Can the US and China end their trade war?

April 14, 2019 3:28 am

Trump’s “easy to win” trade war drags on despite intensive efforts to make a deal

The US-China trade war began in July 2018 with the imposition of tariffs on Chinese imports by President Trump’s government and immediate tit-for-tat retaliation by China. This is the biggest trade war since the 1930s and is increasingly taking its toll on the global economy. IMF chief Christine Lagarde, reflecting the fears of global capitalism, recently warned that 70 percent of the world economy is expected to see a slowdown in growth over the next two years, urging governments not to aggravate matters with the “self-inflicted” damage of trade wars.

Currently the Chinese and US governments are locked in negotiations, which are widely expected to produce a deal. Socialist magazine asked Vincent Kolo of Marxist website chinaworker.info to explain the impact of the conflict and the likely outcome of the trade talks.

Will the US and Chinese governments reach a deal to end their trade war?

A deal is the most likely, but the real question is what kind of deal? I think it will be a largely cosmetic deal with elements that allow both sides to save some face, rather than leading to significant changes in the economic relationship between the US and China. It won’t live up to Trump’s rhetoric about a “historic” and “epic” deal, and in particular it won’t result in fundamental “structural changes” in China’s economy which is what the anti-China hawks in the US ruling class are demanding.

The trick that Trump’s team are trying to pull off in the negotiations and a major reason they are dragging on for so long – they’ve now had nine rounds of talks – is to squeeze enough concessions out of China so that it looks like “fundamental changes” have been agreed. Without this Trump will face a lynch mob from within his own party and from the Democrats who’ll accuse him of a sell-out over China. Xi Jinping’s bottom line is that China’s state capitalist economic model is untouchable. Beyond this Beijing can take a flexible approach, as has been shown, over the type and scope of concessions it offers.

‘Belt and Road’: Imperialism with Chinese characteristics

But a deal won’t touch on the real roots of this conflict, which is a battle for economic and great power pre-eminence – will China or the US be number one? That struggle is not going to be negotiated out of existence, that’s not how capitalism and imperialism work. There can be a deal, which for political reasons both sides will proclaim as a great victory but in reality it will be a kind of ceasefire with the economic conflict shifting from tariffs and trade into other actually more decisive fields such as technology, investments, and geopolitics. We’re already seeing a tug-of-war between the US and China, but also the EU, India, Russia and Japan, over China’s ‘Belt and Road Initiative’ (BRI) – the biggest global infrastructure project in history.

Trump and his negotiators are under pressure to get a deal, but the Chinese regime is also under pressure?

Yes but even at this stage, with both sides pushing hard for a deal, we can’t rule out that there won’t be a deal. However, what’s pushing them towards a deal is the faltering global economy and the political risks associated with a recession, which would completely blow Trump’s re-election hopes but could be even more costly for Xi Jinping – we’re talking about unprecedented mass unrest in China in the event of the first recession in living memory.

Both sides dread the prospect of fresh stock market turmoil, which erased 13 trillion US dollars from global markets last year, around half of that in the US. Hence the stream of reassuring statements about the talks going “very well” and “making progress”, all designed to boost stock prices and keep the momentum going for more talks. This is an indication of how much more financialised capitalism has become, much greater even than in the run up to the 2008 financial crisis, because the policies followed by governments and central banks since then have had a much bigger impact on stock markets than on the real economy. In the short-term the economic confidence of the capitalists has been restored but this rests on precarious foundations.

A new stock market crash could by itself plunge the world economy into recession because the stock markets have become “too big to fail” – something of a contradiction in terms.

Trump’s position has changed since the trade war began – has he gone soft on China?

He’s had to pull back at least partly from a disaster of his own making. In July, when Trump imposed the first set of tariffs against China he bragged, “trade wars are easy to win”. The tone from Washington was very aggressive and provocative. Now the US economy is hurting just as much as China’s.

The US trade deficit – initially the issue Trump went to war over – grew to an all-time high last year, US$891.3 billion with the whole world and a record US$419.2 billion with China (an increase of 11.6 percent from the year before). These figures are a spectacular refutation of Trump’s “easy to win” bravado.

At the outset Trump’s administration imagined they could achieve quick results – they slapped an even bigger set of tariffs in September and Trump threatened that if Beijing retaliated he’d double down, extending tariffs to everything China exports to the US. This extravagant approach was heavily influenced by the US midterms [elections to Congress] with Trump wanting to show he was a tough president. Since then he’s been outflanked by politicians on all sides of Congress who’ve jumped on the anti-China bandwagon.

This is now complicating the government’s attempts to de-escalate the conflict, while Xi realises he may have to deal with an even more hardline US regime in the future, another factor pushing Beijing to make a deal now.

The increasing economic toll and the risk things will get much worse in 2019, forced Trump to hit the pause button at his December meeting with Xi Jinping in Buenos Aires. This meant keeping the original tariffs in place but postponing the increases set to take effect on 1 January. This delay has since been further extended as the talks drag on. The original deadline for a deal which Trump laid down in Argentina was 1 March. The latest reports suggest the talks can go on “for weeks”, possibly until the Osaka G20 summit at the end of June.

US-China trade war: A long conflict?

Clearly, the two sides are not as close as they want people to think. But they are also under pressure to de-escalate, without losing face. This last point is what’s mainly causing the negotiations to drag out.

What strategy has the Chinese regime followed in the trade war?

Initially, Beijing was wrong-footed by the tariffs. They thought they could avoid this by offering limited concessions – basically to buy more from the US especially energy and farm produce. They looked at the issue mainly as an economic problem and underestimated the political dimensions on the US side – Trump’s need to show a tough hand. Xi’s regime underestimated how far Trump was prepared to go and the support he had for confronting China.

A year ago, Xi had consolidated his dictatorship and abolished term limits on his rule, increasing state repression to unprecedented levels. There was overconfidence within the ruling group. A domestic backlash against Xi’s authoritarianism was then able to draw some encouragement from the trade war, not in terms of any pro-US sentiment, but rather a feeling of satisfaction that the regime’s all-powerful image had taken a knock. Xi had clearly miscalculated on how to manage relations with the US – China’s single biggest foreign policy issue.

Another miscalculation was that Xi’s people thought they could count on pressure from Wall Street and China’s “friends” within US finance capital to avert a trade war. US multinationals have been a powerful lobby for greater economic ties with China over several decades, but last year we saw a decisive shift. It was something that took the Chinese regime by surprise.

Wall Street, which has made mega profits from China and US-led globalisation policies in China, has increasingly adapted to the Trumpian doctrine of demanding more radical concessions and punishing China’s alleged economic “cheating”. This is part of a wider strategic shift within the US ruling class, of which the trade war is just one symptom, towards a fundamentally confrontational approach to prevent China from usurping the dominant position of US imperialism.

We saw this with a recent speech by Jamie Dimon, CEO of J P Morgan Chase, the largest US bank. He said it was “absolutely right” for the US to enter a trade war with China saying, “We’re better off dealing with it now, whatever that means for the economy”. When a US banker is saying this it’s clear there’s been a major shake up in the outlook of the ruling class.

But the nature of this conflict is long-term, with no “easy wins” à la Trump. Xi’s regime are now in no doubt that the ground has shifted in the US-China relationship, that it’s not just a question of an unpredictable US president but rather a historic turning point with the “engagement” policies of the past 40 years giving way to open strategic rivalry. Beijing’s counterstrategy is shifting accordingly.

The concessions China’s negotiators are offering in the latest talks are more substantial than one year ago, but the difference is not huge. The Chinese side have a bottom line in terms of what they are prepared to concede, beyond which they won’t go. They know there is big pressure on Trump not to abandon the talks.

This, ironically, explains why Trump walked out of his talks in Vietnam with North Korea’s dictator Kim Jong-un. The two sets of talks are superficially unrelated, but actually Trump’s Korean denuclearisation strategy has always ultimately been about increasing the pressure on China and the struggle for political and military hegemony in the Asia-Pacific. Trump’s walkout was partly to pressure Kim over too little progress, but was also a warning to Beijing that the US side is also prepared to walk away from a trade deal unless more concessions are made.

US chief trade negotiator Robert Lighthizer meets Liu He his Chinese counterpart.

What are the remaining obstacles to a deal?

The most significant development so far is the agreement that both sides will set up “enforcement offices” to make sure they each honour the terms of the deal. This issue was a potential deal-breaker because Trump’s team need to show their deal is “different” and China will be held to account.

Meanwhile China’s negotiators would not agree to any one-sided enforcement mechanism, as first proposed by the US side, or the idea of current US tariffs remaining in place to ensure Chinese compliance. Either of those alternatives would have been politically unacceptable to China, leaving Xi’s regime open to charges it had accepted “interference in China’s internal affairs” and reviving memories of the “unequal treaties” of pre-revolutionary China.

But the proposed “enforcement offices” seem to be a façade that may look impressive but won’t make much difference in concrete terms. As it stands both governments can impose tariffs against the other, even if these are in breach of WTO [World Trade Organisation] rules, which is the case with Trump’s current tariffs. In fact, the whole deal that is emerging will probably be in breach of WTO rules, because the deal is about managed trade rather than “free trade”, which also shows the WTO is a dying force. The creation of US and Chinese “enforcement offices” is an act of showmanship on one hand to convince sceptics in the US Congress that the deal has “teeth”, and to remove the stigma on the Chinese side of accepting anything that isn’t mutual and reciprocal.

There are other potential obstacles to a deal. The US side has reportedly drawn up 150 pages of agreements to be signed including detailed agreements in six contentious areas: forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and non-tariff barriers.

On currency, for example, there are reports the Chinese side has agreed not to use devaluation to counteract the effect of tariffs and to give more information to the US about its currency policies. But actually this is in line with Beijing’s own interests, which are to broadly maintain the current exchange rate. Beijing is far more concerned at this stage about yuan depreciation triggering capital flight than the upside of this which would be increased exports.

Likewise in agriculture, the Chinese side has promised huge additional purchases of US farm goods as part of a trade deal. More politically sensitive, and state media have begun preparing domestic opinion for this, Trump’s people are demanding a lowering of Chinese farm tariffs, which potentially could be a heavy blow for many of China’s poor farmers.

Beijing will surely announce subsidies and other support measures to cushion the impact of this concession, but it conforms to a wider pattern with China’s concessions falling broadly into two categories: They are either things the Chinese regime can afford – buying more soybeans and oil from the US will cost countries like Brazil and Iran more than it costs Beijing – or they are rather vague commitments to “reform” that can be haggled over and dragged out. That’s of course a well-honed tactic of the Chinese regime.

But Xi’s regime won’t sacrifice “core areas” which are anything vital to their state capitalist economic model such as state subsidies, protection of key state monopolies and creation of “national champions”. This is not primarily an economic but a political question. Xi, who represents the billionaire princelings [hereditary leaders] within the Chinese regime, state and economy, is fully aware that the regime’s future as a one-party dictatorship rests on its ability to bend the economy – with the “police club” to use Leon Trotsky’s term – to the needs of regime survival and not become a hostage of “the market” as is the case with Western capitalist regimes. And politically, the Chinese side won’t sign up for any deal that makes it look like they caved to US pressure. They can dress up many of their trade concessions as “reforms” that while corresponding with US demands actually came from within China.

Donald Trump walked out of his summit with Kim Jong-un in Hanoi.

What affect will a US-China deal have on the world economy and will it mean an end to confrontation?

On the economy it could give a temporary boost, mainly in terms of financial froth, a new surge on stock markets, but even that’s not a certainty. Markets, which have soared since the start of the year, have largely priced in a US-China deal. A breakdown in the talks on the other hand could unleash havoc.

For the real economy it’s debateable what a deal would mean. The US, China and other major economies are all slowing in 2019. Parts of Europe are in outright recession. The Chinese regime’s new stimulus measures – the biggest tax cuts in ten years and an explosion of new debt – are having some effect, a partial steadying of the economy, but the effects get smaller and smaller every time with Beijing’s stimulus, while the debt problem gets bigger.

Companies that began relocating their production out of China even before Trump’s tariffs are likely to continue doing so. Unless the deal is much stronger than we expect, it won’t coax these companies back to China because the uncertainties mean they want to hedge, moving factories to Vietnam and other parts of Asia, but almost in no case back to the US.

On the US-China relationship, a trade deal won’t represent a re-set or a return to the pre-2018 situation. That’s gone forever. Instead, as economist Stephen Roach says, what is posed is a “protracted struggle”, what he called “cold war 2.0”. Roach also argued that the US economy is in far worse shape – due to higher debt levels and slower growth – to wage a cold war today than it was in the period 1947 to 1991.

Another crucial difference is that in the previous cold war, between a capitalist US and Stalinist USSR, the latter’s state-owned and bureaucratically (mis)managed economy was far less integrated into the global economy than China’s state capitalist economy is today. China is the largest trading partner for 124 countries compared to 76 for the US. There are 120 Chinese companies in the Fortune 500 [the world’s largest companies], just behind the US with 126, and well ahead of Japan with 52 in third place.

Conflicts over the BRI, Huawei and 5G technology especially, the South China Sea and other territorial disputes, are all likely to worsen. The Global Times [a major regime-controlled newspaper] recognised this when it recently warned, “It is a bad idea to assume that the two sides can sort out their trade matters and then to focus on fierce political and security rivalry.” But in reality this is the most probable outcome.

What is the socialist alternative to the trade war and economic nationalism?

The events of the past year, the escalating conflict between the US and China, but also tensions with the EU and other major powers, are symptoms of a chronic condition afflicting global capitalism. The system cannot shake itself free from the crisis that began more than ten years ago.

Governments fear mass upheavals as we are again seeing in the Arab world with the uprisings in Algeria and Sudan against brutal dictatorships. The capitalists are increasingly forced to look for ‘national’ solutions, variants of Trump’s ‘America First’ doctrine. Capitalist globalisation, with its mega profits for the billionaires, has given way to “slowbalisation” as the Economist magazine called it, with each capitalist government protecting their own companies and markets and resorting to economic and geopolitical bullying in the sphere of international relations. From 1987 to 2007 world trade averaged 7 percent growth every year, but this slowed to just 3 percent from 2008 to 2014, and has slowed further since then.

For the working class both these phases of capitalist development, pre- and post-2008, have resulted in greater exploitation and poverty, economic, environmental and even military disasters.

The workers’ movement needs an independent approach, refusing to line up behind the economic nationalism of right-wing politicians like Trump or the neo-liberal globalisation policies of liberals but instead demanding policies that strengthen workers’ rights, jobs and the ability to organise freely. We fight for the nationalisation under workers’ control and management of companies that threaten to relocate, close or outsource production blaming “foreign competition”.

Organisational links need to be built between unions and workers’ organisations internationally. Unions in the US and other countries should demand trade union rights in China, while also fighting to democratise their own unions and turn them into fighting organisations. International solidarity is needed to support Chinese workers against the Chinese regime’s ban on independent unions and the right to strike. This is the socialist alternative, to stand independently of the capitalists but in united struggle with the working class everywhere, rejecting all capitalist solutions and fighting instead for democratic public ownership and control of the major companies to facilitate democratic planning and socialist trade policies. This is how to prevent the working class being divided by nationalism and politicians like Trump and Xi which would be the road to defeat.

 

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