The trade war between the U.S. and China has escalated to new heights, with both sides preparing additional tariff increases and President Trump ordering U.S. companies to move operations outside of China (even though his words carry no legislative weight). Both sides seem to be torn on how to best handle the trade disputes from here, with hawks on each side wanting to “stay the course” and others wanting to reach an agreement before the global economy suffers the consequences.
Timeline of events in the recent trade war escalations:
- August 13, 2019: The U.S. delays a portion of tariffs on China, set to take effect September 1 until December 15. The administration says the move was meant to avoid disruptions to the holiday shopping season in the U.S., a rare acknowledgment that tariffs can raise prices.
- August 19, 2019: The U.S. Department of Commerce said it would grant a temporary reprieve to Huawei, giving companies an extra 90 days to find an alternative to the telecommunications giant.
- August 23, 2019: China prepares retaliatory tariffs on $75 billion of U.S. products and says it will reinstate duties on cars. The escalations are set to go into place on the same dates as the U.S. side.
- August 23, 2019: President Trump vows to hit back against those countermeasures, announcing the U.S. will raise the tariff rates on Chinese products by about 5 percent. Financial markets tumble sharply as the president also orders private U.S. companies to leave China, sowing confusion even though the command carries no legislative weight.
- August 24, 2019: Message from the Chinese Ministry of Commerce in response to President Trump’s remarks over the weekend: “On August 24, the U.S. announced that it would raise the tax rate on the tariffs of about $550 billion on Chinese exports to the United States. China is firmly opposed to this. This unilateral and bullying trade protectionism and extreme pressures violate the consensus of the heads of state of China and the United States, violate the principle of mutual respect, equality and mutual benefit, seriously undermine the multilateral trading system and the normal international trade order, and will surely suffer from it. The Chinese side strongly urges the US side not to misjudge the situation, not to underestimate the determination of the Chinese people, and immediately stop the wrong approach, otherwise all consequences will be borne by the U.S.”
- August 26, 2019: President Trump moves to cast a positive light on trade negotiations as financial markets open. He says Chinese officials called over the weekend and want to make a deal but declines to elaborate. China disputes that claim. The Chinese Foreign Ministry spokesman Geng Shuang said he was “not aware” of the phone calls President Trump had mentioned on Monday. The Global Times, an organ of the Chinese Communist Party, also questioned the newfound optimism.”Based on what I know, Chinese and U.S. top negotiators didn’t hold phone talks in recent days,” Global Times editor Hu Xijin wrote in a tweet. “The two sides have been keeping contact at technical level, it doesn’t have significance that President Trump suggested. China didn’t change its position. China won’t cave to U.S. pressure.”
- August 29, 2019: China confirmed that it was open to a face-to-face meeting and Commerce Ministry spokesman Gao Feng told reporters in Beijing, “China has ample means for retaliation, but we think the question that should be discussed now is about removing the $550 billion of new tariffs to prevent escalation of the trade war… The most important thing is to create the necessary conditions for continuing negotiations. The most important thing is to create the necessary conditions for continuing negotiations.”
The risk of losing face is not taken lightly
For most, the recent events have been hard to follow, with both sides seeming to escalate the trade war rhetoric at a blistering pace. But perhaps in order to understand the two opposing sides, it is best to take a step back and look at the underlying, cultural foundations of each country’s perspective.
The Chinese have a term known as “Guanxi” that is used to describe relation-based networks that play an important role in shaping interpersonal and political relations. For the Chinese, this term best defines the fundamental dynamic in personalized social networks of power and is a crucial system of beliefs in Chinese culture. Guanxi plays a fundamental role within the Confucian doctrine, which sees the individual as part of a community and a set of family, hierarchical and friendly relationships. In particular, there is a focus on tacit mutual commitments, reciprocity, and trust, which are the grounds of guanxi and guanxi networks.
Culturally, we are dealing with two differing fundamental ideologies; – China in the East, with a society built upon ideologies such as Guanxi whichthat are based on Collectivism, with a top-down hierarchical structure. And the U.S. in the West, with a deep sense of individualism based on democracy with social and political freedoms. While liberal economics has tried very hard to penetrate the foundations of Chinese society, the Communist government still has a unique way of doing business. President Trump’s approach to the trade war fundamentally opposes these Chinese norms, where “losing face” is a very real risk and one that is not to be taken lightly.
Many economists and politicians view the U.S.-China trade war as a lose-lose situation with the way it is currently being managed. The U.S. was quick to push manufacturing to China and take advantage of its massive, and cheap, labor force. Did U.S. companies expect China to remain the factory of the world indefinitely at the expense of its people, environment, and culture? Did we expect that China would not eventually learn how to re-engineer technologies and products that had taken the U.S. decades to develop? It was very convenient and profitable for multinational corporations to manufacture in a country where unions are not allowed, livable wages are not always paid, and basic “human rights” are not guaranteed, but now that they have “learned the ropes” of these companies’ business practices and are building infrastructure at a rate that makes the Industrial Revolution look like a small “blip on the radar,” in their minds the Trump administration is a bit quick to accuse them of cheating. The Chinese see some extreme hypocrisy in these accusations when they are coming from the country that has built a vast, interconnected, invisible empire by writing international law to favor its political theories and business practices. China sees it as “evening the playing field.”
With the Chinese government’s ability to control the flow of information via state-controlled media, criticizing Xi Jinping (who has recently rewritten constitutional law to make himself Chairman/President for life) in public via Twitter and haphazardly via U.S. media outlets enables the Chinese Communist Party to easily control the rhetoric that its people see and hear on a daily basis. In the U.S., the media can portray President Trump in whatever light they choose, and can openly criticize his actions, but in China, where people do not enjoy the same freedom of speech, openly criticizing President Xi Jinping can quickly have you in a precarious legal predicament (to put it lightly).
In my opinion, this trade war is more than just a dispute over China “cheating” and gaining unfair advantages with currency manipulation and infringements on U.S. companies’ intellectual property. China’s meteoric rise to the world’s second-largest economy (or first in purchasing power parity), has the U.S. concerned about its status as the world’s lone superpower; a role it has played for the better part of the last quarter-century.
This is their moment
On the other side, the Chinese appear to have been waiting for their moment, and for the world to finally recognize it as a global superpower. For the last 20 years, China has endured enjoyed economic growth never before seen on the world stage and has manufactured a large portion of the world’s consumer and industrial goods; meanwhile bringing around 1 billion of its people out of poverty. It now has technological sophistication that rivals the world’s top companies and claims to lead the world in artificial intelligence, super-computing and robotics.
The easy answer is that nobody wins in a trade war because both sides have created an interdependency on one another that is not easily reversed without the risk of major economic repercussions. Both economies have already felt the pressures of the tariffs, and both are on the brink of driving the global economy into a deep recession (if it is not already irreversible at this point). It can be said that free trade has proven to be a mutually -beneficial economic ideology and has lifted millions out of poverty, but one could argue that in order for free trade to exist, a country must have certain guaranteed freedoms and a democratic electoral process. With the Chinese Communist Party’s tight control and massive technologically -adept surveillance state, it seems unlikely for China to adopt this type of political process.
China also knows that the U.S. has the world’s reserve currency, has military supremacy, and dominates international organizations such as the United Nations, World Bank, and the International Monetary Fund. But, the U.S.’ weakness may lie in its political process. With the country politically divided over politics, a potential new president in 2020 (who will be at an extreme disadvantage from the get-go), and with the last electoral process having its credibility jeopardized by potential Russian interference, China is likely hoping for the U.S. to ultimately to defeat itself through an internal struggle.
As if the recent escalations between the U.S. and China were not enough to frighten the financial markets, the closely -watched yield curve inverted this month for the first time since before the global financial crisis in 2007, setting off alarm among investors who viewed it as a sign that a U.S. recession could be ahead.