ERIC CHIOU, ASSOCIATE PROFESSOR
(The original article is issued in Taipei Times, May 4, 2018, available at: http://www.taipeitimes.com/News/editorials/archives/2018/05/04/2003692473)
The term the “Phony War” is used to describe an eight-month period at the beginning of World War II, when France and Great Britain had declared war against Nazi Germany, but where there was virtually no military conflict. It seems appropriate to apply that situation to the US-China trade standoff.
Since the beginning of this year, the global economy has been overshadowed by the gloomy clouds of US-China trade frictions.
In January, US President Donald Trump imposed punitive tariffs on Chinese solar panels and South Korean washing machines.
In March, the Trump administration announced 25 percent and 10 percent tariffs on imported steel and aluminum respectively, citing national security reasons.
Trump also signed a memo on Section 301 of the US’ Trade Act of 1974, to raise tariffs on up to US$50 billion of Chinese goods in order to punish Beijing for its allegedly unfair practices against US firms operating in China.
In retaliation for US tariffs on Chinese steel, Beijing declared US$3 billion in tariffs on US products.
Last month, immediately after the Office of the US Trade Representative (USTR) publicized the Section 301 sanction list, Beijing announced a list of nearly 1,300 items from the US — worth about US$50 billion — that would face 25 percent tariffs.
Trump responded by asking the USTR to consider further tariffs on up to US$100 billion of Chinese products and Beijing vowed to do the same.
The US-China trade spat seems to have rapidly intensified, which has invoked widespread concern and anxiety in various markets around the globe.
Some critics have said that the worst consequence of the US-China trade disputes could be another Great Depression, because these bilateral trade tensions could easily escalate into a total trade war, which would ignite a frenzy of trade protectionism around the world.
Despite these justifiable worries, the status of US-China trade tensions is more similar to the Phony War than any trade war.
Except for a few tariffs on limited items having taken effect, the reality is that both parties’ long lists of sanctions against each other have not yet been implemented. The two nations have been waving heavy hammers and shouting at each other, but no one has initiated the first strike.
Although Washington issued the tariff list of Section 301 on Chinese products, the final decision for implementing tariffs still needs to go through hearings this month and another few months of consultations and assessments.
As for the Chinese tariff retaliation, the date for the tariffs to take effect is “to be announced.”
This suggests that the two sides remain flexible and intend to maintain leeway for negotiation.
Washington and Beijing have kept communication channels on trade issues open. For example, in late February, Chinese Vice Premier Liu He (劉鶴), an economic adviser close to Chinese President Xi Jinping (習近平), was sent to Washington to ease trade tensions with the US, albeit fruitless results.
Trump last week said US Trade Representative Robert Lighthizer and US Secretary of the Treasury Steven Mnuchin would travel to China for trade talks. [Editor’s note: They arrived yesterday.]
That indicated that Washington had not shut down the window of negotiation, neither has Beijing refused to talk with the Americans.
The reason this trade war is phony is quite straightforward: Neither the US nor China is willing to embrace the catastrophic outcome of a total trade war. Hence, although both sides have a gun aimed at the other, no one is willing to fire the first shot.
Furthermore, US-China trade tensions have been compared with a so-called game of chicken, which is also called a loser’s game, since the outcome is determined by the action of the loser. The winner’s chance of triumph has to unrealistically depend on the loser’s complete concession. Otherwise, the result will be mutual destruction.
Apparently, both the US and China are unwilling to see the worst-case scenario, so they have kept the door open for continuing negotiations. Nevertheless, both parties have incentives to maintain the credibility of their tariff threats, in order to maximize their leverage during negotiations.
Despite the war of words, the odds that US-China trade tensions will deteriorate into a full-blown and full-scale total trade war are unlikely.
First, a full-scale trade war would mean that the US and China mutually impose high comprehensive tariffs on each other’s products, making no exceptions. Given the complex trade interdependence between the two, the political constraints on the US presidency and various thorny domestic challenges in China, it is extremely difficult to imagine that either Trump or Xi would be willing to take this risk, which could destroy their political futures.
Second, tariff threats, for Trump, are a means to an end. They are a tactical instrument and an effective weapon to compel China to address trade imbalances, open its domestic market, enhance the enforcement of intellectual property protection and so forth. They are not for the sake of tariff revenues.
For China, tariff retaliation against the US is nothing but a face-saving defensive measure. Hence, neither side has any intention to shoot those mutual destructive weapons. As a result, this trade tension might end with a compromise by both sides, although the negotiation might be prolonged.
However, this phony trade war might transcend US-China trade frictions, and reach a higher level of strategic competition between the US and China.
It is debatable whether Trump holds a long-term strategic perspective on maintaining the supremacy of US power, rather than just considering his electoral base and the upcoming midterm elections for US Congress.
However, there is no doubt that Washington’s latest economic offensive assaults against China exceed conventional trade issues and reveal its security concerns and strategic awareness of China.
For instance, the Section 301 tariff list mainly targets the items in so-called “Made in China 2025” initiative, revealing new US strategic considerations regarding China.
“Made in China 2025” is Beijing’s latest industrial policy, with the ultimate goal of transforming itself into a high-tech manufacturing powerhouse by 2025.
In this initiative, many high-tech products, such as semiconductors and airplanes that are imported from the US, are to be replaced with Chinese goods. Washington is concerned that China might undertake this plan using unfair and illegal practices.
Moreover, the US Department of Commerce has targeted China’s No. 2 telecom giant, ZTE Corp, and imposed a ban to prohibit ZTE from purchasing any US products for seven years, while the US Department of Justice is investigating Huawei Technologies Co, China’s No. 1 telecom company, for possible violations of US sanctions against Iran. Trump is also considering tightening restrictions on Chinese investments in the US.
A series of unfavorable US policies toward China reflect the Trump administration’s assessment of Beijing as unveiled in its first National Security Strategy, issued in December last year.
That strategy refers to China and Russia as rival and revisionist powers. Correspondingly, the USTR’s 2018 Trade Policy Agenda and 2017 Annual Report said that “supporting our national security” is one of five pillars in Trump’s trade policy.
As a result, Trump’s trade measures against China should be seen as part of implementing the US’ national security strategy toward China, rather than mere retaliation against Beijing’s unfair trade practices.
Hence, although the phony trade war might eventually end with a peaceful outcome, the US-China strategic competition is likely to last and intensify.
As power transition theory reveals, the US, as an existing superpower, is actually waging a silent preventive war against China, a rising challenger, to stop the latter from becoming too industrially strong to be deterred and defeated.
Beijing will be even more determined to reinforce its high-tech development in order to narrow the gap with the US.
Taiwan, as a small state caught between the two great powers, not only needs to be attentive to any tiny shift in the power struggle between the US and China, it also has to prepare various contingency plans for different scenarios in their trade spat, as well as their ongoing competition.
The only way for Taiwan to safely sail through this trade turbulence will be with a compass of foresight and prudence.
Eric Chiou is an associate professor of international political economy at National Chiao Tung University.