My practice involves many transactions and clients from China, and I pay keen attention to the economic and political climates of both countries since a trade war will directly affect investments and cases going both ways. After giving the issue of a trade war between China and the United States much thought, I have concluded that there is more than a 90% chance that a trade war will come between the two countries if President Trump does not accept token concessions from China, because Trump is attacking China’s now-entrenched political position that China cannot extricate itself from.
As I have mentioned previously, Trump has indeed made China an important focus of his foreign political and trade policy. While I was wrong on the timing of Trump addressing China by a year, I believe the timing was off due to Trump having to deal with other more acute issues such as the firings of Michael Flynn and James Comey, repealing Obamacare, DACA, tax reform, and North Korea. The question of the bilateral trade deficit and containing China could be placed on the backburner. Still, Trump was not sitting idle on the issue of China; already in 04/2017, he directed the Department of Commerce to begin an investigation into steel dumping.
A year later, Trump is now confronting China through the enactment of an escalating trade policy, first on steel and aluminum, then working towards tariffs on $50 billion’s worth of Chinese imports, and then teasing an additional $100 billion’s worth of imports. Trump’s stated objective is to cut down on the trade deficit between the two countries by providing additional intellectual property safeguards for US companies, and to provide additional help for US companies which do business in China.
China’s response is multifaceted: The Chinese government is conservatively mirroring Trump’s but is not “upping the ante”, yet at the same time it is gearing up for a protracted trade war. Some Western observers, and apparently equity markets as well, have interpreted Chinese President Xi Jinping’s very recent speech in Boao on trade policy as conciliatory and that China is willing to negotiate within the framework of Trump's proposed tariffs, but they are wrong.
Xi just successfully abolished term limits, which has been called his “coronation” by influential commentators. Xi’s “mandate of heaven”, then, is grounded in his dual “Made in China 2025” (MIC 2025) and “One Belt One Road” (OBOR) initiatives, which seek to develop alternatives for China to the post-Cold War, US-fostered world trade network that has been key to securing world peace through mutually-dependent economies, and to isolate and weaken adversaries (e.g. sanctions against Cuba, Venezuela, Iran, Russia). In other words, Xi is seeking to avoid the containment of China in its continued ascension as a superpower.
While the majority of Americans might not have heard about MIC 2025 and OBOR and therefore are uninformed as to the strategic position that Xi has entrenched China in, MIC 2025 and OBOR are household terms in China, the Chinese government has made sure to spread this message far and wide, and MIC 2025/OBOR are essentially the same concepts as Manifest Destiny for the United States. Students of history will know that Zheng He is regarded in China as a Chinese Christopher Columbus, and the narrative of Zheng He is promoted heavily today in China in conjunction with MIC 2025 and OBOR as both a celebrated apex of the achievement of Chinese civilization, as well as a warning that to go against "opening up" -- meaning both domestic isolationism as well as foreign containment in terms of economics and technology -- is a death sentence for China.
Trump’s tariffs strike at the heart of both MIC 2025 and OBOR. Trump’s essential demands retard the developmental path of MIC 2025, the fruits of which have already been demonstrated most visibly in China’s high-speed rail (HSR) network, through which forced technology sharing has resulted in China eventually leapfrogging over their foreign partners in building the largest high-speed rail network in the world and both an export and foreign policy tool. Thus, there is absolutely no way that China is going to back down from forced technology transfers, although China is most likely willing to provide minor concessions in the way of enhanced IP enforcement (such as trademark and patent protections) and making additional purchases of US commodities.
But ultimately, Trump’s tariffs, whether intentionally or otherwise, is viewed as an existential challenge to the political legitimacy of not only Xi, but of the Chinese government as a whole. The reality is that China will rather take the sting of a trade war, just as Russia has taken one to the chin and has not backed out of Ukraine in spite of US sanctions, since Russia feels that the issue of Ukrainian alignment is also an existential issue in having a potential NATO ally in the cradle of its own historical foundation.
In this context, Xi’s Boao speech which I have mentioned earlier is clearly not as a conciliatory gesture towards Trump, although it does serve as a neutral statement that China does not seek confrontation. Instead, Xi’s Boao speech is directed at China’s domestic audience and politics; it is Xi’s framing of the situation by setting up China as seeking openness and free trade, as an innocent victim of Trump’s tariffs, and as a gesture to other nations that China is willing to go even further in its OBOR initiative in promoting trade alternatives (meaning even better terms for grants, loans, and other aid).
My interpretation is the correct interpretation of the current course of events, and with neither Trump nor Xi backing down from their positions, negotiations are not happening, and I believe that unless Trump is willing to soften his stance and accept minor concessions from China without major reform, which I do not believe Trump to be willing to accept, a trade war is inevitable.
As I have mentioned previously, Trump has indeed made China an important focus of his foreign political and trade policy. While I was wrong on the timing of Trump addressing China by a year, I believe the timing was off due to Trump having to deal with other more acute issues such as the firings of Michael Flynn and James Comey, repealing Obamacare, DACA, tax reform, and North Korea. The question of the bilateral trade deficit and containing China could be placed on the backburner. Still, Trump was not sitting idle on the issue of China; already in 04/2017, he directed the Department of Commerce to begin an investigation into steel dumping.
A year later, Trump is now confronting China through the enactment of an escalating trade policy, first on steel and aluminum, then working towards tariffs on $50 billion’s worth of Chinese imports, and then teasing an additional $100 billion’s worth of imports. Trump’s stated objective is to cut down on the trade deficit between the two countries by providing additional intellectual property safeguards for US companies, and to provide additional help for US companies which do business in China.
China’s response is multifaceted: The Chinese government is conservatively mirroring Trump’s but is not “upping the ante”, yet at the same time it is gearing up for a protracted trade war. Some Western observers, and apparently equity markets as well, have interpreted Chinese President Xi Jinping’s very recent speech in Boao on trade policy as conciliatory and that China is willing to negotiate within the framework of Trump's proposed tariffs, but they are wrong.
Xi just successfully abolished term limits, which has been called his “coronation” by influential commentators. Xi’s “mandate of heaven”, then, is grounded in his dual “Made in China 2025” (MIC 2025) and “One Belt One Road” (OBOR) initiatives, which seek to develop alternatives for China to the post-Cold War, US-fostered world trade network that has been key to securing world peace through mutually-dependent economies, and to isolate and weaken adversaries (e.g. sanctions against Cuba, Venezuela, Iran, Russia). In other words, Xi is seeking to avoid the containment of China in its continued ascension as a superpower.
While the majority of Americans might not have heard about MIC 2025 and OBOR and therefore are uninformed as to the strategic position that Xi has entrenched China in, MIC 2025 and OBOR are household terms in China, the Chinese government has made sure to spread this message far and wide, and MIC 2025/OBOR are essentially the same concepts as Manifest Destiny for the United States. Students of history will know that Zheng He is regarded in China as a Chinese Christopher Columbus, and the narrative of Zheng He is promoted heavily today in China in conjunction with MIC 2025 and OBOR as both a celebrated apex of the achievement of Chinese civilization, as well as a warning that to go against "opening up" -- meaning both domestic isolationism as well as foreign containment in terms of economics and technology -- is a death sentence for China.
Trump’s tariffs strike at the heart of both MIC 2025 and OBOR. Trump’s essential demands retard the developmental path of MIC 2025, the fruits of which have already been demonstrated most visibly in China’s high-speed rail (HSR) network, through which forced technology sharing has resulted in China eventually leapfrogging over their foreign partners in building the largest high-speed rail network in the world and both an export and foreign policy tool. Thus, there is absolutely no way that China is going to back down from forced technology transfers, although China is most likely willing to provide minor concessions in the way of enhanced IP enforcement (such as trademark and patent protections) and making additional purchases of US commodities.
But ultimately, Trump’s tariffs, whether intentionally or otherwise, is viewed as an existential challenge to the political legitimacy of not only Xi, but of the Chinese government as a whole. The reality is that China will rather take the sting of a trade war, just as Russia has taken one to the chin and has not backed out of Ukraine in spite of US sanctions, since Russia feels that the issue of Ukrainian alignment is also an existential issue in having a potential NATO ally in the cradle of its own historical foundation.
In this context, Xi’s Boao speech which I have mentioned earlier is clearly not as a conciliatory gesture towards Trump, although it does serve as a neutral statement that China does not seek confrontation. Instead, Xi’s Boao speech is directed at China’s domestic audience and politics; it is Xi’s framing of the situation by setting up China as seeking openness and free trade, as an innocent victim of Trump’s tariffs, and as a gesture to other nations that China is willing to go even further in its OBOR initiative in promoting trade alternatives (meaning even better terms for grants, loans, and other aid).
My interpretation is the correct interpretation of the current course of events, and with neither Trump nor Xi backing down from their positions, negotiations are not happening, and I believe that unless Trump is willing to soften his stance and accept minor concessions from China without major reform, which I do not believe Trump to be willing to accept, a trade war is inevitable.
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