Two weeks ago, Trump announced tariffs on another $200bn worth of imports from China. The announcement was met with protests from the Chinese, as well as big business in the US. China responded with tariffs on another $60bn of imports from the US.
Trump is one of the most narrow-minded and isolationist presidents the US has had for a long time. His capacity to understand international trade and the world economy is limited to that of a construction magnate. He is only interested in driving hard bargains. He and his supporters think the US is hard done by and has been taken advantage of. Trump’s solution (to threaten and bluff until he gets his way) is like a businessman pressing for a better deal from a competitor.
This completely overturns all the norms of how to conduct international diplomacy. It also threatens US domination – a world order where the US calls the shots but where all the main imperialist powers get a chance to benefit. If the US is now attempting to use its military and economic strength to bully other powers into signing less-favourable trade agreements, it undermines the whole of the post-WWII order and world trade (also known as globalisation). This is why the North American, Japanese and European bourgeois have been strenuously opposing Trump’s approach. It could have disastrous long-term consequences for trade on a global scale.
It seems that for the moment, this conflict has abated. A temporary agreement was reached between the US, EU and Canada, while Mexico and the US have just negotiated a new NAFTA (rebranded USMCA). Trump is also in discussions with the Japanese. Yet, even if agreements are reached, long-term damage has been done to confidence and trust in the US commitment to tariff-free trade. The various open trade disputes over the past several months have led IMF chief Christine Lagarde to warn that trade barriers are “hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise”.
Focus on China
The agreement with Canada has raised hopes among the US ruling class that Trump will return to TPP negotiations, from which Trump pulled out. Many of the clauses in the new USMCA are very similar to those in the TPP. Wall Street Journal columnist, Aaron back, put it as follows:
“The U.S. should now follow this template with its Asia-Pacific trading partners, to revive the dream of building a new, rules-based trading bloc to counter China.”
Indeed, the focus in world trade and international relations has shifted firmly to the trade war between the US and China. Unlike the various conflicts Trump started with US allies, he is cheered on in his dispute with China by the US bourgeois.
To be more precise, there are two separate conflicts that are being fought at the same time. Trump is attempting to close the massive gap between what the US imports from China and what China imports from the US. This conflict is difficult to resolve, particularly in the short run, but the Chinese government wouldn’t necessarily be completely opposed to some measures in that direction. In fact, it lies generally along the road China intends to travel anyway: of reducing its industry’s reliance on exports.
Moving up the food chain
Chinese efforts to develop more high-tech sectors of industry is the more difficult issue to resolve. The US – as well as Europe and Japan – are accusing China of stealing technology and forcing companies to transfer technology to Chinese companies. This is not a new development. Every country that has developed technologically has done so on the back of technology from other countries. Why reinvent the wheel? The Chinese might do so using methods that are frowned upon by others, but fundamentally they have all done the same thing at some point or another.
The question isn’t really how China is doing it but that it is doing it. Chinese production of electronics uses semi-skilled labour and parts produced in other countries. Most components, as well as machinery, are sourced from Taiwan, South Korea, Japan, the US and even Europe. The result is that although iPhones are nominally manufactured in China, in reality only a very small part of the production process is located there.
According to a study by the World Intellectual Property Organisation, only 0.3 percent of the iPhone 7’s components (by value) are produced in China, compared to 29 percent in the US and 29 percent in Taiwan. For the Samsung Galaxy S7, the figures are 45 percent of component value from US and 29 percent from South Korea. The Chinese Huawei P9 by contrast included 32 percent of Chinese components. Given that the final assembly (in China) only represents 1 percent of total value contained in the product, and components 10 percent, this leaves the US and Taiwanese manufacturing with a contribution of 3 percent each of the total price of the iPhone, but obviously much higher for the P9.
What China is attempting to do is enter higher up the supply chain and capture the markets for the high-tech components used in electronics. At the moment Chinese companies and production facilities are incapable of delivering the quality that other countries can. For this reason, semiconductors constitute one of the key parts of the ‘Made in China 2025’ plan, which puts China in direct competition with the US and its companies. This is something the US, the EU and Japan are determined to stop, or at the very least slow down.
Competing with the US
The Wall Street Journal wrote the following in an editorial statement:
“If China were a small country, the U.S. could afford to absorb surplus goods and let American consumers benefit. China’s effort to leapfrog into the ranks of developed economies by forcing companies to relocate their most valuable processes and pervert the law of comparative advantage will ultimately fail.
“But when the world’s second-largest economy goes rogue, the collateral damage is huge and has undermined political support in the U.S. and the West for free trade. More ominously, China’s mercantilism is part of a larger Xi Jinping strategy to establish a new military and commercial hegemony in Asia.”
Basically, the WSJ is objecting to China becoming another power to compete with existing ones. They’d much prefer if China stuck to its traditional role of assembly and manufacture of more low-tech goods.
The same sentiment is echoed in the Financial Times:
“Unlike Mr Trump’s complaints against other economies, including the EU and the US’s Nafta partners, Mexico and Canada, much of his criticism against Beijing is warranted. China has swerved significantly off the glide path to becoming a market economy that the rest of the membership of the World Trade Organization believed the country would follow after it joined the body in 2001.
“The ‘Made in China 2025’ initiative, which aims to establish a global lead in high-technology sectors, has given central and local governments and state-owned enterprises even more licence to intervene. They are distorting markets with protectionist regulation and stealing technology from foreign companies operating in the country.”
The FT and the WSJ claim it’s unfair competition, but all countries (except perhaps England and Holland) at various times used significant state-directed investment in order to develop their industries. They also used tariffs to protect themselves against more competitive, established powers.
China is attempting to follow the same path, but it’s doubtful whether it will be successful. At the beginning of the crisis, all the European and US economists were calling for precisely this. They were arguing that China must raise its wages, it must develop more of an internal market, rely less on exports etc. This is fully in line with the plans of the Chinese government, but it has certain consequences.
The Chinese regime has emerged from the 2000s with a profound sense of confidence in its own system, but it is tremendously worried about labour unrest. The recent decades of economic development have created a massive proletariat, concentrated in enormous industrial centres. Some of these urban centres have a GDP per capita almost as high as that of Spain (for example, Guangzhou and Shenzhen), but with wage levels significantly lower ($13,000 versus $18,000). The state has already intervened to push wages higher but it risks removing one of the major factors pushing Chinese economic development to this point: a cheap, but comparatively well-educated, labour force.
In order to raise wages, China has to produce products that add more value, in order to remain competitive. They have to produce more high-tech products, requiring more skilled workers. These are the only means by which they will be able to move from low wages and low labour productivity to higher wages and higher productivity.
The main problem standing in China’s way is the economic crisis. The Chinese economy is slowing its rate of development from 14 percent in 2007 to 6.9 percent in 2017. The vast credit binge that the government has promoted has almost doubled total debt (private and government) in the same 10 years, from 145 percent of GDP to 256 percent. Now analysts are speculating on a further loosening of credit in response to the tariffs. This is unsustainable. Trump and the US bourgeois are hoping that the economic difficulties that China is undergoing will make them more susceptible to pressure. This remains to be seen.
If China were to accept putting a limit on its development of new technologies, it risks creating an economic, social and political crisis on a level that would dwarf Tiananmen. The heavy-handed way in which it reacted to the Uyghur protests, as well as clampdown on labour movement activists, gives an indication of a regime that is very nervous about the risk of protests becoming generalised.
The US bourgeois, of course, is in precisely the same predicament. The support for Bernie Sanders and the election of Trump were clear indications that the workers in the US have had enough. The US ruling class is, therefore, attempting to cling on to those markets where it, along with its allies, is currently dominating. It is not prepared, in these conditions, to allow the development of a rival on the scale of China. This is why both Democrats and Republicans, as well as the European bourgeois, are uniting behind Trump on this question.
A threat to national security
It’s not just a question of pure economics either. On multiple occasions, the US has raised concerns about the Chinese security services using Chinese-produced electronics to spy on the US. Both Huawei and ZTE have been banned from selling certain types of telecom equipment to the US for that reason. Of course, the US know all about this, as they have been spying on everyone else over the past 20-30 years using precisely such methods. So, the US is concerned (and they are probably correct), that another nation will develop the kind of spying capabilities that it currently possesses.
Similarly, Chinese military expansion is threatening US domination of the seas. It’s not by accident that renewed trade tension has caused new friction over the South China Sea, with the US provocatively sailing close to new Chinese military installations. The US calls them “freedom of navigation” missions, which means the freedom of the US Navy to patrol any sea it wishes.
The new aircraft carrier that China has launched, as well as new missiles, are putting a big question mark over US domination of this crucial trade route. It raises the prospect of China dominating this sea, which carries 1/3 of global maritime trade. Developing more advanced consumer technology would also help China produce the more sophisticated equipment required for modern aircraft carriers and missiles.
No end in sight
The relationship between the US and China has been deteriorating for some time. Obama attempted to extricate himself from the Middle East in order to “pivot to East Asia”. He began a series of trade negotiations with allies in the Pacific aimed at isolating China and strengthening trade with the other countries in the region. The Trans-Pacific Partnership was a crucial part of that.
Trump came into his presidency like a bull in a china shop and wrecked a lot of the Obama administration’s diplomatic plans in the region. He broke off the TPP and imposed tariffs on a number of key allies in the region. At first, he also appeared to only take an interest in the question of the trade deficit, which is a secondary consideration from the standpoint of the US ruling class. Over the past 3-4 months, he has shifted to align himself more clearly with the rest of the US establishment. The NAFTA 2.0 deal was a clear indication of that. This means that the US ruling class has found at least a temporary unity of purpose.
This strengthens Trump’s hand. He can now face the Chinese with a Congress more-or-less united behind him. This means that it is unlikely he will be forced to back down from domestic pressure. At the same time, what the US is proposing is impossible for the Chinese to accept. They will not abandon their attempts to move into new technologies, neither will they accept large-scale privatisation of key State-Owned Enterprises.
Zhang Xiangchen, China’s representative to the WTO said in July that China is a “socialist market economy” and that any speculation about China changing its path was “wishful thinking”. When he says “socialist”, of course, he merely refers to state influence and direction: a necessary prerequisite for China’s economic development. The key point that Zhang makes is that China will not abandon its state direction of, and intervention in, the economy.
The seriousness of the conflict has escalated to the point that there is open speculation about the US attempting to break away China from its supply chains, creating the possibility of companies operating multiple supply chains: one for the US and one for the rest of the world.
A new normal
Some kind of agreement is not excluded in the short run. Apparently, President Trump is hoping to discuss with President Xi in November at the G20 summit. This agreement would have a temporary character. The conflict between China and the US will only intensify over the coming period, particularly when the next recession comes.
As far as trade wars are concerned, the genie is clearly out of the bottle. For a whole period, trade wars were excluded from the arsenal of weapons in international conflict. Trump has brought them back to the table. Saudi Arabia blocked trade with Canada in a recent conflict over a tweet by the Canadian Foreign Minister. Trump attempted to force Erdogan to release a US pastor by sinking the Turkish economy.
As we reach the end of the first decade after the crisis, protectionism is rearing its head very prominently. For the first 10 years, the bourgeoisie fought hard to stop it coming back. One of the reasons that the 1930s crisis became a recession was precisely a turn to protectionism. No one knows exactly what consequences a reversal of the past decades of very low tariffs on trade will have on the world economy. For many years the bourgeois insisted it would be a disaster. Now they are hoping it might not be as bad as they feared.
With the prospect of a new recession, they ought to be worried. Any lingering tensions of this nature (when there is supposed to be a recovery) are bound to explode into an even bigger conflict when the next recession hits. There is a new normal in international relations, and it will only serve to intensify future economic crises.