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US-China Rivalry Is More Than a Trade War

Let us hope that wiser and cooler heads prevail.

This year, China is in the headlines because President Trump wants better trade terms. That’s important, but it’s only one piece of a much larger Chinese story that has been unfolding slowly for decades.

The US sees China as both partner and rival. Obviously the two economies are intertwined and depend on each other.

President Trump is right that China doesn’t always reciprocate the trading rights that the US and other governments extend. China is really quite protectionist—far more so than the other “BRIC” countries.

Trump is also right to press for better trade parity. When China can ship cars to the US for 2.5% tariff, and US cars must pay a 25% to go into China, something is out of balance. There are literally scores of examples like that.

But at its heart, the US-China rivalry is not really a trade war. This has been unfolding for a long time. Trump’s tariff threats are only the latest move and won’t be the last.

The Grand Plan of China

Beijing has two big economic programs, neither of which it considers negotiable. They are strategic priorities the rest of the world will have to face.

Made in China 2025 is a broad industrial policy with multiple goals:

  • Improve manufacturing productivity
  • Build up technology-intensive sectors
  • Gain 70% self-sufficiency in key materials and components

The government, state-owned enterprises and private businesses are all giving Made in China 2025 truly massive funding. Research & development spending was US$232 billion in 2016 alone.

Founded just last year, a new government commission is overseeing the “integration” of this project with possible military use. And let’s make no mistake, this “funding,” whether equity, loans, or grants, ultimately comes from the state or at the urging of the state.

Note that last goal of 70% self-sufficiency in certain markets. Made in China 2025 is, by its nature, an anti-trade program. Favoring domestic producers necessarily disfavors importers.

China’s other massive infrastructure program is the Belt & Road Initiative, but that’s not all. It is Xi’s mercantilist version of the US-led postwar Marshall Program.

The Marshall Program carved out leadership via institutions and trade agreements, while at the same time supplying much-needed money. Now China seeks to do the same by physically connecting itself with the Eurasian continent.

China’s main strategic challenge is that the US controls the seas. Geography means China’s imports and exports must traverse coastal bottlenecks the US could easily close if it wished. That’s intolerable if your goal is to be a superpower, and that’s definitely what Xi wants.

One Belt, One Road is the answer. It will link the Eurasian landmass into a giant trading bloc, with Europe at one end and China at the other. The project will open land routes the US cannot interdict, thereby letting China take what it feels is its rightful place of leadership.

China is building a “main pipeline” not unlike Eisenhower’s interstate highway system. And that means all the little Asian countries will access that main road. Ultimately, China wants to pay for all the products it buys in renminbi and have those small countries make it part of their central bank holdings.

That is part of the process of becoming a reserve currency, which is something China covets. The same thing is true for the project’s ocean and seaport aspects.

The scope is breathtaking, but Beijing is determined to make it happen.

US’s Dilemma

This world that Beijing envisions is incompatible with Washington’s priorities. So, there is right now a grand struggle in Washington to redefine how we interact with China. Multiple wings are jockeying for position.

For now, President Trump is the most important player. Despite some of his rhetoric, I don’t believe he is against trade. I think he just wants a US “win” and is flexible on what that means.

However, the current China-US rivalry could go many directions. In the worst case, we could slide into a kind of economic Cold War with China, with both sides deploying aggressively protectionist policies. I am afraid that would spark a global recession. I am not being hyperbolic. It is a dark alley we do not want to walk into.

More optimistically, Beijing might grant enough concessions to satisfy Trump and buy a few more years of relative harmony. But as I said, the underlying rivalry will come back unless Xi makes some massive changes, which he shows no signs of even considering.

So, I think the likely near-term outlook is lots of noise with only mild tariffs or other restrictions. A real trade war serves no one’s interest. But people make mistakes and do irrational things, so someone could miscalculate.

Let us hope that wiser and cooler heads prevail.

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