Looking beyond the US-China negotiations

There is scant chance that the Trump will be able to achieve its containment objectives, as - with respect to China's rise in every single domain - the train has left the station quite some time ago

US-China trade negotiations have resumed on Tuesday as President Trump reiterated last week that he was willing to hold off on increasing tariffs to 25 per cent by March 1 on $200 billion in Chinese goods if an agreement was in sight to satisfy US complaints about China’s “unfair” trade and forced technology transfer practices.

However, beyond the negotiations what is really going on the American side — at least among the hardliners in Washington led by Trade Representative Robert Lighthizer and  White House trade advisor Peter Navarro — is the implementation of a two-prong strategy towards China: On the one hand, decoupling the US and Chinese economies and, on the other hand, implementing a containment policy to slowdown or even stop the rise of China as a strategic technological, economic and military competitor to the US.

In that respect, even if the present trade negotiations were to end with an agreement from China to buy more American goods, to open more its markets for foreign companies and to stop the forced transfer of technology by foreign to Chinese companies, this would be at best a pause in what hardliners in Washington — and to some extents hard liners in Beijing — see as the unavoidable great power confrontation for global prominence.  

There is scant chance that the Trump administration will be able to achieve its containment objectives, as — with respect to China’s rise in every single domain — the train has left the station quite some time ago. China has already become too much of an economic power with a huge population, a vast and dynamic domestic market and overarching economic and business worldwide connections. It is now a technological powerhouse on the verge of overtaking the US in some key technologies and is fast developing its military capabilities. There is no way that the US could replicate with it what its Soviet containment policy achieved in the Cold War era.

The rear-guard battle that the White House is waging might at best delay China’s development in some domains for a few years. It will, in fact, prompt Beijing to accelerate its drive to become self-reliant in key areas such as semi-conductors or aeronautics.  But what it will definitely create is resentment towards the US from a Chinese public fiercely nationalistic, extremely proud of what the country has achieved over the last 40 years and exacerbate the sense of a revenge to be taken over history.

This would undoubtedly make even more difficult the much indispensable modus vivendi that needs to be achieved among two super-powers operating with different systems and logic but compelled to find ways to engage in business, economic interaction and to collaborate on some key global issues.

The Beijing leadership will not bend to any pressure to change a system that it sees as extremely successful in making China achieve in 40 years what it took a 150 years for Western countries to achieve. It will also not accept any change in its policies that would endanger the grip of the Communist Party as a structure of power. This means the continuation of the leading role of the public sector and the SOEs in all strategic economic and technological areas and the reliance on a very directive industrial policy. The line one hears in Beijing from government and Party officials is: We are not asking any country to change its political or economic system and we don’t see why anybody would be entitled to ask us to do that.

In that context, the most likely — and best — development in the US-China confrontation is that Beijing will offer some concession to reduce the US trade deficit, additional pledges and measures to protect intellectual property rights and reduce forced transfers of technology. This will not weaken or change in any way the modus operandi of the Chinese system or the basic structures on which its economy functions. But, these tactical concessions will presumably be made in a way allowing Mr. Trump to declare victory and tell his electoral base what a strong leader he is, without Beijing conceding anything essential to its strategic objectives.

The key structural challenge remains of how to make two economic blocs having achieved a kind of parity but operating according to different systems and logic not only to coexist but to interact in a positive way and to be able to join forces in addressing some global challenges.

Western corporations will have to re-calibrate the way they do business in and with China — as the Chinese market will get even bigger  to ignore — while Chinese corporations will also have to devise less abrasive and offensive ways to get from the US and Europe the kind of technologies they will continue to need in the coming years to accelerate their evolution.

There will certainly be some sighs of relief if the present US-China trade negotiation end up successfully before 1st March. But don’t hold your breath. We are just at the very beginning of a period of deep global structural economic and geopolitical adjustments. 

The most likely pattern that we are going to go through in the coming period will be an alternation of phases of low-intensity economic and geopolitical frictions and phases of high-intensity economic and geopolitical frictions. And the most favourable outcome will be to limit the damage of this alternation and maintain the interdependence between the US and Chinese economies as the best safeguard against something worse.

The writer is President of Smadja & Smadja, a Strategic Advisory Firm   @ClaudeSmadja