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Echoes from history in China’s latest trade trouble

The country has long had a complex relationship with international openness 

By George Magnus  

Chinese President Xi Jinping. Photo: Li Xueren/Xinhua News Agency/PA Images

The Monument to the People’s Heroes in Tiananmen Square records several revolutionary events in China’s recent history, starting with the Burning of Opium in Humen. It was on the banks of the Pearl River Delta in 1839 that China seized and destroyed 1,000 tonnes of opium from British merchants, triggering the First Opium War and the start of what the Chinese call their “century of humiliation” by foreigners. It is a reminder that for China, trade and openness to the outside world have been historically both an agent of progress and a cause of profound instability.

This dichotomy is newly relevant given the challenges facing Xi Jinping’s China, especially as President Trump prepares to widen the trade war in which probably half, and perhaps all bilateral trade between the two countries will be affected.

As I explain in my forthcoming book Red Flags: Why Xi’s China is in Jeopardy, Britain’s 19th century insistence on the use of opium for payment in trade, the legalisation of opium for sale in China, and tariffs structured for Britain’s own benefit comprised the early agenda to force China to open its markets. The Chinese had to accept unequal treaties, pay indemnities and cede territory to foreign jurisdiction including treaty ports such as Hong Kong. Other European powers joined the fray, along with Russia, Japan, and eventually the United States.

Foreign powers carved up China and undermined its sovereignty, and the country was certainly forced to trade on unfavourable terms. But foreigners also brought new technologies in transportation, finance and commerce, along with employment opportunities and outlets for the sale of tea and silk that paid for industrial imports and essential infrastructure.

Fast forward to the present day and you can still see the ambivalence that trade represents for China. The country has been a major beneficiary of globalisation, and there is no question that the policies adopted to prepare for World Trade Organisation membership in 2001 (and take advantage of it afterwards) helped propel Chinese economic development. Today, China professes to champion globalisation as Donald Trump’s America backs away from it, arguing that US trade policies are tantamount to an attack on the Chinese state.

Yet China is in the cross-hairs for exploiting global rules governing trade and investment for its advantage. Intellectual property theft and plagiarism, technology transfer requirements to do business locally, restricted market access for foreign companies and a heavily biased regulatory, procurement and competitive environment that favours local companies are just some of the many criticisms laid at China’s door.

“China underestimated the persistence of Trump’s trade strategy—and this failure has had repercussions”

Because of the dominance of state enterprises in key strategic sectors and a lack of transparency about what really constitutes a private company, in the tech sector for example, foreign firms are at a disadvantage doing business in China and selling goods and services into the country. With advanced technologies now on everyone’s “must have” list, essential for defence industries and boosting productivity, it is no surprise that technology and associated industrial policies now represent a fault-line in relations between China and the west. This divergence is here to stay, and will shape the ways in which China and the west engage, or not.

As the American political scientist Edward Luttwak once said in a different context, the geo-economics in the relationship between major powers can be viewed as “the logic conflict in the grammar of commerce.” And that is what is playing out.

President Trump’s strategy will be judged, at least in part, in the Congressional elections in November. But the political consequences of the trade war in China are harder to fathom. It seems clear though that China underestimated the persistence of Trump’s trade strategy. And this failure has had repercussions.

This summer there has been much speculation regarding the authority of Xi Jinping, who was feted as unassailable only six months ago, while there are also questions over the status of key advisers and subordinates. Opposition to Xi’s leadership style and tactics has come out into the open a little more, thanks to the published essays of some leading Chinese scholars.

Yet it is far too soon to conclude that the trade war has upset the political order in any meaningful way. If anything, in the face of an adversarial Trump, Xi’s ability to play the nationalist card may be even stronger.

This is not to say that all is well. Beijing failed in least three rounds of negotiations with the US. Its tit-for-tat tariff options are nearly exhausted, simply because Trump’s tariff threats against China cannot be matched. America’s imports from China are four times as large as the other way round. Since consumers tend to pay for tariffs in the end, China may be unwilling to risk an additional constraint on local households. China has targeted South Korean and Japanese firms before in international spats, and is likely to raise the regulatory and “nuisance” temperature for US firms operating in China.

If it oversteps the mark, though, it risks further serious US retaliation, as well as torpedoing its own hard-slog attempt to build international credibility. The economic, financial and political stability Xi Jinping craves would be at serious risk.

The danger for China is that while the trade war may not affect reported GDP growth much, it is happening at a bad time and has spillover effects the economy, confidence and political authority that are hard to measure. But the economy is certainly slowing down, household debt is rising fast, Chinese firms still depend on imported technology, and financial markets, especially the stock market and the Yuan have already been spooked.

Trade economists always remind us there are no winners in a trade war, only those who can deflect more damage onto their antagonists. China now faces challenges on multiple fronts, now including trade, with “new era” governance that may be much less than auspicious in dealing with them.

George Magnus’s forthcoming book is Red Flags: Why Xi’s China is in Jeopardy (Yale University Press)

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