Sun Tzu and the art of fighting a trade war
It will be long, it will be nasty and Trump would be foolish to underestimate Xi and the resolve of China
Imagine the Chinese leadership out of the public eye for nearly two weeks – virtually holed up, immersed in a secret debate. That is exactly what just happened at Beidaihe, the beach resort in eastern Hebei province.
While there might be James Bond-ish conspiracy theories out there for this annual ritual, there are no doubts about the key theme of discussions: The US-China trade war.
The second-largest world economy under President Xi Jinping is deep into the long march towards superpower status. The previous geopolitical and geoeconomic status quo is dead.
Xi has made it abundantly clear that for China to just become a “responsible stakeholder” in the post-Cold War US-controlled liberal international order is not enough.
It did not escape the notice of the senior leadership at Beidaihe of the change of direction by the US. President Donald Trump’s administration is taking a belligerent approach while the US National Security Strategy in December 2017 unmistakably labeled China a “revisionist power,” a strategic rival and for all practical purposes, from the Pentagon’s point of view, a top threat.
Instead, what the Beijing leadership identifies is what we could define, in Chinese culture terminology, as the “three threats.”
A threat to their foreign policy concept for the coming decades, such as the Belt and Road Initiative, and a threat to China’s own integration drive centered on the three strategic zones of the Greater Bay Area, the Beijing-Tianjin-Hebei corridor and the Yangtze river delta. And, of course, a threat to the Chinese stock market.
State media is still grappling on how to deal with it. The People’s Daily has, politely, defined the Trump administration’s strategy as “engagement plus containment.”
China Global Television Network (CGTN) has played the soft power card by addressing a sarcastic letter to Trump. The network thanked him for uniting the rest of the world while forcing China to make its economic environment more seductive to foreign investment. The CGTN video subsequently “disappeared” from YouTube and Twitter.
So, even as the leadership consensus may be this is all about containing China’s irresistible rise, and even considering the fog surrounding major Beijing decisions, it’s still possible to detect some fascinating nuances.
For Trump, on the record, “trade wars are good and easy to win.” That reflects his fascination with the World Wrestling Entertainment (WWE) ethos. Trump, in this case, is The Undertaker bent on taking Xi to the woodshed. Xi is no more Mr. Nice Guy, Trump’s former “good friend.”
So, Xi cannot possibly believe that galvanizing the crowd like superhero The Rock will save the day. The WWE is not about “win-win” – that is for losers. Now, it is no holds barred. Trump accuses China of US election interference: “Fools that are so focused on looking only at Russia should start also looking in another direction, China.”
China’s military “adventurism” allows the Pentagon to come up with a Space Force. China is also barred from investing in US industries related to national security.
The US response to the reach of the Belt and Roaf Initiative is to invest in the fuzzy “Indo-Pacific” – by committing a paltry $113 million in energy, infrastructure, and digital commerce. “Made in China 2025” is qualified as an absolute threat to “America First.”
And China is increasingly depicted as “malign” – the buzzword of choice that makes Trump, in this case, fully aligned with the industrial-military-security-think tank complex.
So, how to fight a cage match with no referee? Enter Sun Tzu, China’s legendary military strategist who wrote The Art of War. The first rule is simple: “All warfare is based on deception.” As in Beijing gearing up to negotiate both as a partner and a threat.
It will be long, it will be nasty, it will be protracted, going way beyond the talks this week in the US, which importantly do not feature Vice-President Wang “Firefighter” Qishan, a key player and Xi’s trusted consigliere. He is more useful coordinating long-term strategy in Beijing.
Here, a quick flashback to the British Empire is in order. In 1793, during the first diplomatic mission to Beijing, led by Lord Macartney and received by Emperor Qianlong, the Brits quickly identified how the teeming markets of China posed a “threat” to Europe and the contemporary world trade system.
China was self-sufficient at the time and exported to Europe goods such as silk, tea, textiles, porcelain. In fact, all the trimmings of the luxury market in a web of silk routes or an earlier version of the Belt and Road.
But what did they import? Not much, apart from Siberian furs, some exotic food and ingredients for traditional Chinese medicine. Here is Emperor Qianlong comments: “The Celestial Empire possesses all things in prolific abundance and lacks no product within its borders. There is, therefore, no need to import the manufactures of outside barbarians in exchange for our own products.”
We all know how that ended – gunboat diplomacy, the Opium Wars, Beijing being sacked in 1860, “unequal treaties” and the Chinese “century of humiliation.”
All that still features deeply in the Chinese collective unconscious as much as the real roots of the current trade war. Deng Xiaoping’s brilliant strategy was to open China’s special economic zones or SEZs as unbeatable, low-cost production bases for Western and Asian multinationals.
Deng offered the prime platform for the expansion of global capitalism. The inevitable consequence was a stampede of foreign direct investment (FDI), off-shoring and outsourcing.
Now, compare it with key data supplied by China’s General Administration and Customs. In the first six months of this year, no less than 41.58% of China’s exports to the rest of the world came from American, European and Asian multinationals.
There is no evidence corporate US – represented by multinational companies – is willing to sacrifice low production costs to “bring those jobs back.” Multinational companies also prize a devalued yuan because that keeps those low production costs down.
Additionally, any Trump attack on “Made in China 2025” does not alter the fact that the world’s second-largest economy is relentlessly climbing up the manufacturing ladder. Eventually, it will overtake the US in technological innovation.
As Zhigang Tao, director of the Institute for China and Global Development at Hong Kong University, pointed out, Beijing handed American capital the proverbial offer you can’t refuse – access to the Chinese market in exchange of technological transfer.
“[In fact,] this technology-for-market-access strategy has worked extremely well, as evidenced by China’s rise in key industries including high-speed rail, aviation, automobiles and wind turbines,” Tao said.
So, the next step should be an extension of the Tesla-in-Shanghai model.
Seducing American capital to invest in China under more lenient rules may be only one aspect of a Sun Tzu maneuver for Beijing to defuse the trade war. Beidaihe certainly evaluated what might happen if this all goes wrong and becomes a hot trade war.
A Hurricane Tariff would have the potential to devastate China’s employment and financial landscape and provoke high inflation and even a recession. Xi cannot possibly risk losing his de facto power base, which is not the Chinese proletariat, but the rising middle class on a frenetic consumption and global tourism binge.
Add to that, the relentless working-class anger, already in full effect, according to the University of Utah’s Minqi Li. After all “Socialism with Chinese Characteristics” is hardly Marx.
Proverbial Western myopia has been riffing about a China collapse for years. Yes, there is a possible debt bomb. Yes, China’s dependency on foreign sources of oil and gas is a recurrent nightmare. And yes, US-China relations are now unmistakably in Cold War territory, even without considering the South China Sea and Taiwan.
But underestimating a rising power capable of planning a concerted global strategy in detail up to 2049 is foolish. Xi and Trump will have the chance to have a serious face-off on Nov. 30 at the G20 summit in Argentina.
Trump may even bill it as a “win”, as in his summits with Russian President Vladimir Putin and North Korean leader Kim Jong Un. Sun Tzu, though, is waiting in the wings.