War without end?

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War without end?


Stephan Haggard
The author is the Krause Distinguished Professor at the Graduate School of Global Policy and Strategy at the University of California in San Diego.

How do trade wars end? In the Trump view of the world, you escalate sanctions — now announced on the entirety of China’s trade — and the costs imposed on the slowing Chinese economy will force Xi Jinping to blink.

As Koreans know from dealing with Kim Jong-un, however, this happy ending is by no means a foregone conclusion. Rather than moving toward a speedy conclusion, political as well as economic circumstances are likely to extend the current uncertainty in U.S.-China relations through the 2020 U.S. elections. We could be moving toward a trade war without end, with all of the uncertainty for the world economy such an outcome implies.

The trade war was not launched in an effort to lower Chinese tariffs — the objective is much more ambitious. In the last decade, Beijing has gradually drifted away from its reformist course, outlining an ambitious industrial policy under the broad rubric of Made in China 2025.
These industrial plans, backed by over $1 trillion in government funds and fed by incessant theft of intellectual property, have targeted cutting edge technologies: from semiconductors to electric vehicles, biotech and aerospace technologies. Korea is arguably more exposed to these policies than any other advanced industrial state, precisely because of its reliance on high-tech manufacturing. Even if some of these plans fail, others will hit. The implications for China’s rapidly-growing military capabilities are obvious and intended. Consensus in Washington is growing that a showdown on trade is not just an economic issue, but has much wider strategic implications.

The Trump administration has not made a resolution any easier, and what China claims as “core interests” are also now in play. The United States is moving forward with a $66 billion sale of F-16 fighter jets to Taiwan that is one of the biggest military deals with the island democracy since the normalization of relations with China. Beijing has already promised undefined countermeasures.

In addition, Hong Kong may pose an even more serious risk to the U.S.-China relationship than the Taiwan arms sales. Everyone has been surprised by the durability of this wave of anti-government protests. But the Hong Kong government’s extradition bill even makes the usually-compliant Hong Kong private sector nervous — could businessmen skirting the law in Hong Kong’s free-market economy be extradited to Beijing?

Until recently, President Trump has done little to provide comfort to the protesters, despite the claims from Chinese nationalists that the United States is behind the demonstrations. As usual, he in fact has little interest in defending democracy abroad, in this case the fraying integrity of China’s hands-off, “one country-two systems” pledges.

If China felt that it had to intervene with force to limit the mounting damage to the city-state, however, it would be virtually impossible for the United States to sit on the sidelines. Already, Trump has faced withering criticism from both Republicans and Democrats for appearing to side with Xi Jinping on the issue.

Add to this toxic mix the political cycle in the United States. Trump has now promised the American public a “big deal” with China for the sacrifices affected sectors, such as American soybean farmers, have made. He recently delayed the imposition of more tariffs on China, citing the Christmas season as his justification. But his room for maneuver is limited.

For his part, Xi Jinping has equally if not more pressing reasons for resisting external pressure. What would it do to his image as China’s new strong man to capitulate to Donald Trump on a signature initiative like Made in China 2025?

For their part, the Democrats might ultimately offer up a more nuanced return to engagement with China if they regain the White House. But in the interim, they have few incentives to look soft on China either — human rights and trade are issues for Democrats too. Opposed to Trump on virtually every major policy area, differences on trade policy between the two parties are much narrower. There are even Democrats openly arguing that Trump is too soft on Beijing and that the United States should more aggressively “decouple” from China.

Market analysts fearing a recession are poring over details like the slowdown in business investment and the flight from stocks to U.S. government bonds. In these circumstances, however, I worry about so-called “headline risk”: that a small perturbation — a Trump tweet, an escalatory move from Beijing, a Hong Kong protest that goes too far — will upset an already fragile world economy. Fasten your seat belts. We are in for a bumpy ride.
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