How the Battle Between Trump and Xi Threatens a New Cold War

By: Bob Davis and Lingling Wei

Published: 2020

Read: 2021

Summary

A summary of the struggle over global political, economic and technological supremacy before and during the Trump administration, providing an insider’s perspective on how US-China relations have deteriorated and where they may be headed (Cold War II).

Worth Reading

Clear, detailed and straight-forward reporting.

The stakes are high and many of the political characters involved are colorful. Yet, at times, it can be challenging to make the minutia of managing diplomatic relationships compelling.

A realistic perspective and interesting contrast with “Has China Won?”

Worth Reading

1980s and 1990s: China’s rise.

• During this time, China’s GDP per capita increased about 25-fold.
  • More than 800 million people were lifted out of poverty.
• Party-led development.
  • Marketizaton and deregulation led by reformist Deng Xiaoping (1978-1989).
    • Markets liberalized, political system not liberalized.
    • Tendency towards corruption, overspending inefficiencies somewhat balanced by competition among regions.
  • Continued by Xi (2012-).
    • Experienced with markets, strong party allegiance.
    • Private businesses can prosper as long as they support the party.

1993: early engagement with China.

• Similar approaches to China: Clinton’s and Trump.
  • “Take on China”.
  • Messy and dualistic (engage or disengage).
• Similar lessons learned.
  • Tough, if not impossible, to get China to make changes opposed to its national interest (or weaken the party’s grip on power).

2000 – 2008: WTO and beyond.

• US and China seeking common ground, while reserving differences.
• China agrees to reduce / remove tariffs, subsidies and trade barriers in exchange for global market access.
• Expectation of increase China democracy.
  • US expectation that requirement to “play by Western capitalist rules” will put China on path towards more democratic governance.
    • Private property, encouragement of innovation, more choice, etc.
    • Collective security, commitment to human rights, open markets.
  • Chinese people enjoy more personal freedoms, but governance system no closer to democracy.
• US economic gains.
  • Substantial overall gains from increased trade with China (lower prices, more choice).
  • Benefits mostly went to business, not labor.
• China economic gains.
  • Decade after WTO one of the most prosperous in China’s history.
  • Becoming the world’s factory floor.
  • Party retains control, combining market and state planning elements.

2008: China to the rescue.

• China starts re-thinking views on Western economic system after 2008 GFC.
• GFC opportunity for China to extend its global influence.
  • Massive China stimulus package pulled global economy out of recession.
  • Led to high levels of debt, oversupply and inefficiencies.

2009 – 2016: American backlash.

• Free trade with China initially regarded as generally positive.
  • Many US industries benefited from access to China market.
• But some US industries were unprepared for change.
  • Impact not spread evenly around the country: specific industries, specific regions.
  • Largely blue collar industries in Appalachian region, Midwest.
• Post GFC, further increase in dissatisfaction.
  • More visible Chinese global aspirations.
  • Impact of China overproduction and exports (US job losses).
  • Pressure for US firms to transfer technology, limited IP protection.

2016: Trump and Xi.

• Trump’s China.
  • China becomes Trump target for lost manufacturing, job losses, technology poaching, trade deficit.
  • Tradewars are easy to win, blame it on previous Presidents, previous negotations.
  • No overall strategy.
  • Trump divided between wanting action on trade and pleasing Wall Street.
  • Similarly, Trump team divided between nationalists and globalists.
  • China not used to handling freewheeling, unpredictable Trump (back and forth between Trump hard line and soft touch).
• Xi’s America.
  • Familiar with power of markets and foreign investment.
    • Xi’s was Zhejiang party secretary, ran Shanghai.
  • But there are limits to private market driven growth.
    • Prior to GFC, growth mainly driven by exports and debt-fueled investments.
    • Labor costs, social unrest, high debt, environmental issues.
  • Going forward, state-owned enterprises have explicit role to play.
    • Market had failed during GFC, state had to come to the rescue.
    • Requires consolidated power and strong party.
  • The China Dream: ultimate goal and vision is similar to “American Dream”.
    • Ordinary individuals can get ahead through hard work.
    • Or: social security, stability, decent life.

2016: initial shared goals.

• Some overlap early on (2016/2017).
  • Trump needs Xi for N-Korea.
  • Xi wants to stabilize ties quickly so he can focus on domestic power consolidation, also needs a strong yuan, continued growth.

2017: start of conflict.

• Series of disappointing trade talks.
• US starts investigating use of Section 301 to start imposing tariffs.

2018: start of trade war.

• China’s unsuccessful offer, early 2018.
  • China: reduced auto tariffs, free trade negotiations, etc.
  • US: looking for immediate deficit reduction, resolve tech and IP issues.
• US’s unsuccessful attempt, June 2018.
  • Driven by globalists inside Trump team.
    • Argue trade deficit isn’t necessarily a bad thing.
    • Point out that tariffs also hurt US producers and consumers.
    • Move discussion to structural changes (market access, IP protection).
      • “It’s not just about buying more soybeans.”.
    • “Buying mission” to China by globalists fails.
  • China prepares counter-measures for US tariffs.
    • Lowering tariffs for EU, Japan, others, but not US.
    • Multilateral trade deals (investment agreement with the EU).
    • Brush up international image.
• Start of trade war, June 2018.
  • US initiates 25% tariffs on USD 50 billion of goods.
  • China replies with the same.
  • US believes China will run out of bullets first (USD 505b of China imports vs USD 130b of US imports.)
• Both sides drifting apart, mid 2018.
  • US:
    • Discouraged US business community on board with Trump policies.
      • Worries about forced tech transfers, (through JV structures, fake panel reviews, rigged courts) and subsidies to state-owned companies.
      • Lack of access to cloud market.
    • Broad bilateral shift in political views on China: requirement for more open markets, frustration with lack of progress.
  • China:
    • Tech transfer through JVs as legitimate quid pro quo for market access.
      • US firms enter into JV arrangements on voluntary basis.
    • Still relying on US business community for political support, which is not forthcoming.
    • More fearful of market forces and associated volatility.
    • Government should play larger and stabilizing role.
• Efforts to resume talks, late 2018.
  • Trade war affects global economy, stock markets.
    • Impact of tariffs felt both in the US (higher prices) and China (lower exports).
    • Pushing both sides to subsidies (US to farmers, China to export sector).

2019: partial truce.

• Diplomatic efforts fail, early 2019.
  • Both sides act.
    • US push for deal with elections on the horizon.
    • China doesn’t like the terms and pushed back.
    • US increases tariffs.
    • China retaliates.
  • Series of threats, counter threats, mistrust and miscalculations.
    • Rather than working together, on a path of suspicion and separation.
  • US policy towards China under Trump schizophrenic.
    • Change China’s objectionable policies (market access, IP, etc.).
    • Don’t want to upset global trade, world market.
  • China not adjusting to changing realities.
    • Deteriorating US sentiment (massive job losses, instability).
    • No support from US businesses (unhappy about technology transfers, IP, etc.).
  • Derailment rather than decoupling.
    • US and China are too intertwined for a decoupling.
    • But both countries’ growth can be derailed.
      • China growth affected due to less technology transfer.
      • US growth affected due to more limited access to China market.
  • Perception problems.
    • US not seeing China’s ascent as a capitalistic achievement.
    • China not appreciating US’s support (access to WTO, etc.)
  • Both sides hurt.
    • Causing general reduction of global GDP (0.8%).
    • US: slow-down in investments, relocation of global supply chains.
    • China: loss of export jobs, diminished foreign investment / access to tech.
• Truce, December 2019.
  • Partial settlement (Phase 1 deal).
    • Agreement on IP, FX policies, increase Chinese agricultural purchasing.
    • Save tougher issues (subsidies, cloud, SOEs) for later talks.
    • Tougher issues more complex and less of a worry to the general public.

Going forward: Cold War II.

• Further de-coupling, especially in tech.
  • Trump’s trade politics reinforced China’s plans to make it less dependent on US companies and US technology.
• Increasingly antagonistic attitudes.
  • Majority of US people hold unfavorable view of China.
• Ongoing “clash” of political systems, unclear which one will prevail.
  • West: private enterprise and democracy is most efficient and socially acceptable form of production.
  • China: state-led economic development, bureaucratic direction, competition among provinces.
• Lower expectations that engagement with China leads to political liberalization.
  • Few fundamental changes in China’s economic system.
  • Continued state-support for Chinese SOEs, etc.
• “Cold War II” may provide impetus to unify fractious US.
  • Having a “common enemy”.
• US: economic impact of ongoing tariffs mostly negative.
  • US trade deficit (with rest of world) has not declined.
  • Burden of tariffs mostly borne by US consumer.
  • Income from tariffs spent as subsidies (US farmers).
• China: may face challenges of increasing levels of state control.
  • Stalling productivity growth.
  • Overproduction, waste, corruption, excessive debt.
• US approach going forward may rely more heavily on working with allies.
  • Present united front against China.
  • May still include (threat of) tariffs.