Chinese Economic Ascendance, US Entangled Fortune and Its Repercussion

Credit: Sgt. Mikki Sprenkle / Public domain

“There are many things we could do. We could cut off the whole relationship. Now if you did, what would happen? You would save 100 billion US dollar,” President Trump said last week at Fox Business interview. This anxious response might seem to be a likely fallout of President Trump’s frustration over Chinese initial handling of coronavirus but the root of this anxiety goes long back and has a structural connotation. This paper tries to demystify it.

Personal behavior, societal norms and international system, cutting across every aspect of life — is going through an unprecedented crisis of kind neither seen before nor foreseen ahead (at least to the present generation). Being at the helm of international affairs, instead of dealing collectively with the pandemic, the rivalry between the two largest economies (the USA and China) has claimed international news headlines, first, with Trade war before the advent of COVID-19, and then with tit-for-tat blame game regarding the origin of coronavirus. This article also tries to explore structural historic positioning of both the giants to which current crisis can be attributed. It also tries to anticipate the likely repercussions. 

Historical context

It remains quite paradoxical that very essence of U.S. socio-economic structural framework which is based on democratic capitalism is arguably dependent (albeit certain sectors) on a Communist socio-political structured nation, China. Chinese politico-economic model is sui generis. Its unprecedented rise from slumber, acknowledgement by the world community as a manufacturing heavyweight (2001 WTO accession) and its position today where it is posed to challenge U.S. superiority in almost every sector (except military) be it artificial intelligence, space technology, telecommunication, thriving gaming network etc., is in part, fuelled by the U.S. itself. In a bid to expand the capitalist network and to ensure extreme prosperity, U.S. entrepreneurs started shifting their manufacturing base to cheap labour and relatively stable markets such as China, Mexico, Brazil etc. It was fuelled by three factors, those are, the maturity level of U.S. industries to the point where innovation was less a competitive factor than the low cost, Deng Xiaoping’s transformational economic reforms and Chinese huge thriving market with cheap low skilled labour. These factors charmed the U.S. to bring Chinese into the international trading regime with a tripartite objective. These were, gaining fruits from a thriving economy and huge market, change in the Chinese political system moving towards democracy and putting to rest the claim of Chinese revisionist strength. 

The U.S. President Bill Clinton said in 2001, “Today the House of Representatives has taken a historic step towards continued prosperity in America, reform in China and peace in the world… it will open new doors of trade for America and new hope for change in China.” This statement of extreme optimism and risky action fuelled by Western traditional state evolutionary theory, turned upside down when frightened the U.S. opposed what was agreed under section-15 of Chinese Instrument of accession to WTO in 2001 which said ‘country’s upgrade as a market economy is automatic after completion of 15 years of its WTO membership. Assumption based on the lines of Russian perestroika and Glasnost, the U.S. expected that economically well off Chinese middle class would overthrow the Communist political system and would welcome democracy with both hands. But far from U.S. expectation, China in 2016 was a well-recognized economic superpower with GDP next only to the U.S. (it was ranked 6th when it joined WTO) with an ambition to rule information technology revolution, had a thriving space program and was a global bidder for upcoming 5G technology. In the strategic domain, China under Xi Jinping has embarked on reviving ancient Silk Route in a new version named ‘Belt and Road Initiative’ with trans-continental land and sea route connectivity.

Genesis of the trade war

Two decades down the line, American socio-economic prosperity to some extent, arguably, dependent on Chinese thriving manufacturing base. This is evident by the fact that bilateral trade between two giants in 2019 was almost $560 billion out of which Chinese goods export to the United States amounted to $452 billion and U.S. exports were $106 billion. 

Having discussed the structural economic dynamics and their respective position in global power politics, let’s dwell upon the origin of trade war. It all started with Donald Trump’s election campaign which claimed to reduce more than $350 billion trade deficit when elected to power. On the pretext of Chinese unfair trading practice such as intellectual property theft, forced technology transfer, lack of market access to American companies in China and unlevel playing field caused by Chinese subsidies to select domestic companies, Washington imposed 25 percent tariff on $50 billion imports from China mainly on transport and electronic goods. This prompted China to impose a retaliatory tariff on imports from the U.S. mainly on agriculture, beef and dairy products. 

Four months down the line, President Trump increased tariff on some $250 billion imports and announced a plan for the third round of increase before the first phase of China-U.S. Trade Deal in January 2020 was materialized. Latest in the list is a new rule by the commerce department that requires companies to have a license from the U.S. authority for sale to Huawei of semiconductors made abroad with U.S. technology in addition to barring U.S. companies from working with or purchasing telecom equipment from the company that poses a national security risk. These developments are taking place amid global market unrest fuelled by events such as U.S. unilateral withdrawal from JCPOA, U.S. withdrawal of commitment under Paris Climate Deal, a standoff between the United States and Turkey, the downfall of crude oil prices after bombing of Saudi Armaco oil processing facility at Abqaiq and khurais. All these flow of events, as well as the global economy came to a standstill with the advent of Novel Coronavirus. Now the stage is all set and the only player, COVID-19, is running the show. 

It is frightening to reckon that almost a century back, after World War I, this trade war with tit-for-tat tariff was one of the causes leading to the Great Economic Depression of 1929. Still, this historic evidence of ensuing catastrophe of such a practice has not bothered powers to indulge in economic power politics.

Aftermath

According to, the U.S.-China Business Council 2019 report, over 80 percent of U.S. companies got affected and about 50 percent reported lost sales — ceding market share to foreign competitors, disruption and uncertainty in the supply chain, fluctuation in diplomatic ties. Coronavirus pandemic would further exacerbate the crisis. The likely fallout is based on two factors, the Chinese huge consumer base and rising production cost. This would further the bifurcation of investment strategy allowing divestment of export-focus operation from China. 

As discussed above regarding the U.S. companies’ manufacturing base in China, it is becoming increasingly untenable for them to continue losing out. As per U.S.-India Strategic and Partnership Forum (USISPF), some 200 U.S.-based companies are seeking to move their manufacturing base from China to India. For instance, a giant, Apple’s iPhone manufacturer Wistron and Foxconn will now shift 20 percent of production from China to India.

In addition to the trade war, U.S. unilateral actions and its unwillingness to remain a ‘global policeman’ and at the same time Chinese resolve for tit-for-tat retaliation —  may risk the situation to spillover and enter the diplomatic and political realm. We have already been experiencing that in the form of strained diplomatic ties on the question of expulsion of U.S. journalists from China, Chinese assertion in its periphery (up the ante in the South China Sea, border scuffle at Line of Actual Control with India) and Chinese unruly attitude towards her economic partners on the question of investigation over the origin of coronavirus. Talk in the expert community is gathering pace of new Cold War dynamics.

Latest in the list of President Trump’s rhetoric is cutting off completely its relationship with China. He has already freezed albeit temporarily the funding of WHO, and has threatened to permanent the freeze and also reconsidering its membership in the organization. At this juncture where world is reeling with a pandemic, such fund cut has a disastrous impact on WHO’s ability to help the most vulnerable at remote corners of the world. Scholars are not hesitating to link all these unilateral steps amid pandemic, to diversionary tactics in order to cover up his failure on coronavirus handling in the U.S. Much now depends on the upcoming Presidential elections where Democrat Presidential nominee and former Vice- President Joe Biden is ready to battle the incumbent.

The views and opinions expressed in this article are those of the author.