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Donald Trump throws the rulebook out the window in his...

Business Maverick

US-CHINA TRADE WAR

Donald Trump throws the rulebook out the window in his trade war with China

(FILE) - US President Donald J. Trump (L) and Chinese President Xi Jinping (R) shake hands during a press conference at the Great Hall of the People (GHOP) in Beijing, China, 09 November 2017 (reissued 04 January 2019). EPA-EFE/ROMAN PILIPEY

Two anniversaries are being remembered now, just as the Americans and Chinese angrily confront each other across the frontier of an increasingly ill-tempered, ill-humoured trade confrontation.

Those anniversaries are D-Day and the massacre in Tiananmen Square. The first is being observed on its 75th commemoration by thousands on the site of the cross-channel invasion that helped end Nazi domination over Europe, and followed by a global audience of millions.

The second, now on its 30th anniversary, has virtually been erased from history by China in the interest of social cohesion. There are lessons to be drawn from both for the current circumstances of the US-China standoff.

Timeline of US-China Trade

  • 1784 NY ship, Empress of China, opens US-China trade.

  • 1787 Boston ship, Columbia, carries sea-otter pelts to Canton.

  • 1805 Baltimore ship, Entan, carries opium to Canton.

  • 1840-42 The British-China Opium War.

  • 1844 China grants US full trading rights in Treaty of Wanghia.

  • 1899-1900 US persuades China to keep ports open to Western trade from all nations.

  • 1931-45 Japanese invasion of Manchuria, followed by World War 2.

  • 1950 Korean War begins; US and China break all relations.

  • 1972 US-China trade resumes.

  • 1979 US and China resume full diplomatic relations.

Despite the recent supernova of attention on it, US-China trade has not just been an all-encompassing fact of modern life. The history of this bilateral economic relationship reaches back to shortly after the official end of America’s war for independence from Britain.

The first American-flagged China trader, Empress of China, departed New York City harbour on 22 February 1784, bound for Guangzhou (Canton), China, carrying cargo to be sold, hopefully at a tremendous profit, to Chinese consumers — and simultaneously transporting America’s first official trade representative to China.

Aiming for a product mix the ship’s crew and owner hoped would be appealing to discerning (and wealthy) Chinese consumers, the ship was loaded with luxuriously warm beaver and otter pelts, chests of Spanish silver (the de facto common currency in the Pacific Basin at the time — those ubiquitous “pieces of eight” so beloved of pirates and novelists), raw cotton, and 30 tons (!) of North American ginseng roots. Ginseng was highly prized, then as now, for its presumed health qualities. And there was also the belief it was the 18th century equivalent of Viagra.

As it happened, a temporary oversupply of ginseng in Chinese entrepôts that had been brought by other foreign traders meant those hopeful American sailor/entrepreneurs did not fully reach their anticipated sales targets and profit margins. Then as now, correctly predicting supply and demand in foreign markets, accurately forecasting consumer tastes, and thoroughly understanding fickle, changing consumer preferences remains something of a roll of the dice.

Nevertheless, despite that less-than-flawless market research regarding the ginseng, the trip was not a commercial failure. According to New England Historical Society records, when the Empress returned to New York Harbour, it brought 800 chests of tea, silk cloth, 20,000 pairs of Chinese cotton trousers, and 64 tons of highly prized fine porcelain, including a set of fine china that ended up on the dining table of George Washington’s Mount Vernon home.

Such high-quality Chinese manufactured products (plus tea) were highly sought-after by American consumers, and the Empress’ success generated a rush by US traders to make their fortunes importing that tea and those hi-tech Chinese products of their day. The demand eventually encouraged some Chinese porcelain manufacturers to establish factories to produce porcelain solely for the booming American market.

Professor Karen Markoe (State University of New York), in her article “Two Hundred Years of US Trade with China (1784-1984)” has written:

The Empress left New York harbor on February 22, 1784. Six months later, in August, it arrived at Macao, a Portuguese outpost on the Chinese coast. Here, Captain Green hired Chinese pilots to guide his ship up the Pearl River to Whampoa. Trading ships stayed in Whampoa while their supercargoes [commercial agents] worked out deals in Canton, 12 miles upstream…

Shaw [the ship’s commercial agent] traded his cargo for tea, nankeen [Chinese cotton], tableware, silk, and spice. The shipment was welcomed in the US when the Empress returned there in May, 1785. The Chinese goods brought Robert Morris [the ship’s principal investor] and his partners $30,000 — an impressive profit.

Other US merchants were quick to see the value of the China trade. At first, however, they flooded the Chinese market with ginseng. Chinese demand for the root dropped, and so did its price. But the Chinese did want sea-otter pelts, which Yankees traded from Indians in the American Northwest. Sandalwood, found in the Sandwich Islands (Hawaii), also brought a high price from Chinese merchants.

The trade took an ugly turn in the early 1800s. British merchants began carrying opium to China, and many Americans followed suit. Opium, a drug, created its own demand by making addicts of its users. US merchants found they could buy a pound of opium in Turkey for $2.50 and sell it in Canton for $10.00.

A Chinese attempt to shut down the opium traffic led to war with Britain. The ‘Opium War’ lasted two years. It ended with a treaty that punished China and opened four more ports to British shipping. In later treaties, China granted the US and France the same privileges Britain had. Turmoil within China would interrupt trade with the US during the next 100 years. Then, in 1949, a Communist government took over in China. The next year, Chinese and US troops faced off in Korea, and the China trade ended for 22 years.”

Regardless of the political turmoil, post-1949, at least until World War 2 had broken out, generations of American traders and corporations chased the possibilities of the enormous Chinese market (something that would repeat itself in the 1980s). Textile merchants dreamt of convincing the Chinese to add just a few inches to their standard length shirt tails (and thus the millions more metres of cloth to be sold), or of the possibilities of vast sales of illuminating kerosene to the millions heretofore sitting in darkness, as portrayed in the hit 1935 film, Oil for the Lamps of China, based on a popular novel from two years earlier.

When regular US-China diplomatic relations recommenced in 1979, and as the pro-growth, pro-business, state-capitalist (but non-democratic) policies of China’s Deng Xiaoping took hold, a new China trade dream took hold in the West. Growing numbers of American companies sought deals to produce products under licence, to market US products there, and to create products for export to the US and elsewhere, using the vast reserves of inexpensive, but industrious Chinese labour. The Chinese electronics sector, including such companies as the now-giant Huawei, rose out of this period of rapid industrialisation.

In recent days, as the US-China trade snarl has gotten increasingly ugly, Chinese officials (and others supportive of them) have started raising the banner of the “Century of Humiliation” by foreign powers — from the Opium Wars until the end of World War 2 — as a useful metaphor for what is happening, yet again, between China and its leading western antagonist. But this time, Chinese officials are warning, things will be very different.

It may not be too much of a stretch to suspect that some of the Chinese government’s focus on this current trade dispute — and a conflation with the previous century’s issues — has been at least partially fuelled by a desire to deflect away any reflections on the 30th anniversary of the Tiananmen Square massacre and the government’s decisive blow against greater freedom for democratic expression, in tandem with economic liberalisation.

And so we move on into the current mess. Donald Trump, of course, had campaigned for the presidency in 2016 on the idea that America’s trade partners such as China had been systematically (and deliberately, maliciously, consciously) ripping off America and American businesses for years as they built up a vast trade surplus in the neighbourhood of $500-billion, vis a vis the US.

This Trumpian fusillade of criticism had been an echo of an earlier trade conflict that had portrayed another commercial antagonist of America, in this case, Japan, as an implacable, unstoppable, and deeply menacing nation. Once he came into office, declaring “winning a trade war isn’t hard, it’s easy,” in tandem with his more general unilateralist, transactional foreign policy, the Trump administration pressed forward on a number of ways versus China.

For one thing, the administration promised to enact a range of tariffs directed against Chinese imports, arguing — for public consumption, at least — that Chinese firms and China more generally would pay for all the costs to American consumers.

Not too surprisingly, China began taking steps in return to impose its own set of tariffs against a range of American products. While not beaver/otter pelts or ginseng roots this time around, American agriculture’s extraordinarily efficient production of things such as soya and pork for export were now in the gunsights of Chinese trade officials for their new tariffs and import cuts.

Importantly, these American exports were among the most efficiently produced such products on the globe, as well as key products from American Midwest states such as Iowa that had been important — even key — parts of Donald Trump’s road to victory.

These new Chinese barriers to soya and pork, and the possibility of financial ruin for many American farmers, may well have a particular pointedness for Republican candidates going into the next election, and the Chinese undoubtedly had thought through this aspect of the dispute rather carefully. Chinese leader Xi Jinping had, himself, spent time in Iowa back when he was just a regional agricultural bureaucrat, years before, and he surely had a full appreciation of these interconnected economic, agricultural and political dynamics.

By the time these opening moves had played out, the Trump administration had had its tariffs in place against several hundred billion dollars’ worth of Chinese imports and the Chinese had retaliated with import restrictions and countervailing tariffs on some $60-billion of imports from the US. One problem for the Trump administration has been that the president obdurately continues to insist the Chinese are paying the cost of all this, when, in fact, tariffs are a tax placed on products at the port of entry, thereby putting their cost on American importers, wholesalers, retailers — and the ultimate consumers, that is, standard, ordinary Americans. Oops. People will soon begin to notice this as tariff-added products make their way into the economy.

Yes, it is true Chinese manufacturers and exporters (and thus all those shop floor workers and many others in supply chains) are going to suffer too, as orders fall off — if there is sufficient substitutability by cheaper imports from other nations not (yet) hit by these tariffs.

Accordingly, there is some truth to the Trumpian argument of how this will hurt the Chinese. Of course, by that same logic, that will also be true of American exports, as Iowa is not the only place where soya beans grow. Or where pigs thrive. And once import substitutions from Latin America, South Africa, or elsewhere become better-established, it may be hard for the US to reverse them in order to regain lost markets. As the first impacts of that begin to happen, the Trump administration is now being forced to scramble to come up with a programme to offset such losses, generating yet another distortion in the market.

Concurrently, the president’s team has launched a second front with its attack on the Chinese telecommunications equipment company, Huawei, now a global giant in cell phones, Wi-Fi routers, 5G equipment and so forth. The ostensible bans on Huawei products came from the (still unproven) charge such products provide a backdoor for insidious Chinese cyberhacking of American persons or companies using them. Then, in order to beat them harder, it would then ban exports of the very high-end microchips from the US to the Chinese company that still remain essential to many Huawei products.

Additionally, threats of blacklisting third-country firms working with Huawei now represents yet another ratcheting up of pressures, as well as pressing Canada to arrest the company’s treasurer while she was on a visit there, for financial and trade law violations. (All of this has come after an earlier set of sanctions was announced last year against ZTE, the Chinese telecoms company, before relaxing them after some direct communication between the two national leaders — and the payment of a $1-billion fine.)

Things have continued to get nastier, with the Chinese now threatening to curtail exports of those so-called rare earths, a group of non-ferrous metals central to the operation of a vast range of electronic hi-tech stuff. The problem, of course, is that something like 90% of those metals now come from China and such production is not quickly replaced from elsewhere, although there already are efforts to expand production of them from Central and East Africa.

Most recently, the Chinese government has been giving out some friendly advice to Chinese students interested in studying in US universities that such a thing is going to be looked upon with increasing disfavour, and, in any case, they would be harassed and discriminated against if they do go to the “Gold Mountain” (the 19th century Chinese name for the US).

American universities are, as a result, in a growing state of panic about this, given that close to 400,000 students now come from China to study in America — about a quarter of all entering foreign students — and that, of course, represents a goodly share of the tuition paid into universities, funding all manner of programmes in that sector. Oops, again.

In all of this, some of the initial, and generally appropriate complaints of American (and other foreign) businesses about operating in or with China have increasingly been lost in the shuffle, as the tit-for-tat tariff salvoes have heated up.

Over the years, these complaints have often focused on Chinese failures to adhere to international standards of intellectual property protection, leading to surreptitious reverse engineering of patented, protected products, ideas and software.

Then there have been charges of predatory practices forcing foreign companies effectively to hand over shares of equity to Chinese partners; and a failure to accord the same treatment of foreign corporations as that given local ones. And there have also been frequent complaints about the unfair advantages deriving from collusion between the Chinese government, the state banks and manufacturers, to the unfair disadvantage of foreign competitors.

Moreover, there have also been documented charges that some Chinese entities have carried out the cyberhacking of proprietary foreign corporate data, including hacking efforts that have not been limited just to the product or direct business operations. All of these practices would seem to be in violation of the rules laid out by the World Trade Organisation, a body of which China is now a member.

Taking D-Day as an obvious example of multinational co-operation in support of a great global effort, the American case over China’s failure to follow trade rules and the need to improve the trade balance might have led to a broad, multilateral coalition to press China.

Such a grouping might well have made the case for concessions and changes in business practices that could have been portrayed as victories for fair play and well-policed globalisation. But given the Trump administration’s lashing out at nearly every one of the country’s traditional allies over trade and security, there was rather less appetite for lining up with Trump versus China.

Meanwhile, the US has promised to put tariff threats on Mexico as well in an effort to coerce or cajole Mexico to change its policies on immigration issues. As a result, the US has largely been going it alone in any head-to-head trade and economic confrontations with China. Critics charge that Trump foreign policy approaches have largely boiled down to the use of tariffs or the threat of them, rather than any other foreign-policy tool.

Given the way this trade dispute has now evolved — away from much broader issues, and into one in which the core issue appears to be a struggle over the technology related to the next generation of internet connectivity and the equipment that goes with that — it is increasingly being seen as a competition over who will own the internet in future, or how trade blocs will be divvying up that world. As The Washington Post made clear, “It may have begun as a trade war, but the US conflict with China is increasingly becoming a technology war.

President Trump’s decision to confront Beijing over policies that he says discriminate against foreign companies and distort global markets has become a battle for control of advanced communications and computing technologies.

That evolution is taking the transpacific conflict into sensitive realms of national security and human rights, making a quick settlement an ever more distant outcome. It is also putting at risk a wide array of US-China technology co-operation, including easy access to visas for researchers and venture capital funds for US start-ups — and threatening to boomerang on US companies that China might retaliate against.

The administration’s decision to blacklist one of China’s most prominent companies, Huawei Technologies, along with the likelihood that US officials will take similar action against additional Chinese targets, means the administration’s offensive against China is likely to intensify before Trump meets Chinese President Xi Jinping at the Group of 20 summit in Japan at the end of June.

The trade war really is more about technology than about trade,” said Paul Triolo, who heads Eurasia Group’s global technology policy practice. “Our sense is that the gloves are off.”

The escalating US actions are starting to inflict genuine pain on China. On Wednesday, two British telecommunications companies, Vodafone and a unit of BT Group, said they would halt the use of Huawei smartphones on their newest networks. And Arm Holdings, a major designer of mobile-phone computer chips, said it was ‘complying with all of the latest restrictions set forth by the US government’.

As the financial casualties mount, Xi shows no signs of blinking. On Wednesday, during a visit to southern China, he urged people to prepare for difficulties that he likened to a ‘new Long March’.”

Some more cynical types have argued the charges against Huawei — charges that speak to cyber-snooping, but which paradoxically could easily be resolved by the right bilateral agreement — seem to point more towards sorting out who will rule the next generation of the internet, as opposed to resolving current trade disputes.

Regardless, it now seems that even if Donald Trump and his aides continue to mouth the words of aiming for a broad trade deal (and China’s Xi Jinping and his advisers say much the same thing), the two sides are increasingly locked into their respective, obdurate stances.

As New York Times columnist Tom Friedman wrote the other day: “If I had one wish it would be that the leaders and trade negotiators of the US and China would go on a weekend retreat together — I’d suggest Singapore — with a facilitator — I’d suggest Singapore’s prime minister, Lee Hsien Loong — with no press or tweeting allowed and try to work out the basic trade and geopolitical understandings to govern their future ties.

Because if their trade tit-for-tats keep intensifying, they’re going to do something that they and the rest of the world will profoundly regret — fracture the foundations of globalisation that have contributed so much to the prosperity and relative peace the planet has enjoyed since fighting two world wars in the last century.

The US and China are the two most powerful countries and economies in the world. Their economies are also totally intertwined. If they start ripping out the telecommunications wiring, manufacturing supply chains, educational exchanges and financial investments that they’ve made in each other since the 1970s, we’ll all end up living in a less secure, less prosperous and less stable world. If you don’t think that’s a real prospect, you haven’t been paying attention.

President Trump was right to engage in some trade shock therapy with Beijing. China no longer just wants to sell the US toys and tennis shoes. It now wants to sell the same hi-tech products, like 5G telecom, robotics, electric cars and AI systems, that America specialises in. So China had to be made to bluntly understand that the US would not look the other way any more from China’s longstanding abusive trade practices, nor would it be bought off, either.

We need a level playing field — but not a new battlefield.”

Nader Mousavizadeh, co-founder of Macro Advisory Partners, a geopolitical consulting firm that advises many global companies doing business in China, observed:

A strategic reset was needed in relation to 21st-century China, but the danger is that we’re sleepwalking into a generational conflict that is neither necessary nor one that we in the West are prepared for, any more than the Chinese.”

Unfortunately, if the stances of the two nations remain as they are now with their current positions, angers, hurts, slights, and public protestations, then “getting to yes”, as negotiators like to say, with any kind of deal is going to become an increasingly hard slog.

In the end, eventually, the cynics may well be proven right that this contretemps really is all about G5 technology and beyond, and the breaking up of the world into rival internet blocs.

Not good. DM

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