A Matter of Survival: How the Trade War will Shape China’s Future

By Francesca Ghiretti and Lloyd Yijue Liu

2 May 2019

The trade war between the US and China is just the tip of the iceberg of deeper differences that will have complex ramifications (Manufacturing.net)

 

The trade war between the US and China is more than what meets the eye, and this is not a mystery. In fact, besides the trade deficit, there are multiple aspects at stake: intellectual property rights, the opening of the Chinese market and most of all, the political-economic system of China. The economic aspects appear to be laden with heavy political values for both actors. For Trump the trade war is a political means aimed at reinvigorating his political message with the eye on re-election, while for Xi Jinping it is a matter of survival, both his and that of the Communist Party of China (CPC).

Although negotiations are ongoing, the deeper political issues on the table risk triggering a mutation of the trade war. During the current state of affairs, an open armed conflict is highly unlikely. However, it is probable that the conflict between China and the US may spread to other countries and areas of interest, thus creating a complex matrix of entangled elements. The fight for technological advancement appears to be the most notorious battlefield, leading many to believe that in the near future the trade war could take on the shape of a technology war. The case of Huawei and the debate on AI are only two early examples of what such a conflict might look like. One wonders: why technology? Technological advancement is fundamental for the survival of the American primacy in the world and of the CPC in China. Both powers are aware that those who will lead the technological revolution that is unfolding under our eyes will lead the world in the coming years. After all, Britain would have hardly had the capacity to build an empire without the advantage of the first industrial revolution, and the West would have looked very differently and occuped a very different global position were it not for the industrial (and technological) revolutions.

Thus, both China and the US interpret the ongoing power struggle as a matter of survival, and technological development appears to be the main arena in which the battle is fought. In the long-run, instances for the US and China to face each other and present their contrasting models will not be lacking in number. However, in the short term, an agreement might be reached. It is for this reason that we propose three different scenarios each consisting of a possible outcome of the current negotiations between the two countries. In scenario one, an agreement is reached, and all tariffs are dropped. Scenario two describes the current situation– a state of limbo where some tariffs are in place but there is still space for communication and for a sudden turn in any direction. In the third scenario the US and China are unable to get a significant deal, leading to the prolonging and worsening of hostilities.

There is a perceivable division between the motives of President Donald Trump and those of the American strategists. The former needs a victory in view of the upcoming elections, even more so following the failure of the negotiations with North Korea. American strategists, on the other hand, appear to be seeking a more radical change in China’s way of doing business. Trump’s goal is to obtain an agreement which has the aspect of a victory for the US, with China expected to open its market to more American investments and firms, protect intellectual property and balance the trade deficit. Such objective seeks only a superficial change which would mean sizeable but not system-changing concessions by China.

The adoption of a Foreign Investment Law by China and the reform of the law on Intellectual Property suggests China’s propension to implement a few changes in order to find an agreement with the US, at least formally. On the other hand, the broader aims of the strategists seek deeper changes which ultimately would strip the CPC of its absolute centrality. This might be a real deal-breaker, should they be seriously pursued. In fact, Xi understands the importance of achieving an agreement for the sake of the Chinese economy. However, the survival of the CPC and its control over the entire Chinese society will always remain the first priority. All in all, what is to be expected is a temporary deal where China makes some quantitatively significant concessions but leaves structural changes to an unknown future.

Scenario 1.     Trade deal (Tariffs at 0%)

In the first scenario the trade war ends with the US and China reaching an agreement which leads to the abolition of all the tariffs. However, this scenario envisages not a peace treaty but a regulated and extended truce. The deeper issue however, the nature of the Chinse political system, will not have been resolved. The basis of the Chinese government’s actions lays firmly with the doctrine of the ‘party leads everything’ (党是领导一切的) and is expected to remain. Here, the CPC would keep on centrally managing all aspects of China’s life, including areas which in the West are usually private or independent, such as academia and the judiciary. If the US is seeking a change in such approach, this issue is destined to come to the surface again at some point in the future and spur a conflict between the two.

In the short run, however, China will certainly be more collaborative with the US and the West. This would not mean a return to Deng Xiaoping’s ‘hide and bide’ paradigm, but a purely rhetorical switch to a more low-key and friendly campaign to present the ‘rise of China’ to the world, while creating more skillful ways of attracting foreign talent and importing technology and know-how from developed countries to develop China itself.  Moreover, forging new strategic partnerships in the Western sphere would be easier with the blessing of the US and China’s renewed collaborative attitude.

Scenario 2.     Further extending the deadline for a deal (Tariffs at 10%)

Currently, we are likely to be living the last moments of this transition scenario, which is probably advantaging China more than the US. The longer the negotiation lasts, the more uncertainty to the global economy and pressure on Trump’s credentials it will bring. The CPC is not immune to the political repercussions of a slowing economy, but unlike Trump, Xi does not have to face elections in a few months. Were it not for these looming elections, Trump too would have highly benefitted from a longer period for negotiations, as it would have allowed him to test whether China’s promises turned into reality. In such a scenario, a full-fledged deal (Scenario 1) would still be on the table, but China would have time to consider and perhaps test other alternatives. To force the Americans to reach a suboptimal deal and to protect their own economy from future repercussions, the Chinese might try to intensify their transactions with other trading partners. They might also try to explore possible fractures between the US and its allies, such as the EU, while exploiting the disruption of the global supply chain of goods manufactured in the country, such as tech components, to increase the pressure on the reaching of a deal and preparing for more negative alternative scenarios.

Scenario 3.     No deal (Tariffs at 25%)

This is not the most likely outcome. However, with Trump and Xi, two stubborn leaders leading the discussions, this option cannot be ruled out. In this case, China and the US would become more assertive in implementing their own plans and fulfilling their geopolitical interests. Thus, multiple actors and areas of interests, such as technology, geopolitical claims and multilateral settings, would be involved in the disputes which is likely to take place simultaneously in different arenas, an example of which was the run for technological advancement previously mentioned. If the conflict becomes further politicised; China will make it difficult for the US to reach its goals in any international issues which China has influence on (such as in North Korea, the South China Sea or instances presented to the UN Security Council). At the same time, China would actively strengthen its already existing alliances, seek new allies and leverage any possible dispute between the US and its allies.

At home, the CPC would further devalue the Renminbi (RMB) to maintain China’s competitive edge while promoting stronger nationalism. In fact, it is believed that after 1979, the way in which the CPC maintained the level of legitimacy it needed to govern has slowly shifted from a nationalistic rhetoric to a more pragmatic promise of future wealth for Chinese people. Now that growth is slowing, and the West is becoming more hostile to China’s economic power, the CPC is attempting to transform the public’s economic grievances into a nationalistic feeling of an imminent external threats, which would grant the Party more space of maneuver. Interestingly, although often thought otherwise, it has been shown that the younger generations are at the same time materialistic and nationalistic, the use of an emergency rhetoric might override their materialistic need and help them endure economic difficulty in time of perceived external threats.

Regardless of the outcome of the trade war, the Chinese government could use its tax policy and the control of property price to encourage consumer spending. Furthermore, the CPC is likely to implement more large-scale infrastructure construction projects to keep the economy running in an attempt to mitigate the impact of the trade war and the slowing economy. An excellent example of this is the outcome of the recent Belt and Road Forum where China has strongly reaffirmed its commitment to the realisation of the project, robustly responding to the increasing skepticism towards the feasibility of the Belt and Road Initiative (BRI).  In China, more openness of the market has oftne been followed by a tightening effort for societal control to avoid a Soviet-style system collapse, this is likely to remain the case in the foreseeable future. Abroad, as in Scenario 2, China would seek new allies. However, according to the outcome of the trade war, the degree of assertiveness used by China to pursue such goal will change.

In conclusion, none of the scenarios presented rules out a future clash between the US and China, as the power struggle between the two will endure even after reaching a potential agreement. Their embodiment of different, and in certain aspects antithetical, models of governance and development will impede the complete appeasement between the two, leaving the world politics and economy in an uncertain state of affairs. In the long-run, this is likely to end with a drastic change in one of the two actors and the subsequent victory of one and loss of the other.


Francesca Ghiretti is a doctoral candidate at department of War Studies and European and International Relations at King’s College London where she has been awarded the Leverhulme scholarship ‘Interrogating Visions of a Post-Western World: Interdisciplinary and Inter regional Perspectives on the Future in a Changing International Order’. The focus of her thesis is the political response of the EU to Chinese foreign direct investments. Follow her @Fraghiretti.

Lloyd Yijue Liu is currently working as a research assistant for the China part of the research project Mapping Elite Networks and Governance in the 21st Century at the Department of Political Science at VU University of Amsterdam. He holds an advanced master’s degree in International Relations and Diplomacy from Leiden University and previously studied History and Modern European Studies at the University of British Columbia. 

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