US-China trade war: toward the Thucydides Trap?
According to the Thucydides Trap theory, when a rising power threatens to displace the supremacy of an established power, war is often the result. Some may be inclined to characterize the escalating China-US trade war in such terms, but military conflict is unlikely to be the outcome of this spat.
As Deng Xiaoping said, “the China-US relationship can never be too good or too bad,” for it is simply too important. It is that central importance – for the global economy and regional stability – that will prevent this fundamentally economic dispute from turning into a military dispute.
Since the establishment of diplomatic relations in 1979, China and the US have experienced numerous tense episodes, such as the US arms sales to Taiwan in 1981, the bombing of the Chinese Embassy in Belgrade in 1999, and the military-aircraft collision of 2001. These incidents did not result in escalatory military conflict. Bilateral relations not only survived, but they thrived thereafter.
Decades ago, when the two countries’ economic relationship was not nearly as entrenched as it is today, the leaderships of both nations desired to ratchet down tension and preserve the relationship, and that has proved to be the cornerstone of bilateral relations ever since.
The foundation of the current dispute is the imbalance in the two countries’ trading relationship; it is not, at its core, about a desire for trade supremacy. America’s merchandise trade deficit surged by 12% to US$566 billion in 2017, the highest since 2008, of which 66% ($375 billion) was attributable to China.
From the US perspective, this is of course unsustainable, even if it has itself partly to blame. US manufacturers, in search of inexpensive labor and access to China’s marketplace, helped make China the economic engine of the world. And it was the US that agreed to the terms of bilateral and multilateral trading relationships that may have been to its own disadvantage in the long term.
That said, while China has been a party to numerous trade agreements, including membership in the World Trade Organization, it still has some strict conditions on foreign investors in place, which many see as both unfair and lopsided in favor of Beijing. For example, foreign investors cannot have access to Chinese foreign-exchange reserves when transferring currency and must generate their own foreign exchange.
No one forces anyone to invest in China, of course, but the lure of access to the Chinese marketplace has prompted many foreign companies to agree to terms they might not agree to anywhere else in the world.
According to the US Trade Representative’s exhaustive Section 301 Report for 2018, “the Chinese government uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous administrative approvals needed to establish and operate a business in China.” Although China has repeatedly rebutted such accusations, many foreign investors contend that it continues to utilize so-called “state capitalism” to its advantage.
From China’s perspective, America’s trade imbalance is a long-standing structural problem that should be resolved through bilateral negotiations. However, the Trump administration’s credo is that there is no longer any time for ‘consultation’ and ‘political correctness’
From China’s perspective, America’s trade imbalance is a long-standing structural problem that should be resolved through bilateral negotiations. However, the Donald Trump administration’s credo is that there is no longer any time for “consultation” and “political correctness.” It sees Beijing as having skillfully manipulated the bilateral and global trade regime to its distinct benefit, and it blames countless previous US administrations for pandering to Beijing while the US trade relationship with China became further and further imbalanced.
President Trump is seeking nothing less than a reordering of the global trade regime so that it is not tipped so much in Beijing’s favor, but levels the import and export playing field for the US, and the rest of the world in the process. Trump sees this escalating trade war with Beijing, and the trade war he initiated with the rest of the world, as an effort to tip the balance before it is too late.
It may already be too late, however. America’s trade imbalances did not occur overnight, but rather over the course of many decades. If the balance is to be readjusted, it will take many years – perhaps decades – for this to happen.
The Chinese government and many Chinese people believe that Trump’s trade war and other investment restrictions placed on Chinese companies are ultimately aimed at curbing their country’s technological development – particularly in light of its “Made in China 2025” strategy – to attempt to contain China’s rise as a great power. This is indeed a consideration in Trump’s strategy, as the race for supremacy in fifth-generation (5G) wireless technology, artificial intelligence, and enhanced cyber technology heats up. The stakes are extremely high in that regard.
Thus far, the US is being perceived as aggressive and offensive in the trade war, while China is being seen as reactive, defensive, and reciprocal. Based on this, it would appear that China wants to avoid the Thucydides Trap. Similarly, there is no reason to believe that Trump desires military conflict with China. On the contrary, both countries’ leaderships realize what is at stake, and neither ultimately wants to derail the mutually beneficial economic relationship that forms the foundation of their economies.
In post-World War II history, there have been many opportunities for both countries to escalate tension and trigger military conflict. Beijing and Washington understand that this is a line that neither has crossed in the past, and there is every reason to presume that neither wishes to cross that line in the future. Both countries have proved that they are masterful at taking two steps forward and one step back. That also appears to be what is happening now.
It is ultimately the degree of economic pain both countries can endure, and the length of time it can be endured, that will determine the economic outcome of this trade war. There is every reason to believe that it will not result in military conflict, but rather, mutual respect, and the desire to continue a bilateral trading relationship that is mutually beneficial in the long term. What is unknown at this time is how long it will take to arrive at an equilibrium, and at what cost for both countries.
This article was co-authored with Daniel Wagner, chief executive of Country Risk Solutions based in the US.