The tortuous slog for China and the US to reach Phase 1 of an agreement that would end their trade war looks increasing problematic and may indeed go “poof” before Presidents Trump and Xi can agree on a place to meet and sign a deal.
One day, Donald Trump declares that “we’re about to sign the best deal ever.” The next, he threatens to raise tariffs to the next level.
China believes the Phase 1 agreement would include a US commitment to remove all tariffs on imports from China. Presidential trade adviser Peter Navarro, whom Bloomberg Businessweek has called the most strident China hawk, is the White House hardliner who opposes rescinding any tariffs on Chinese goods.
Navarro leads Trump astray
Navarro has persuaded Trump that imposing tariffs on Chinese imports would close the trade deficit. Instead, the US trade deficit with China has only worsened. Despite being wrong, Navarro’s credibility with Trump appears intact. His view prevailing within Trump’s China team may mean no deal at all.
Trade hawks like Ron Vara, aka Peter Navarro, insist that the US can win the trade war with China by piling on tariffs. Navarro habitually credits the fictional Ron Vara for the more ludicrous assertions and statements that he has concocted. Most likely he’s too ashamed to be identified with the more outlandish positions.
Navarro/Ron Vara learned from his mentor and good friend Gordon Chang (author of The Coming Collapse of China) that attacking China can be personally rewarding. As proof, despite Chang going off the rails predicting the collapse of China nearly two decades ago, he still gets invited to US network news and writes commentaries for the print media.
Navarro does Chang one better because he’s a better writer than the rambling “Collapse” Chang. Navarro’s book Death by China, though full of misrepresentations, nonetheless caught Trump’s fancy, and that’s how he became part of the White House team on China.
One of Navarro’s favorite assertions is that China’s unfair trade practices steal jobs from Americans, an accusation he has managed to imprint on to Trump’s brain.
However, his former colleagues at the University of California, Irvine have just published a factually based study supported by charts and tables in the Harvard Business Review that refutes his allegations about China. Specifically, the study showed that the US had not lost any jobs to China since China joined the World Trade Organization. Of course, as I reported earlier, the same colleagues also told me that Navarro came from not knowing anything about China.
The concluding sentence of the HBR article said, “But the data of the last 25 years portray US-China commerce as the most synergistic bilateral relationship in world history, bringing peace along with mutual prosperity.”
‘Be careful what you wish for’
Former Australian prime minister Kevin Rudd spoke recently to the Asia Society in Palo Alto, California. He said, “Those seeking to unravel this relationship, be careful what you wish for in terms of known consequences and unintended consequences.” Rudd was referring to people like Steve Bannon and certain members, such as Navarro, of the Trump administration who are pushing for decoupling with China.
The consequence of a decoupled US could be as devastating as a nuclear winter, and the American public needs to know and fully understand what the US would look like once decoupled from China. It’s high time to examine the consequences carefully.
As the threat of a trade war loomed early last year, Chinese consumers begin to favor their own local products over competing American brands. The Apple smartphone, once the must-have item for every Chinese yuppie, has fallen behind at least four Chinese brands in market share in China.
Online sales on Singles Day (November 11) broke all records with 25% higher revenue than last year. Obviously, China’s consumer economy is not being hurt by US imports, made more expensive by added tariffs, because consumers are not buying US goods. Decoupling would mean American businesses being permanently kept away from a market at least four times as large as their own domestic market.
On the technology front, decoupling would bring collaboration to a halt and slow innovations and advances. Take Huawei’s 5G (fifth-generation telecom) development as an example. Decoupling would force Huawei to source many of its components from outside the US, but it’s double-edged. As much as 70% of Qualcomm’s revenue depends on supplying Huawei.
According to National Public Radio, 54 countries have already accepted Huawei’s 5G while only the US, Japan, Australia and New Zealand are banning Huawei. If the US and China are fully decoupled, the world will be split into those countries with 5G and a handful without. The gap would only widen, since countries with Huawei’s 5G will be in line to move up to 6G years ahead of others, as 6G is already under development at Huawei.
How China and the US influence the rest of the world would be dramatically different.
The US military is stationed in more than 60 countries with around 1,000 bases. The basis of alliance with the US would rest primarily on this umbrella of armed security. Economic synergy, if any, would be minimal, or even negative for US allies as Trump strong-arms them to pay more of the cost hosting American troops in their homelands.
Instead of military alliances, China seeks economic collaboration with many countries around the world, especially as part of the Belt and Road Initiative. After it was launched in 2013, 65 countries involving 4.4 billion of world’s people have entered agreements and projects with China under the initiative.
In general, China offers to finance and assist in the building of infrastructure projects. These projects can be railways, highways, power plants, ports and the like. What these projects have in common is that their size and scope are more than the individual country can handle and the completion of the project would provide a significant boost to its economy.
The US, Secretary of State Mike Pompeo in particular, goes around warning Third World countries of the potential debt trap that these BRI projects represent. The response from most of these countries is, “Do you think we’re too stupid not to recognize debt traps?”
Instead, they have seen how infrastructure investments in China have resulted in hundreds of millions of people being taken out of poverty, and they want some of that. Of course, it goes without saying that Chinese investors financing BRI projects must ensure that the terms of financing are sound and not give cause for BRI skeptics to say I told you so.
Uzbekistan a beneficiary of BRI
Uzbekistan is one of the more recent success stories. When the Uzbek strongman Islam Karimov died in 2016, his successor stepped in and opened the country to the outside world. Reforms eliminated corrupt practices and enacted laws to safeguard foreign direct investments.
China liked what it saw: a politically stable country, a large market of 32 million people, and a high-caliber workforce. Sixty percent of the population was under age 30. Within the last two years, more than 1,200 Chinese companies have entered Uzbekistan to create employment for young workers. At the same time, China became the largest contributor of foreign direct investment at US$15 billion.
China has installed fast rail from Tashkent to Xian to help Uzbek farmers sell fresh fruits to China, replacing fruits formerly imported from the US. Up to now, most of the Uzbek fruits have been exported to Russia, but now the farmers see a Chinese market potentially 10 times as big.
The rail link also sends cotton, Uzbekistan’s No 3 major export product, to the textile plants in China. To improve the quality of Uzbek agriculture, China sends agricultural machinery, seeds and technology.
The ancient Silk Road used to run through the length of Uzbekistan and its old cities are popular tourist destinations, and visitors from China are no exception. Becoming fluent in Mandarin in order to be a tour guide has become a popular course of study for young Uzbeks.
Recognizing the tourism potential of historic Samarkand, China has sent a team of architects and city planners to work with the Uzbeks. Funded by China’s Silk Road Fund, the team is working to redesign the ancient city for maximum tourist appeal, conservation and preservation of precious sites while facilitating economic growth.
Another reason Uzbekistan is important to Beijing is its critical geographical location between China and Russia. The BRI objective to link China to Russia and Western Europe by rail has to run through Uzbekistan.
The hostility of the Trump administration has pushed Russia and China to a high level of collaboration and cooperation. Chinese President Xi Jinping has had 30 meetings with his Russian counterpart Vladimir Putin over the past six years and made eight state visits to Russia this year alone.
Chinese-Russian strategic relations
The two leaders call theirs a strategic partnership, a special relationship. The partnership encompasses sharing of Russia’s advanced weaponry and anti-missile warning systems and China injecting foreign direct investments to help Russia revitalize its economy at an average rate of $5 billion a year.
As one example, Great Wall Motors invested more than $500 million for a state-of-the-art sport-utility-vehicle plant in Tula, south of Moscow, to supply its popular Haval to the Russian market. The factory provides employment for 1,000 workers.
Huawei is engaged in helping Russia develop its 5G telecommunication network with no concerns about back-door leaks but with the wide recognition that 5G will be a crucial boost to the Russian economy.
Russia is also encouraging China to help develop polar navigation in the Arctic. As an alternative direct shipping route from China to Western Europe, it is a Belt and Road initiative of keen interest to China. It is an interest shared by the Russians, but they lack the resources to go it alone.
Every university and institution of higher learning in Russia has a partner school inside China. Students exchange residences to learn what each country has to offer, while facilitating the sharing of research.
Russia offers its expertise in classical music and mathematics while the Chinese do so in technology. And they work on artificial-intelligence projects together.
Russian students find studying Chinese a popular pursuit, an asset in their portfolio for a future career path involving China. At present, salaries in China are two to three times as high as in Russia for comparable occupations.
Fork in the road
The two countries also have another foreign policy in common: They do not try to tell other countries how they should run their governments.
Carry decoupling to the extreme, and we will see two very different worlds. Uneasy lie the countries that depend on the American military for their sense of security. They never know when Uncle Sam will hand them a sudden uptick in the bill for services rendered as Trump is currently doing with South Korea. Nor can they tell when the US might want to renegotiate the terms of the military arrangement.
China would lead the world based on trust and a mutual sense of security derived from trade and shared economic interests. Given that China is already the leading trading partner for well over 100 countries, I would anticipate that at least three-quarters of the world would gladly join an integrated global economy led by China.
The American people are at a fork in the road. Their president has elected to base his China strategy on Navarro, whose false narrative puts his personal agenda above national interests. That path will surely lead the US into isolation and diminished prospects of economic well-being.
Or, do they listen to far wiser observers, former government officials and statesmen who do not counsel disengagement with China? Kevin Rudd and Joseph Nye are just two of many examples. Nye has a distinguished record of government service and was former dean of Harvard’s Kennedy School of Government.
In a recent interview, Nye said, “I think the important point is to realize that China does not present an existential threat to the US like Hitler did or like Stalin did. China is not trying to really destroy or change the American system.”
The first step to re-engaging China is for Trump to decouple from Navarro.