US-China Trade Deal Unravels. What Next?

The world community can heave a sigh of relief that there isn’t going to be a new cold war between the United States and China. A Cold War needs two blocs: while Washington is unable to cobble together a bloc, Beijing is disinterested in one, lacking a bloc mentality. But isolating China in the international community is easier said than done, as the US-led globalisation is replaced by a China-led globalisation.

Nor is there any prospect of a Sino-American hot war. What is unfolding instead is a standoff between the Trump administration and Beijing in a geopolitical void whose trajectory will now largely depend on the outcome of the presidential election in the US in November.

The world community at large is not party to this standoff except for just two ‘Indo-Pacific’ maverick exceptions that have got on to the US bandwagon — Australia and India.

Asia itself remains unscathed. Japan has taken care not to provoke China. (See my blog Japan-US alliance gets less intimate.) The ASEAN countries refuse to take sides between the Trump administration and China.In fact, the ASEAN has just ensured that Regional Comprehensive Economic Partnership agreement, which involves both China and Japan will be signed within this year, radically transforming the regional integration of the Asia-Pacific.

Europe too stands detached and has begun working on the terms of engagement with China for a more equal and balanced partnership attuned to the compelling realities of the post-Covid-19 era in which China stands apart as the least wounded economy.

Phobias at centrestage

In a nutshell, all this began with President Donald Trump’s decision to raise a China bogey as one of his main campaign planks in the US presidential election in November.

Trump calculated that it would be a smart strategy where the winner takes it all. On the one hand, he assumed that the ‘Phase 1’ trade deal of January would oblige China to buy over $200 billion worth American products including massive quantities of agricultural products, which would inevitably show up as his foreign policy success.

On the other hand, Trump also saw uses in projecting himself as the ‘toughest’ American president ever on China — a self-portrayal that he plays up to impress the domestic gallery and to differentiate his candidacy from his presumed main opponent John Biden’s, whom Trump would hunt down as incapable of standing up to an ‘assertive’ China.

Over and above, by conjuring up the ‘Wuhan virus’, Trump hoped to distract attention from his incompetence and dismal failure in addressing the challenge of the Covid-19 pandemic that is conceivably surging as the likely nemesis of his presidential campaign.

Arguably, Beijing might not have minded being targeted as a punch bag for Trump to look ‘strong’ as a politician in an election year.But the Trump administration officials unwisely proceeded to create synergy out of Trump’s game plan also on the diplomatic plane with a view to lay the foundations of a future cold-war like strategy toward China under US leadership.

This entire architecture was built on a catastrophic misreading that the Covid-19 pandemic has lethally weakened China, derailed its economic growth which in turn is engendering social disaffection and alienating the public from the Chinese Communist Party, and posing grave unprecedented challenges to the leadership of Xi Jinping.

That is to say, in the US narrative, the present moment presented itself as a rare opportunity to discredit and isolate China and destroy its prospects as a rising superpower rivalling America. Thus, US diplomacy under the stewardship of Secretary of State Mike Pompeo (a former sergeant in the US Army who replaced James Mattis, a decorated general with a cautious mind) shifted gear with an anti-China agenda as its main focus.

During the past couple of years as Trump launched the US-China tariff war, Pompeo went into an overdrive with an obsessive Churchillian ‘fight them on the beaches’ diplomatic agenda — ranging on the one hand from the incitement of unrest in Hong Kong, the tirade on alleged suppression of Uighur Muslims, the robust attempts to create an alliance system with India and Australia to counter China, the increasingly abrasive US military posturing in the South China Sea, the retraction from the sacrosanct ‘One-China’ policy commitments of 1972, and a global campaign of vilification against Huawei and China’s 5G technology to a series of calibrated moves on the other hand to roll back the broad sweep of US-China bilateral relationship (including sanctions and visa curbs lately), within an eventual long-term policy outlook to ‘decouple’ the US-China relations.

China’s approach to Pompeo’s road map has been largely reactive. China avoided provoking the US or acting against its core interests regionally or globally. China’s ‘countermoves’ included, principally:

• the strengthening of China-Russia entente;
• overtures to the European Union member countries (especially, Germany and France) for a mutually beneficial partnership based on mutual respect and trust;
• creation of new supply chains to prepare for an eventuality of ‘decoupling’ from the US;
• focus on innovation and indigenous development of technology;
• calming down tensions with Japan;
• ‘regionalisation’ of its globalisation policies (ASEAN has replaced the US as China’s No. 1 trading partner);
• using BRI to spur China-led globalisation (including the mapping of a Health Silk Road lately to position itself as a global health leader in the COVID-19 pandemic); and, of course,
• forcefully rejecting the US interference in Hong Kong or in China’s internal affairs elsewhere and countering the perceived threats to its ‘territorial sovereignty’.

Running a fine comb through the Chinese moves, it is not possible to see any of them as ‘anti-American’.

Myths explode

However, things began to change in the most recent weeks and months when Pompeo’s roadshows began increasingly frequent targeting and vilifying the Chinese Communist Party (CCP), caricaturing the venerable party founded by Mao a century ago in 1921 as the fountainhead of all evil on earth.

Conceivably, the American diplomacy got carried away by the (false) notion that the social base of the CCP has been dramatically eroded by the coronavirus and Xi Jinping’s hold on power has become very shaky, and that a historic opportunity is at hand to finish off the legacy of the Chinese revolution similar to what the US brilliantly exploited in the 1980s to weaken and destroy the former Soviet Union and bury the Bolshevik legacy.

Indeed, the prevailing narrative among America’s China experts (and among analysts in India) is that Beijing is under such immense pressure due to the disarray in its internal affairs that the leadership is forced to ‘flex muscles’ abroad in a contrived fashion to dissimulate strength and political stability at home.

However, paradoxically, the empirical data shows otherwise — that it is Trump who has come under pressure to project himself in the current election year as the ‘strongman’ capable of decisive leadership, stemming out of the polarisation and near civil war conditions in the US political economy — and fuelled by the Covid-19 pandemic, deep economic recession, racial unrest, and the two-party system locked in mortal political combat, cleaving the nation in the middle into two distinct halves.

Joe Biden has increased his lead to 19 points per latest polls, which is daunting. If the pandemic becomes more acute in the US in the coming weeks and months ahead, which seems a high probability, Trump’s political judgment will come under severe scrutiny — in particular, his fateful decision to reopen the economy even before flattening the Covid-19 ‘curve’.

Unsurprisingly, China’s patience has worn thin and it is hitting back at Trump where it hurts — by excusing itself from the obligation to buy hundreds of billions of American products unless Trump retracted from his hostile policies toward Beijing.

China is retaliating, knowing fully well that the farm lobby is an important segment of Trump’s support base. It is a deadly body blow. (Trump is trailing Biden in the crucial state of Wisconsin.)

Meanwhile, it is also beginning to emerge from recently released trade data that the balance sheet of Trump’s much trumpeted ‘trade war’ with China shows that the results are largely the opposite of what the White House has been counting on.

Ironically, as two Carnegie scholars on China pointed out last week, “Tariffs have produced no real improvement in the United States’ underlying trade balance, while China’s trade surplus has increased and its export markets have become more diversified.”

The data shows that “Trump’s reduction of the bilateral trade deficit with China was quite costly, with a significant contraction in economic activity and an inadvertent increase in China’s overall trade surplus.”

While US imports from China fell by $87.3 billion year-on-year, it largely manifests as higher prices for retailers and households instead of hurting China’s overall trade surplus or triggering a ‘blue-collar’ boom in America’s manufacturing industry, which Trump had expected to happen.

China has also effectively compensated for the drop in exports to the US by ramping up sales to nearly everyone else. Chinese exports to ASEAN alone went up by $38.5 billion. China’s retaliatory tariffs against American products brought down its import bill by $33 billion.

It transpires now that despite the trade war with America, China ended up in 2019 with an overall trade balance exceeding $60 billion. And this is despite the fact that, as the Carnegie study puts it,

“China’s dominance in global manufacturing has been gradually waning since its peak in 2015, due to structural shifts in the Chinese economy, such as its continued graduation from low-skill manufacturing such as clothing and textiles, the decline of China’s role as a location for final assembly, and rebalancing toward consumption and services, which are less trade-intensive than capital investment.”

Clearly, what the above trends underscore is that the trade war with the US and the pandemic-induced supply chain shifts will only further accelerate the trends that Beijing has set for itself as its economic strategy as a middle income country.

In sum, Trump’s goal of reducing trade deficits and weakening China’s economic prospects is yet unrealised. Judging from investment, consumption, and price levels, China’s economy has not been significantly affected by the crackdown on trade and science and technology from the US.

Whatever ailments Chinese economy suffers today are not due to Trump, but are, as a Chinese scholar wrote recently, “caused by the contradiction between domestic supply and demand, the financial bubble caused by land financing, which has not been fully digested by society, and the bumpy economic cycle between the long-repeated Keynesian aggregate demand stimulus and the excessive issuance of M2 (per monetary school theory).”

War is not a option

Suffice to say, Beijing had made its calculations while drawing the red line on the sand in Hawaii at the meeting on June 17 between the powerful Chinese politburo member and top diplomat Yang Jiechi and the US Secretary of State Mike Pompeo. (See my blog China warns Trump not to risk trade deal.)

The heart of the matter is that since there is no great disparity in the economic strength between the Chinese and American economies today, war against China is no longer an option for Washington.All of Trump’s trade war, the war of science and technology or the war of ideology cannot make a difference to the power gap between China and the US, which is narrowing at an accelerated pace.

On the contrary, the pandemic outbreak has struck heavy losses on the US economy as evident from the sight of the American stock markets successively triggering their circuit-breaker mechanisms in the period since March. Also, the cumulative impact of the extremely high unemployment rate and the death of over 100000 Americans on social stability is going to be very lethal.

On the geopolitical plane, except for India and Australia, there are no takers for Trump’s strategy to suppress China. What isolates the US most is that the European Union countries are ploughing an independent furrow toward China to advance their distinct interests, with emphasis on Europe’s cooperation and partnership with China despite the vigorous economic competition between the two sides.

The EU insists that engaging and operating with China is“both an opportunity and a necessity”while robust efforts will continue to rectify China’s unfair economic practices. The point is, Europe is heavily dependent on China in trade and investment and cannot and will not share Washington’s obsessive focus on geopolitics. Nor will Europe participate in any US military adventures against China. Even in their rhetoric, European leaders eschew any attack on China in a confrontationist, unyielding, punitive idiom.Most important, Europeans are deeply distrustful of the Trump administration and regard it as unreliable and unpredictable.

Suffice to say, the Trump administration’s current policy of suppressing China and effectively contain the further development of that country’s comprehensive national strength has no future. Trump feels embittered to be seen as a ‘loser’, a role that he despises. The bitterness shows.It has become personal lately, as seen in the extraordinary outburst at the White House this week bracketing Xi Jinping with Joseph Stalin as a tyrant and an incorrigible Marxist-Leninist, the ultimate pejoratives in Trump’s political vocabulary.

Having said that, polemics apart, Trump is also a realist who would know that his administration’s suppression policy against China in his first term has not only failed to bring the desired dividends to boost his re-election prospects but also fell short of inflicting any serious damages on the lifeline of the Chinese economy.If Trump wins a second term, this realisation may prompt him to adjust his China policy. A new start is possible with a new foreign-policy team on board and with electoral compulsions no longer requiring him to do grandstanding. If that happens, China will respond to any overtures.

Indeed, a radical turnaround is almost certain if Biden wins the presidency. Biden’s China policy can be expected to be rational and pragmatic, although he was one of the choreographers of the ‘rebalance’ strategy in Asia during the Barack Obama presidency.Biden and the Democrats in general have a relatively more positive and open attitude to navigating the problematic period ahead with China rapidly narrowing its power gap with the US.

Channels of dialogue will reappear, replacing the contrived posturing of the Trump presidency which demonises China as an existential threat.In a Biden presidency, the overall climate of US-China relations can only improve — although the fierce competition between the US and China will continue in the high-tech fields and in setting global standards, as the world economy transits an era of accelerated technological progress and new innovations whose rapid application and diffusion causing abrupt changes in society.

The bottom line is that like the European countries, Biden too will face a host of domestic issues — such as climate change, racial issues, social justice, domestic economic recovery after the pandemic, etc, which create a matrix in which cooperation and coordination with Beijing will become a strategic necessity and the current American economic and technological suppression of China is bound to be tempered by the sobering effect of the prioritisation of dealing with domestic issues in a multilateral international milieu.