indonesia, Russia, Brazil, may be even the EU, should they decide to have their own foreign policy. And unless the US implodes, it will also be around. So it will rather be a multipolar world, where China may be the biggest elephant in the room, but it will not be the only elephant.

Perhaps what Hilary Clinton wanted to say is rather that she doesn’t want her grand children to grow up in a world where the US no longer is the dominant world power. This seems to be a prevailing sentiment in the US establishment. So there is a debate going on in leading political and intellectual circles as to what the US can do to avoid being dethroned and keep the position as the master of the world. How can the surging rival powers, and in particular China be contained or, if necessary, destroyed?

It should be remembered that China bashing is not something that President Trump has invented. The anti-Chinese sentiment has been brewing for a long time, and it is therefore not surprising that Trump’s aggressive policy towards China has won accolades from different corners of the establishment, Republicans and Democrats alike. Blue collar workers who for decades have been living under the constant threat of their work-places being off-shored and who have been told that it is a fool’s errant to go against the globalisation, suddenly think they can see a glimmer of hope. There is no doubt that the upcoming 2020 presidential election will be a competition in China bashing. There will be no place for moderate voices, as this would be treated as treason. So the scene is set.

There are arguments for this new US policy for every taste: this is about defending human rights in China, defending the rights of the Muslim population, defending the right of the Tibetans, combating the Chinese surveillance society, containing the increasing Chinese military power, protecting China’s neighbours, keeping the sea lanes open in South Chinese Sea, defending US companies’ intellectual property – the list is long.

You don’t have to be pro Chinese to take another point of view. China is home to a fifth of the world population and due to its sheer size it is becoming the world’s most important economy. Like it or not. The existing world order is tailored to a US-Europe centred world. With the partly exception of the UN, the institutions have been created by and for the US and Europe: IMF, World Bank, OECD, WTO, etc. This is not sustainable. Either these institutions change, or parallel institutions will be set up. We are already now in a situation where the Chinese investments in infrastructure in Africa are paramount for the continent. The Chinese promoted Asian Infrastructure Investment Bank with 70 countries participating (with the notorious absence of the US) is already now a serious rival to the US and Japanese led Asian Development Bank.

But how can the civilized world accommodate a country that is not democratic and does not respect human rights? Can a semi-barbaric nation as China really be admitted into the club of civilized nations? Wouldn’t that be against all the high moral principles?

What happens is that the US with its European followers are no longer the masters of the world. They can ignore these countries that they don’t like or even despise as they consider them morally inferior. But finally, who ends up being marginalized is not China but the US and the Europeans. So they can whine and scream, but China is a reality that will not go away.

There is some understanding of this reality in Europe, but as mentioned, this is not the mood in the US presently. Then what strategies to contain China are being proposed? It is confusing to go through the China coverage by the many different establishment outlets and think tanks. There are a plethora of opinions going from proposing direct war to some sort of accommodation. But cutting through it, there seems to be two main strains (we leave aside the more extreme proposals of waging a “preemptive war”):

(1) Try to get a deal that is acceptable to the US, while respecting China’s vital interests (the “red lines”). It is about opening the Chinese market more to US companies, particularly within finance and other services, protecting intellectual property, limiting parts of “China 2025” and the like.

(2) Significantly reduce or cut off economic relations with China (called “to disentangle the US economy from China”).

What is important to keep in mind it that even if a deal is reached that is mutually acceptable, at least in the short term, the longer term effect will be some degree of ‘disentanglement’. In the extreme, we may end up having two – or in the unlikely event that Europe stands up to the US and decides to have its own economic and trade policy, three – partly independent and incompatible technology spheres. That has enormous repercussions.

We shall take a closer look at this in a second article. To read it, click here.

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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