Since March, when President Trump announced his plan to slap tariffs on USD 50 billion Chinese imports to the USA, the world has been anxiously waiting to find out about the nature and extent of China's response. On April 2, China retaliated in kind, with tariffs on US exports to China, including meat, wine, fruits and grain. Many, particularly Wall Street, heaved a sigh of relief that China did not come out swinging any harder. China's response was measured, although analysts and China-watchers cautioned that China would play its cards deftly, and in incremental phases, and other trade measures could be coming. However, it was indeed remarkable that President Xi, who just got a strong vote of confidence from the People's Congress and could have unleashed his own version of “fire and fury” against the USA, showed restraint in sharp contrast to the continuous bluster coming from the White House.
All this comes at a critical moment in US-China relationship. The much-anticipated meeting between the presidents of the USA and North Korea (DPRK) is scheduled for May. It is not clear what role China played in facilitating this meeting, but China's involvement in reining in Kim Jong-Un's erratic weapons programme is important. China is DPRK's most vital trading partner, and the recent trip by Kim to Beijing, his first since he assumed office in 2011, only validates the importance of Chinese diplomacy in the denuclearisation of the Korean Peninsula and holding in check DPRK's nuclear ambitions, two key items in America's foreign policy agenda. Thus it is clear that neither USA nor China want to get into an all-out trade war at this juncture which could only distract both countries from working in concert to make the US-DPRK summit a success and harm future collaboration needed to follow through on agreements made at the summit. Many observers have referred to the negotiations between the USA and DPRK as “trilateral” in view of the major role that China as North Korea's most important benefactor will play in its implementation. It is widely held in the USA that President Xi is the “gateway to Pyongyang”. This special bond between DPRK and China was visible during Kim's visit with Xi, when both leaders reiterated their common socialist roots.
Thus, to get a better picture of the current geopolitical dynamics between the USA and China, one has to consider the complex interweave between geopolitical and economic relationships as well as the broader economic milieu. China and USA need each other, and in many different ways. Since President Trump came to power, he soon came to terms to with the fact that China is the largest lender to the US and holds more than a trillion dollar of US Treasury notes. It also means that, if provoked, China could deal a heavy blow to the US financial system by flooding the market with these bonds. This would put upward pressure on US interest rates and destabilise the exchange rate of the dollar. If higher interest rates, in view of recent acceleration in economic growth, reflect expectations of stronger future growth, this would make the US currency more attractive for investors to hold. Thus as the interest rate increases, the dollar gets stronger. The stronger dollar, larger federal budget deficits, and low national saving rates might cause the US trade gap with China to widen rather than narrow and defeat one of Trump's goals.
Turning to China, there are plenty of reasons why China would be keen to avoid a trade war or prolonged friction with the USA. China sees itself as a great power and a strong one, and a manifestation of this ambition is its “zone of influence” in South Asia. The view from Beijing has always been that “USA and DPRK can talk all they want, but if it involves South Asia, China needs to be involved.”
There are many areas of interdependence between these two countries. China's Belt and Road Initiative (BRI) is widely seen as an attempt to build a massive, multi-national zone of economic and political influence. For successful implementation of BRI and President Xi's “Made in China, 2025” initiative, China relies on market development and access to western technology including blockchain, AI, and autonomous cars. To pull itself out of the “middle income trap”, China covets access to US technology, and adopted a three-pronged approach: higher education in US learning centres; coercing US firms to share technology; and copyright infringement. A total break with the USA will be detrimental to China's long-term interest in becoming the dominant political and economic power by the middle of the next decade.
China watchers notice that Beijing reacts quite differently to conflicts with the USA on “sovereignty matters” as opposed to trade issues which count as “money matters”. On issues such as its claim on Taiwan or the South China Sea, China defends its rights with greater fervour than trade and currency, i.e. money matters. In other words, China is willing to “give” in trade negotiations, but in return expects the USA to review the recently passed Taiwan Travel Act, which it considers a violation of One-China Policy. As a warning to the USA, it has hinted at hitting back in diplomatic areas by not cooperating on regional issues as well as finance and investment.
China has also shown flexibility at the behind-the-scene negotiations on intellectual property (IP) protection and China's insistence on transfer of technology as a precondition for US investment/exports in China. While a high level economic dialogue with China in July 2017 ended without an agreement, USA and China plan to continue these talks.
China is focused on its strategic goals to make Chinese companies more competitive across the board, to localise production of components and final products, to have Chinese firms move up the value-added chain in production and innovation networks, and to achieve much greater international brand recognition. Access to US market and technology is important in this scheme of things.
One can then see that both USA and China are using tariffs or threats as a “negotiation strategy”. On April 5, The New York Times ran a front-page news item under the headline, “(White House) Hints That Tariffs on China May Never Go into Effect.” It reports that “White House officials moved on Wednesday to calm fears of a potential trade war with China, saying the administration's proposed tariffs were a “threat” that would help, not hurt, the US economy.” Most US observers now feel that China is not treating US tariffs as a signal to begin a trade war, and China's leadership appears to be understanding of Trump's domestic political manoeuvres before this November's mid-term elections. China's counter-measure is just a “shot across the bow”, a cautionary message to the US President to not allow things to get out of control.
Abdullah Shibli is an economist and Senior Research Fellow at International Sustainable Development Institute (ISDI), a think-tank based in Boston, USA.