The geopolitical logic of the US-China trade war


Tatev Ghazaryan: –

September 25, 2019

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Original author: George Friedman, Geopolitical Futures

Since the inauguration of Donald Trump in 2017, the United States has taken a number of steps to reduce its trade imbalance with China. However, Trump’s decision to impose tariffs on China was preceded by a decade of failed negotiations aimed at establishing fairer trade relations between the two countries. The Obama administration has had a number of high-level meetings with Chinese officials on Chinese manipulation of the Chinese-Yuan barrier to imports from the United States. Many US administrations, rightly or wrongly, have argued that China enjoys free access to US markets without compensation.

Although the Chinese were making some compromise gestures, they could not meet the US demands for greater access to the Chinese market. China’s economy has long been heavily dependent on exports to foreign markets, as its own domestic market could not absorb the huge amount of goods produced by Chinese industry. However, with the onset of the financial crisis of 2008, the domestic market took on a whole new meaning.

The example of Japan

There are some commonalities between the current Sino-US trade relationship and the Japanese-American trade relationship of the 1980s. During the 1970s and 1980s, Japanese industrial production significantly exceeded domestic demand, փակ Japan closed most of its own market to imports from the United States. The period from the mid-1980s to the end of the 1980s was marked by extreme tensions between the two countries. The United States made serious threats of retaliation, but they did not materialize for two main reasons. First, Japan was a strategic ally of the United States. The need to close Vladivostok, which required cooperation with Japan, was ultimately more important. than the US-Japan trade imbalance. Second, the 1980s ․ The last Japanese economy began to collapse. Competition from other industrial centers forced Japan to lower its export prices, which in turn reduced income and weakened the banking system on which Japan’s export industry was based. Banks were shaken and collapsed, which means that Japanese producers could not export to the level they used to.

However, before the bankruptcy of the banks, there was extreme anti-Japanese sentiment in the United States due to job losses in Japanese factories. Today we see similar reactions to the Chinese. In addition, China today faces intense competition, as well as devaluation, trying to enter other highly competitive technology markets.

However, there is a fundamental difference between China and Japan. Japan was of strategic importance to the United States, which to some extent helped to curb economic shocks. China is not only not a strategic asset to the United States, but is increasingly seen as a strategic threat. In any case, the Chinese stressed their growing military capabilities, which means that US-China relations lack the restraint mechanism that existed in Japanese-American relations. Beijing, being an economic and military threat at the same time, provokes different reactions from Washington.

However, it should be noted that China was backing the Japanese strategy in its relations with the United States. It held many meetings, which ended in vain. Since there seemed to be no leverage to force the Chinese to change their policy, many US administrations simply continued to negotiate, which resulted in nothing.

 In these negotiations, the Chinese were helped by large investments made in China by large US companies, which pushed Washington to maintain stable relations with Beijing. But before that, companies benefited from their relationship with China, and the question of whether the US economy benefited from it was always in doubt. They were in China to take advantage of cheap Chinese labor, but at the same time they closed US factories and got rid of their American workers. This helped them achieve results, but the wealth created remained in China.

In previous administrations, the use of foreign production resources by US companies made it difficult to take action against the Chinese. But in the aftermath of the 2008 financial crisis, the massive displacement of the once powerful industrial working class created a large and angry section of the population that became as politically powerful as the American businesses operating in China. The option of simply continuing the ineffective negotiations, which had no effect on China’s policy, gradually vanished.

Thus, the Trump administration used the tariffs to try to force the Chinese to open their markets to

the United States. The problem is that the Chinese economy is not able to accept such competition. The financial crisis has seriously affected China’s export industry, as the global economic downturn has reduced appetite for Chinese goods. It greatly hurt the Chinese economy, shifting it from the equilibrium to the crisis that is still observed in China! The main solution to this problem for China was to increase domestic consumption ․ a problem that was legally difficult due to the inability of financial markets to distribute wealth in China, to increase consumer credit en masse, as well as the fact that Chinese industry was oriented to target more foreigners. than domestic consumers. Selling iPads to Chinese villagers is not easy.

Granting access to the US market in China would be painful, if not catastrophic. The Chinese domestic market was the only landmass that China had, and it was impossible to meet the demands of the United States for greater access. The Chinese reacted against the US tariffs, but it was weak and inadequate. China receives 4% of its GDP from US exports. While the United States receives only 0․5% of China’s exports. China can do much less harm to the United States than the United States to China. Critics of the Trump administration’s tariff policy show that various companies or factories have suffered losses because of the tariffs. These criticisms are well-founded, but they do not show the whole picture. 

The Chinese responded by lowering the value of the yuan, thereby making exports cheaper. This strategy works in the short run, but because it increases the price of oil-like products, it is not a solution in the long run. This policy has also strengthened the position of those who say that China is manipulating its currency in order to strengthen its position as an exporter. It is possible to remember that this is not a new accusation. The Obama administration has been aggressive on this issue, but has lagged behind. The Trump administration also reiterated its previous demands: in early August, it officially called China a currency manipulator.

Recently, Trump threatened to take tougher action ․ to force American companies operating in China to return to the United States. There is a legal precedent for this, but if the United States takes that step, it will be challenged in court for

a long time. Such a move would pose a serious threat to American businesses, possibly even greater than China. Politically, this step strengthens Trump’s position among the Americans who see the reason for their own economic difficulties in delegating jobs to China. And here is how the elections are approaching, The political strategy of Trump’s threat becomes so clear. The same goes for US pressure on China. Foreign high-tech companies operating in China have been a major conduit for the Chinese to access the latest technology.

Geopolitics consists of politics, economy and military issues. Comparing China and Japan, we see these three in action. In the case of Japan, military considerations took precedence over the other two; they limited US operations. In the case of China, politics and the economy are pushing the US to take action, while there are no military motives to hold the US back. If the Chinese decide to retaliate militarily, it is better for them to do so now, when they are weak, than later, when they will be stronger. The logic of geopolitics led us to this point. And the United States is unlikely to stop without concessions that China can not make.