U.S. vs. China: Selective Cooperation by Trade War

Since the 1980s, trade has been a critical driver for the global economy. Likewise, trade has stimulated worldwide growth. The United States has been the main actor in promoting trade and economic liberalization. However, the rise of China, along with the BRICS countries, has led to a clash of interests and values between the former and the U.S. Consequently, the U.S. has been increasingly adopting trade restrictions against China (i.e., trade war) since at least 2009. In fact, Presidents Trump and Biden have continued the protectionist measures against Beijing started by President Obama to restrict the import of foreign goods.

Considering a trade war between the two largest economies has implications for other countries, this conflict represents a critical political and economic case to keep an eye on and analyze to uncover the puzzling motives behind the trade war between the USA and China.

Background

The U.S. and China still have highly interconnected economies. Originally this economic interdependence developed during the 1980s and 1990s after the Chinese leadership agreed to establish special economic zones with Western capital investment to foster development while maintaining an authoritarian regime. Meanwhile, the U.S. sought to undermine the Soviet Union by befriending an influential communist country and using its economic potential.

Much like Japan and Germany benefitted from the U.S.’ system of international trade by accumulating surpluses and reinvesting these into support for the dollar’s reserve currency role, China’s reinvestment of the surpluses in dollar assets has allowed the U.S. to keep running budget deficits. As a result, by providing cheap labor and supporting the dollar, China became economically indispensable.

By providing a low-cost workforce and a big market with significant domestic and regional growth prospects, not only has China become the main trading partner for many wealthy economies but it has also become the main receptor of Foreign Direct Investment. While structural changes such as falling costs of transport and communication, and technological and financial innovation have allowed for the development of a global supply chain that connects products to global markets with China at the core of globalization.

Finally, the growing economic strength of China has resulted in the displacement of the U.S. as the largest partner for numerous wealthy markets. Consequently, China has developed the capacity to represent a danger both to the liberal system and the U.S. military might.

A focus on national security

The changes in the distribution of power by the rise of China are worrying because wealth is a means of achieving political power. Thus, the dispute against economic interdependence with China is threefold encompassing unfair trade terms, US job losses, and military threats.

To begin with, most of the trade disputes between these two countries arise from China’s incomplete transition to a free market economy. Consequently, China has more than 150,000 state-owned or state-controlled enterprises that benefit from favoritism by the Chinese government at the expense of US business and can successfully compete abroad against American corporations. The investment in technology industries and the ineffectual protection of Intellectual Property Rights (IPR) appear to indicate that China aims to reduce dependence on foreign technology. Even if that includes acquiring US top-notch technology illegally (i.e., cyber espionage) to later modify it and claim it as its own.

As for job disputes, studies estimate that the U.S. manufacturing sector has lost approximately three million jobs to China between 1990 to 2007. This entails human costs such as an increase in poverty and mortality. Accordingly, trade exposure to China leads to extreme voting and political instability.  The election of Donald Trump and his subsequent anti-China policies and discourses shows how domestic conflicts can eventually influence international outcomes.

Finally, trade with China has prompted tensions over dual-use technology such as semiconductors and computer accessories. Beijing has been building thousands of new chip factories in a bet to become more self-sufficient and make international buyers reliant on China. Likewise, given the assumption that economic wealth leads to military power, the U.S. has been trying to reduce China’s access to top-notch dual-use technology.

Furthermore, China’s rise in military expenditure, the aggressive strategy of military and economic facilities development on disputed territories in the South China Sea, represent a concern for U.S. national interests in the Asia‐Pacific region. In this case, nuclear development represents an attempt to force the U.S. to accept a relationship of mutual vulnerability with Beijing.

Briefly, the rise of China in key international structural areas such as security, production, finance, and knowledge are reducing the U.S. scope of action by limiting its structural power.

A focus on the liberal world order

Accordingly, the rise of China threatens the current US-led liberal system in three different areas: economic, political and institutional. Economically, despite the U.S.-sponsored entrance to the liberal World Trade Organization (WTO), China has not increased its economic liberalization, nor has it reduced the government’s role in the economy. WTO’s membership meant further integration into the world economy and a greater trading partner to wealthy Western countries despite maintaining a trade regime with restrictions and capital controls.

Additionally, Chinese companies benefit from low-interest rate credits with national banks because China’s national economic management encourages citizens to save their earnings in state-controlled banks and forces state-owned companies to take debts domestically rather than internationally. Consequently, Chinese companies have become very competitive abroad.

Politically, the success of China’s authoritarian governance in reducing poverty and delivering infrastructure expansion and economic growth is challenging the dominant liberal Western economic paradigm and its principles such as individual rights, private property and limited government intervention. The rapid economic wealth that China has accumulated makes this illiberal model attractive, especially to small countries and hybrid democracies reliant on trade with China.

Institutionally, not only has China’s economic growth boosted its influence at U.S.-dominated organizations such as the WTO and International Monetary Fund (IMF), but it has also helped China develop valid alternatives. For instance, Beijing has been offering generous bilateral trade agreements and loans to developing countries in need, especially those more restricted from taking international loans. Therefore, the Belt and Road Initiative or the Asian Infrastructure Investment Bank financing of projects in Asia, Africa, and Latin America is attempting to ensure exports markets and access to crucial natural resources (e.g., nickel, lithium, copper, oil). 

Not being a liberal democracy like the United States but an authoritarian communist country with a significant imperial history, its interests are expected to clash with those of the U.S. Despite pursuing export-oriented growth and being integrated into the world economy dominated by the U.S., China is increasingly trying to give the liberal system an illiberal feature.

What does this tell us about the trade war?

Forthrightly, the rise of China signifies a direct competitor against the U.S. and its values. Either in trade and military terms or for the leadership of the political and economic system. It is now understood that China has demonstrated the willingness to use its wealth to promote its own geopolitical goals regionally and globally.

China’s projects aimed at shaping the structures of power in the world economy have contributed to the economic confrontation with the U.S. To illustrate this better, the U.S. has thus far relied on its structural power to keep the international political-economic system open, liberal, and under control by penalizing illiberal political and economic behavior making use of:

  • Institutional legal frameworks (e.g., WTO dispute settlement).
  • Distribution of money and provision of credit (e.g., WB and IMF). 
  • Use and control of expertise (e.g., R&D).
  • Use of military force (i.e., deterrence).

Under this view, US trade deficits are not a key factor in causing the trade war. For instance, 

previous trade deficits with Japan and Germany did not imply a danger since the latter countries actively supported the liberal system. However, US deficits with China have been primarily redirected to finance and execute Beijing’s plans to not only create alternative institutions and multilateral trade agreements but also to develop high-level industrial expertise and military capabilities to exert coercive measures and military pressure against targets such as Taiwan. 

Moreover, because China’s growth is based on a pool of cheap skilled and unskilled labor, deeper liberal reforms threaten its economic development. In fact, rising prices of exports due to higher wages or greater safety standards could potentially result in a drop in revenue from rich Western countries. In other words, China needs to remain illiberal to sustain its growth. For some Western countries, it may even be instrumental not to push China into deeper liberal reforms. 

Additionally, the shift in the balance of global economic power from the U.S. and Europe to several developing countries (i.e., BRICS) plays in favor of China because Western powers cannot influence international politics as before. Unsurprisingly, the U.S. seems engaged in strengthening ties in Europe, Asia, and Latin America by performing selective cooperation by fostering good relationships within these areas. 

In other words, an improved globalization among allies and strategic partners to reduce China’s influence and comparative advantages.  Trade deals such as the former Trans-Pacific Partnership (TPP) or the current Indo-Pacific Economic Framework for Prosperity (IPEF) are meant to function as a driver for the reglobalization of supply chains and strategic markets as well as a clash between authoritarian capitalism and democratic capitalism. For instance, the now replaced TPP draft included clauses on worker rights and extensive environmental obligations explicitly designed to counteract China’s advantages.

However, this reglobalization that includes the creation of protectionist trade blocs in certain areas, rather than supporting the existing open world economy structures, risks the erosion of multilateralism in place since World War II and cooperation between key actors in the global system because restrictive trade blocs can often do without multilateral international organizations if the integrating partners are wealthy economies.

The bypassing of vital multilateral organizations and the increasing antagonism between key actors would severely affect global governance in crucial areas such as climate change, global commons, poverty, and human rights. Consequently, the more the states reassert their powers, the more certain global institutions debilitate in favor of certain regional organizations. Because of this, the trade war between the U.S. and China is an opportunity for the former not only to perform selective cooperation (i.e., reglobalization) and reorganization of strategic partners but also a reshaping of the international multilevel governance.

Finally, limited trade across blocs between allies in strategically significant areas (i.e., dual-use technologies, semiconductors) fueled by domestic resistance to deeper wide economic integration (e.g., anti-establishment populism) can inhibit global governance. Because as it happened in the past (i.e., WWI, Cold War), antagonism and protectionism can perilously shift the focus from global economic competition to global security competition and military conflict.

[Image by Priyam Patel / Pixabay]

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

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