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China's coming of age

By Munir Majid

August 4, 2019 @ 10:37pm

EVERY time the United States-China trade war escalates, there is plenty of agitation. Markets shoot down, calculations are made of economic costs. President Donald Trump’s threat last Thursday to impose 10 per cent tariffs on the remaining US$300 billion in Chinese imports from Sept 1 was no exception.

Equity markets plummeted. Bond yields came down. US consumers it was worked out, already paying US$830 extra a year from previous tariffs on Chinese imports, would have to pay an additional US$200, this time mainly from consumer products like clothing and footwear.

This latest round of US tariffs would reduce China’s exports by 2.7 per cent and slash gross domestic product growth by 50 basis points. Never mind that at 6.3 per cent growth the GDP value is about twice the size of Spain’s economy. Slower growth will dent expectations among China’s population, and there will have to be some form of fiscal stimulus and easier monetary policy to make up for the contraction.

Global export and economic growth will no doubt be affected by the stand-off between the world’s two largest economies, whatever the investment relocation that may take place — like from China to Vietnam and other countries including Malaysia — as American protectionism will come upon them. Indeed Vietnam is on notice for its huge trade surplus with the US (US$40 billion last year and more than half that in the first five months alone of this year) and for its “unacceptable” trade practices.

There is no hiding place. With the US on the trade warpath, the whole world economy will be affected, not only directly but also consequentially as negative investment sentiment begins to cut into economic activity. The International Monetary Fund now projects world economic growth to slow down from 3.6 per cent in 2018 to 3.3 per cent this year.

Thus, there is cause to be deeply concerned about the economic consequences of the US-China trade war. There is understandable worry whether we are seeing the end of rules-based international trade — and from that, world economic order as we know it. There should be a deeper concern, however, over its systemic impact on the international security system.

The US and China approached their engagement with each other with different objectives, mostly unexpressed. Initially Kissinger and Nixon intended, in 1971-72, to isolate the Soviet Union and catch it off-balance at the height of the Cold War by cultivating China.

Subsequently, with the establishment of diplomatic and trade relations in 1979, the US welcomed China’s coming out and participation in the world economy. By 2001, when China joined the World Trade Organisation, it became fully a part of it.

But never was it in the American mind that China would develop to be the world power it has become. There was indeed an implicit American expectation that China would not come to disturb US primacy in the world. When president Nixon said of his visit to China in 1972 that it was “the week that changed the world”, he could not have expected a change to where we are today: A China that can say “No” — as Japan could not.

Actually, US Trade Representative Robert Lighthizer may be bringing to the table in negotiations with China an eminently unsuitable style and approach that he used in the 1980s in US-Japan trade battles, with severe consequences for Japan.

China is different. It came into the relationship with the US and the world determined to wipe out a history of 250 years of humiliation and to restore China’s place in the international system, of national pride and success.

Never was there any self-imposed limit on how far it could go. Of course, in the early years there was Deng Xiaoping’s 1990 dictum “hide your strength and bide your time”. But by 2017, President Xi Jinping declared at the Communist Party Congress that it was time for China to take centre stage in the world.

Western observers called this a break from Deng’s advice. It was not. China had come of age.

Chinese people living in poverty (US$2 a day) dropped from 88 per cent in 1981 to six per cent in 2017. In 2013 China surpassed the US as the largest trading nation in the world. While the US military remains the strongest in the world, China is a strong third after Russia, with an edge in certain theatres and weapons of potential conflict.

This year in Fortune Global 500, Chinese companies were for the first time ahead of those from the US, 129 versus 121. Chinese technological capability is awesome, especially in AI (artificial intelligence). Huawei’s dual-chip strategy will blunt Trump’s ban on sale of chips to the firm by US semiconductor companies.

All this is based on what Deng had launched in 1978, a socialist market economy, without change to China’s political system.

There is now an equivalence in the relationship the Americans never anticipated, and do not want. They cannot, however, wish it away. Both parties, the Americans particularly, have to address the situation to forge a balance for global stability.

During the Cold War after WW2 until about 1989-90, there were clear distinctions and allocations in the relationship between the US and Soviet Union.

The Iron Curtain was an expression which had a distinct and understood boundary. The spheres for the exercise of power and influence had an allocated geography. Where the two adversaries might compete — as they indeed did through proxies like in Angola, the Middle East (West Asia actually), Afghanistan, even Vietnam arguably — were in countries outside the recognised spheres of influence.

When there was an adventure outside, in fact too close to America by the Soviet Union during the Cuban missile crisis in 1962, the world came closest to a nuclear conflict during the Cold War. The Balance of Terror, another category of clarity in the management of the relationship, saw a Soviet retreat and held America back.

In the relationship between the US and China, there has been less clarity and greater disingenuousness. Many commentators take the view that the current impasse in relations cannot be described as a new Cold War. It is contended China is an active participant in the hitherto US-led international economic order, which never was the case with the Soviet Union. China has not been excluded and the relationship between the two is not adversarial even if increasingly competitive.

It is this pretense at conviviality, however, that has been exposed by the trade war Trump has declared against China. Scratch the surface of apparent mutual economic benefit, so many differences in political system and government and in foreign policy belie an engagement described as so different from the animosity that informed US relations with the Soviet Union.

Now even that economic benefit is deemed not so mutual after all, as China not only rises but overtakes the US. America had an unexpressed place for China even as it embraced and welcomed it to the international system — one that does not disturb US primacy.

The Americans have arrived at a point where they clearly believe the boundary has been disturbed and see China as a challenge to US primacy.

The strategically shapeless relationship with China, however, cannot now be defined by one party alone. From the wishful thinking China could be formed in the US image, the point has been reached where, 40 years after diplomatic and trade relations were established, both countries must engage to define greater clarity in their relationship.

China, too, must begin to act as a responsible great power. It should not keep harking back to past humiliation, be self-righteous all the time, and pretend that it has no claim to spheres of interest and influence by referring to “core interests” and ancient history.

China has arrived in the here and now. Both China and the US have to give a shape and a clarity to their relations which they never did when they started out in 1972.

 

The writer, a former NST group editor, returns to write on local and international political affairs.

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