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Trade war fallout

Nov 26,2018
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Michael Green
The author is senior vice president for Asia and Japan chair at the Center for Strategic and International Studies and associate professor at Georgetown University in Washington, DC.

The Korean Peninsula’s diplomacy has always been vexed by great powers’ rivalry, and U.S.-China rivalry was on full display at the recent Asia Pacific Economic Cooperation (APEC) summit in Papua New Guinea. For three decades the United States and China were able to set aside geopolitical differences and work together for consensus at APEC — but not this year. U.S. Vice President Mike Pence blasted China for its predatory economic behavior and Chinese President Xi Jinping clearly meant the United States when he warned against “arrogance and prejudice.”

For the first time in APEC’s history, the leaders were unable to agree on a joint statement on economic cooperation. Meanwhile, the U.S. side has imposed 10 percent tariffs on $250 billion of Chinese imports and threatened to increase this to 25 percent on Jan. 1 if Beijing does not dramatically change its current economic policies. The two sides seem to be careening towards a major trade war.

What went wrong? One major problem was that Xi and his advisors clearly underestimated the blowback they were causing with mercantilist policies such as the boycott of Korean companies over the Thaad deployment or the “Made in China 2025” strategy to dominate high technology. Beijing also mistakenly assumed it could circumvent criticism by appealing to “friends of China,” such as President Trump’s naïve son-in-law Jared Kushner or more seasoned veterans of U.S.-China relations like former Treasury Secretary Hank Paulson.

Paulson recently warned in a speech in Singapore that China’s economic policies were creating an “iron curtain” — tough words that should have been a warning to Beijing about how low China’s credibility had fallen in the West. Now the question is whether Xi can find any way to backtrack without losing face.
Washington is also a mess. On the one hand, the administration’s tough stance has broad support in Congress and even in U.S. industry, and has created real leverage for a negotiated way forward with China. On the other hand, nobody in the administration can agree on how they would define success. One group around Treasury Secretary Steve Mnuchin would be satisfied with Chinese measures at market-opening, such as removing equity caps on autos or finance. Another group around U.S. Trade Representative Robert Lighthizer is urging U.S. companies to get out of the Chinese market and to shift their production to places like Vietnam, if not the United States itself.

The most extreme partisan of this second group is Peter Navarro, who would like to see complete decoupling of the U.S. and Chinese economies and who speaks in economic nationalist terms that clearly appeal to Donald Trump’s political base. Others in the Pentagon are legitimately worried about Chinese efforts to dominate telecommunications infrastructure with 5G networks and artificial intelligence closely linked to the Chinese intelligence services.
The Chinese side has been trying to negotiate with Mnuchin, but fears having any deal undercut by other factions in the White House that get to Donald Trump first. This is precisely the kind of spotlight and drama that Trump relishes for himself — and why all eyes are now on Trump’s upcoming bilateral meeting with Xi Jinping on the margins of the G-20 summit in Argentina on Nov. 30.

What will happen on Nov. 30? The most likely scenario is that Trump and Xi will declare a “cease fire” in the trade war and agree to enter more serious bilateral negotiations. Trump will bluster about being ready at any time for the fire and fury of a total trade war, but the reality is that he does not want to spook markets and trigger a recession in the U.S. economy before the 2020 elections.

Even with a “cease fire” on the central front of the trade war, there will be more fights on other fronts. For example, the Trump administration will continue badgering U.S. companies to divest production from China and new laws on investment in the United States will be used to pressure financial firms not to partner with Chinese companies eyeing the U.S. tech sector.

There will also likely be more indictments by the U.S. Justice Department of Chinese individuals or firms accused of cybertheft of U.S. intellectual property, and clearer lines drawn to prevent any penetration by Chinese tech companies into the critical telecommunications infrastructure of close allies like Korea. The Korean government and corporations need to be prepared for these stricter policies no matter what happens with tariffs on Nov. 30.

At the same time, Trump’s chaotic political style and life-long admiration for tariffs could mean that any cease fire on Nov. 30 later collapses. A real trade war is still possible, if unlikely. Trump could be backed into a political corner and tempted to lash out with economic nationalism that he knows will appeal to his core supporters.

There is a broad coalition of interests that would seek to prevent this, including U.S. companies, farmers, and allies like Korea. The reality is that the Trump administration’s leverage against China would be more effective if it were multilateralized. He reisists that because he resents the constraints that the multilateralism of the post-war Bretton Woods system place on the United States.

But ultimately there is no escaping reality: as relative U.S. power declines, the institutions and allies that upheld the Pax American will be even more important to achieving U.S. national interests. Korea will have to be more proactive in working with other like-minded states to support the post-war order: both by joining together to pressure China to change and to constrain Donald Trump from sowing chaos.