Trade alliances caught in crossfire as the giants clash
Alan Dupont
April 6, 2019
Will they or won’t they? The gyrations of Theresa May’s discombobulated government have dominated the headlines as British parliamentarians agonise over whether to leave the EU or remain. But the same question also is being asked of trade negotiations between the US and China as the two countries inch their way towards a deal that many believe will determine the trajectory of the most important relationship in the world.
Australia has a stake in the outcomes of both negotiations. But the state of US-China relations is of far greater consequence despite our historical and cultural ties with London and the prospect of enhanced trade opportunities with a post-Brexit UK. This reflects the realities of size, geography and the greater capacity of the US and China to shape the world. A no US-China trade deal would be far more serious than a no-deal Brexit, and not only for China and the US. Australian markets and China-dependent businesses and organisations would suffer real collateral damage.
US President Donald Trump’s bold declaration that he is closing in on an “epic” trade deal with China has raised hopes that the long-running trade dispute is close to a resolution. But this may not be the unalloyed good news that markets anticipate because the trade surplus in favour of China is not the root cause of the growing tension between the two powers. The core problem is their competing world views, values and sense of exceptionalism.
The trade dispute is symptomatic of a deeper malady that has infected the whole relationship, from the geopolitical to industrial policy and the digital economy. A trade deal, no matter how cleverly spun, is not going to get the relationship back on track because both countries have moved from a framework of co-operation to one of open rivalry and strategic competition.
Beijing thinks Washington is bent on containing China to prolong the (declining) power of the US while denying China its rightful place in the sun. US elite and popular views of China also have soured, but for different reasons. Previous goodwill towards China, which took decades to build after the rapprochement that followed Richard Nixon’s opening to China in 1972, is rapidly eroding.
Americans increasingly believe Beijing is threatening US -security interests, undermining its prosperity, interfering in its democracy and challenging its values. Anti-China sentiment unites an otherwise divided and partisan Washington. It will endure long after Trump has departed the White House.
The Asia Society and the University of California, San Diego recently published a review of US-China relations authored by an expert group chaired by academics Orville Schell and Susan Shirk. It concludes the US and China “are on a collision course”.
The downturn in the relationship is “unprecedented” in the past 40 years and is of great concern because it comes when the US and China are more evenly matched, “making the dangers of overt conflict far greater”. This -assessment is widely held in Washington. Former US Treasury secretary Hank Paulson worries about the prospect of an economic iron curtain descending across the world that “unmakes the global economy, as we have known it”. Washington think tanks are fleshing out the details of policy recommendations for a whole-of-government push-back against China that could have enormous implications for Australia.
The problem is that while Trump has justifiably confronted China over its more egregious behaviour, his sledgehammer approach threatens to do more harm than good. Rather than enlisting allies in common cause against Beijing’s mercantilist trade policies, he gratuitously alienates like-minded countries, is openly contemptuous of the benefits of multilateralism and devalues the rule of law. Trump has mistakenly made the trade deficit with China his cause celebre when China’s win-at-all-costs industrial policy is a far thornier issue for the US and other developed countries.
What are the likely outcomes for US-China relations? There are three plausible scenarios: reconciliation, separation or divorce. These are explored in some detail by the Taskforce on Transforming the Economic Dimension of US China Strategy, chaired by Princeton -academic Aaron Friedberg and -former congressman Charles Boustany. Its main conclusion is that while moves towards disengagement or decoupling of their -economies could be reversed (reconciliation), it is likelier that the US and China will move -towards a significant degree of -disentanglement (separation), -especially in the tech sector.
In a worst-case scenario, caused by rising tensions over separation, an external geopolitical crisis over Taiwan, North Korea, the South China Sea or some combination of the two, disengagement could -accelerate and become more complete, resulting in a high degree of separation (divorce).
Reconciliation is unlikely because US-China economic differences have emerged against a background of intensifying competition over ideology, geopolitics, technology and industrial policy, which is undermining trust and muting co-operative impulses.
It’s difficult to see how a trade deal will do anything more than briefly pause the downward spiral in relations. Trump may choose to declare victory by persuading China to buy more US soybeans, natural gas and other commodities, but he will be roundly criticised domestically from the Left and the Right if he is seen to be caving in to Chinese President Xi Jinping without extracting enforce-able and meaningful concessions.
However, Xi will resist any attempt by the US to lock in verification and enforcement of a trade agreement. Nor is he likely to abandon his attempt to dominate the future hi-tech landscape by heavily subsidising Chinese companies while stealing competitors’ intellectual property and forcing foreign companies to transfer technology to Chinese partners.
These practices are integral to the Chinese Communist Party’s plans for achieving technological breakthroughs, boosting productivity, sustaining growth, preserving social stability and keeping its grip on domestic power. Xi is convinced Trump wants to force China to alter its successful economic model by unfairly constraining its economic and technological development with the ultimate aim of destabilising its political system.
Bifurcation
If reconciliation is improbable, does that mean the US and China are headed for divorce? And what would that mean in practice? A push to disengage, or decouple, is beginning to gain traction in both Washington and Beijing.
US hawks consider the best way of preserving their dwindling economic and technological lead and protecting against avaricious Chinese practices is to reduce trade exposure to China and -restrict the country’s access to US technology and education.
Chinese hawks also want to lessen their trade exposure and wean themselves off their technological and financial dependence on the US, which they see as an -unacceptable vulnerability.
In their escalating competition for technological advantage and to coerce other states, the Boustany-Friedberg report envisages more US-China friction, mutual recrimination and perhaps the use of sanctions, tariffs and other measures to exert pressure, impose costs and inflict pain in a divorce scenario. This might be accompanied by tit-for-tat expulsions of executives, scientists, students and tourists from both countries. All of which would be bad news for the Australian economy given the havoc it would play with trade and investment flows, even though we might gain in the short term as an alternative commodity supplier and destination for Chinese students, tourists and investment.
There is also the possibility the world would divide into two competing trading and geopolitical blocs, much as occurred during the Cold War, except the -bifurcation would be more fluid and diverse.
The US bloc would build outwards from North America and include some Latin American and African countries, parts of Asia and most European states. China’s bloc would extend across most of Eurasia, including Russia, the central Asian republics and much of Southeast Asia.
It also could capture a significant number of countries in Africa, the Middle East and Latin America. Where we would fit into this recast world would depend on the rigidity of the blocs. If they were mutually exclusive — the nightmare scenario for Australia — we would almost certainly side with the US.
Degree of separation
For the moment, both countries recognise divorce is unappealing as the costs would be extremely high. The US and Chinese economies remain deeply enmeshed, a co-dependence captured by the “Chimerica” and “Chinafornia” descriptors.
For every US firm that has become disenchanted with Xi’s evocation of the potential of the vast China market, there is another willing to go in search of the promised El Dorado, including super-sized corporations such as Apple, Google and Qualcomm. Beyond their -bilateral relationship, both countries are deeply integrated into the wider global trading system and international economic and financial institutions.
China’s economy is virtually impossible to isolate because of its size and dynamism and its centrality to international commerce and investment. A Cold War-style containment policy would be doomed to failure and would be highly disruptive to the world economy.
Although divorce makes little sense, a degree of separation, or -selective disengagement, seems inevitable and necessary to protect US intellectual property and a fair, open, rules-based system.
If the US fails to protect its competitive advantage, China’s dominance is all but guaranteed. The key question is how much separation and across what timeframe? Will the US and China live together under one roof, in separate apartments or in different neighbourhoods?
The further apart they are and the more bitter the separation, the more probable it is global supply chains will be disrupted and that competing systems of governance and technology will emerge that reshape global commerce and geopolitical alignments.
Should this eventuate, Washington would tighten restrictions on Chinese technology and investment across broad sectors of the US economy, particularly strategic technologies such as telecommunications, artificial intelligence, new materials and those with dual military and civilian use.
US companies would find it more difficult to sell these technologies, establish research facilities or enter into joint ventures where the IP might be transferred to China.
US universities would become more wary of engaging in research projects with Chinese counterparts; there would be new visa restrictions on Chinese students in -science and engineering departments; and the US would seek to draw friends and allies such as Australia into new multinational investment screening and export control mechanisms.
On the defensive
But reflexive, across-the-board opposi-tion to Beijing’s policies is neither desirable nor feasible. The US needs to build on its traditional strengths to compete effectively with China and offer attractive -alternatives to other countries while maintaining as much co-operation as possible in areas of common interest. Or, put another way, “moving forward even as China advances” so competition does not degen-erate into a winner-takes-all -approach that guarantees a rancorous divorce leading to entrenched conflict.
This is the essence of the “smart competition” recommended by the Schell-Shirk review and the “partial disengagement” option favoured by Boustany and Friedberg.
Partial disengagement would be confined to China’s predatory economic practices, notably the ongoing theft or extortion of technology and IP, which diminish investments in R&D; the use of subsidies to undercut US and other foreign competitors; protective measures that constrict or deny access to the China market; and efforts to -secure preferential access to emerging economies across Eurasia and beyond.
In conjunction with allies, the US would enhance its capacity for technological innovation while working to slow the pace at which select technologies diffuse to China. It would seek to preserve a favourable balance of economic power and a “GDP gap” in favour of “like-minded, rule-abiding market states, joined together by high-standard trade and investment agreements”.
To prevent the emergence of an illiberal Sino-centric world in which everyone else would be consigned to a subordinate role, Boustany and Friedberg say the US and other nations have no choice but to defend themselves against the possibility that Beijing “might use economic instruments to sabotage, spy on, or seek to exert leverage across them”. Because of the authoritarian nature of its political system, China cannot be treated as if it were another market-oriented liberal democracy.
Economic domain
Of course, not everything relating to China should be treated as a strategic liability. The challenge for liberal democracies is to identify those that are and take measures to mitigate or eliminate the risk at the lowest possible cost.
Even as they minimise their exposure to China risk, the US and its allies should look for ways to pressure Beijing to moderate its predatory practices. China’s dependence on the dollar, imports of US food, energy and technology, and the continuing -desire of elites to access US real estate, financial markets and educational systems are obvious points of leverage.
It would be foolish to dismiss these reports as little more than the hypothesising of academics. The contributors are a distinguished group of heavyweight China experts and former policymakers whose analyses and prescriptions capture the prevailing mood in Washington and are likely to have considerable impact on administration and congressional attitudes towards China.
They make abundantly clear that Trump’s determination to level the trade playing field with Asia’s rising power is only the first step in an escalating competition for -supremacy that will be won or lost in the economic domain.
For Australia, the key take-away is that although we may hope for reconciliation, the odds favour a partial separation. This could threaten our future prosperity because of our growing trade dependence on China and susceptibility to US pressure to support a China push-back that could aggravate already strained relations with Beijing.
Divorce, of course, would be even more problematic, so we must think creatively about managing the consequences of heightened Sino-US rivalry.
Otherwise it may turn out to be the external shock that ends Australia’s long run of economic growth and derails our relationship with both countries.
Alan Dupont is chief executive of political and strategic risk consultancy The Cognoscenti Group and a nonresident fellow at the Lowy Institute.
Columnist
Alan Dupont is a Nonresident Fellow at the Lowy Institute for International Policy, and a professor of International Security at the University of New South Wales. He has worked on Australian defence and Asian ... Read more