Since my last article on the trade war in April, many have asked whether America or China would win the war. I have no doubt that Trump and his hawkish cabinet would make good on the tariffs threats since the grand plan is to make China weak. A weak China would guarantee a great and strong America. In order to achieve the Grand Plan, it is necessary to target China’s “Made in China 2025”, and to accuse China of unfair trading resulting in a US$500b of trade deficits, predatory trading behavior and the stealing of IP that belongs to US companies. US companies are happy to play along with Trump, believing that Trump would be able to gain a substantial compromise from China, a further opening-up of the Chinese market, and more favorable business conditions. Making China weak is also a good election battle-cry for the Republicans. Ultimately, if making China weak would make American great again, then it would have to be done for the future of America.
The “Made in China 2025” is real, and with the Chinese economy growing at 6.8%, it is likely that the goal could be achieved earlier than forecast. Besides the Internet Plus that is benefitting home-grown giants like Baidu, Alibaba and Tencent(BAT), other advanced technology, eg, Artificial Intelligence (AI) and integrated circuit(IC) are progressing at lightning speed. For instance, in 2009, only one Chinese company, HiSilicon, made it to the global Top 50 Fabless IC supplier ranking, 10 Chinese companies entered the top-50 fabless IC supplier list in 2017.
China is trying to reduce its huge trade imbalance in ICs. The country continues to import a large percentage of its chips from foreign vendors. As part of the plan, China has lured several multinational chipmakers to build new fabs inside its borders. In addition, China’s domestic chipmakers are also building new fabs.
Most analysts attributed Japan’s“Lost Generation” to the signing of the PLAZA ACCORD. A less prominent, but equally devastating agreement was signed in 1986 that destroyed the Japanese semiconductor industry. In the 1980s, Japanese semiconductor manufacturers began to dominate the world market with dynamic random access memories (DRAM).To stop the Japanese from dominating the market, the American semiconductor industry complained to the US government that it faced unfair competition from Japanese firms. The Reagan Administration responded by threatening trade retaliation if Japan did not raise the price of Japanese, low-end DRAM chips in the American and foreign markets. Japan eventually bowed to the pressure and signed “The U.S.-Japan Semiconductor Agreement”. Japan also agreed to try to guarantee the U.S. a specific share of the Japanese market in these products.
This agreement, like the Plaza Accord, literally signed the death note for Japan’s semiconductor industry. Japan dominated the industry with 10 companies in the top 10 worldwide semiconductor sales in 1990. In 2015, only Toshiba made the Top 10.
America did not hesitate to destroy Japan, a close ally, it certainly would not show mercy to a “revisionist power”, an enemy of the American people. With a team of hawks and experienced USTR Robert Lighthizer, and since Tump has declared trade wars as “easy to win” and bet the skirmish will prompt American companies to return operations to the US, with US$336 billion deficits, it seems like the US cannot lose. Perhaps, but I think the US is wrong this time.
China is well prepared for the trade war. Chinese leaders love history and draw lessons from other countries to resolve its growing pains. Japan’s “Lost Generation” is certainly right at the top of their reading list. A civilization state with a long history, China has many stratagems to outwit its opponents. During the Korean War, Mao’s PLA utilized Sun Tzu’s Art of War to hold the US troops to a truce. This time around, we are treated to another excellent execution of the Sun Tzu War Strategies:
1) The Art of War is of vital importance to the State: China has shown that they are more than ready to fight the trade war as the saying “war is a matter of life and death, a vital importance to the State.”
2) If you know the enemy and know yourself, you need not fear the result of a hundred battles: China has dozens of think tanks helping Beijing’s leadership make sense of Washington and Donald Trump. These elite group of analysts, diplomats and scholars hold doctorates from top US universities, and their specialty is one of the best-funded of the social sciences in China. Trump’s “China Expert” is Peter Navarro.
3) The supreme art of war is to subdue the enemy without fighting: In the beginning, China tried various tactics to stop the tariffs trades, from talking about the pros and cons, negotiations, helping US resolve the issues of North Korean Nuclear Missiles, joining the UN resolution to sanction North Korea, and even warning Trump that any unilateral imposition of tariffs would be countered with.
4) All warfare is based on deception: When the Trump Administration reneged on the agreement to hold back on the tariffs, the Chinese began to put a lid on the issue of the trade war, requesting media to be careful with the reporting. In Sun Tzu’s Art of War, it’s “the business of a general to be quiet and thus ensure secrecy; upright and just, and thus maintain order.” Whatever cards Xi has, he’s playing his cards close to his chest. Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Sun Tzu placed a lot of emphasis on deception. You will not hear much about China’s next move, but North Korea issue is brewing again, Xi met with Putin to re-affirm Sino-Russian ties, Premier Li Keqiang visited Europe to meet with the European leaders. There’s a Chinese saying: “Hear not what they are saying, but what they are doing”. It’s no wonder that Trump called Chinese leader Xi Jinping a master poker player.
5) Form alliance with neighboring states: Had Donald Trump sought alliance with allies like Japan and Europe right from the start, China would probably have to decide to call it quits and to meet unreasonable demands to stop the “Made in China 2025” and other demands like opening up the market to more competition. To China’s pleasant surprise, Trump decides to wage wars with his traditional allies as well. As a result, Trump isolated himself and gave China a chance to build a relationship with Europe, Canada, Mexico, Russia and form a loose alliance to defend against the US.
6) Thus the highest form of generalship is to balk the enemy’s plans: Trump’s plan on stopping Made in China 2025 is to force companies to retreat from China and return to the US. China, however, lowered the restrictions for foreign direct investments while keeping the tariffs on US companies. In the wake of the simmering trade war, both BMW and Tesla open factories in China to take advantage of the new policy.
7) You may advance and be absolutely irresistible if you make for the enemy’s weak points: The biggest weak point of Trump is the upcoming midterm elections in November. So far, China has targeted soybeans and agricultural products from states that elected Trump. This would certainly hurt Trump and might force Trump to return to the negotiation table. Lawmakers from both parties have been bombarded with complaints about tariffs from soybean farmers, carmakers, nail manufacturers and other businesses about the fate of their industries as they are starting to face higher steel and aluminum costs and feel the pain of retaliation from Europe and China.
8) Reduce the hostile chiefs by inflicting damage on them, and make trouble for them: China is hitting back on the US in other areas. For example, Kim Jung-un, the leader of North Korea visited Xi after returning from the Trump/Kim Summit in Singapore. Analysts believe Kim is in China to brief Xi on the summit, seek economic assistance, as well as pay deference to Beijing, which is eager to emphasize its role in talks between North Korea, the US, and South Korea. It is reasonable to believe that China is reminding the US that the North Korean issue might not go away. Another issue that China could use is the Iran sanctions. China has vowed to continue a relationship with Iran, and rally other countries to do so.
9) To a surrounded enemy, you must leave a way of escape: Ultimately, China wants a quick war as a prolonged war would be detrimental to both countries. US strategy is one dimensional; relying on tariffs while China has many quantitative and qualitative measures that it could and has already been carried out without any announcement. During a hearing on Capitol Hill Thursday, Treasury Secretary Steven Mnuchin told angry lawmakers that the administration has no strategy to resolve things with Beijing. Saying trade talks with China had “broken down,” Mnuchin basically admitted that the U.S. was out of ideas and that it’s up to China to offer concessions. China will simply ignore the threats and wait for the tariffs to hurt the US economy, and Trump would call for a truce.
While Trump is waiting for China to come back with concessions, China has confirmed deals to increase soybeans import from Brazil and Argentina, and signed new deals with Russia and Ukraine. It is also subsidizing local farms to plant soybeans. China is also cutting many of the restrictive policies and offer attractive incentives for foreign investors. To US farmers’ dismay, the orders are not coming back. If the US is going to wait for China’s concessions, then I have an advice for Trump; Sun Tzu’s Art of War is what he needs.
Joseph graduated with a degree in Business Administration from the National University of Singapore and is a CFA and CAIA charterholder. He enjoys geopolitics and study international politics extensively. Joseph currently lives in Hong Kong.