US-China trade talks: Rifts remain wide open

Muhammad Mahmood | Published: February 09, 2019 21:06:44

The United States and China wrapped up a new round of high-level trade negotiations on January 31 in Washington DC overshadowed by rising tensions in other fronts.  On the eve of the talks US intelligence officials labelled China as a security threat at a Senate hearing. The key participant in the negotiation were US Trade Representative (USTR) Robert Lighthizer and China's chief trade negotiator Vice Premier Liu He. On January 31, Liu also had a meeting with President Donald Trump.  USTR Robert Lighthizer is scheduled to visit Beijing after the Chinese lunar new year to resume further discussions.

At the conclusion of the trade talks in Washington, the White House released a statement with a positive spin describing the latest trade talks as "intense and productive'' and praised Mr Liu and his team for playing a positive role during the discussions. Trump himself also said that "tremendous progress'' has been made. He further declared Vice Premier Liu "a friend of mine'' and "one of the respected men in the world''. But the Chinese media, by and large, downplayed the event and Xinhua covered the topic quite vaguely and briefly without any photos.

It is far more than trade deficits and tariffs at the heart of the trade dispute. It is a contest between two very powerful nations' drive to safeguard their respective national interests. Trump's rhetoric of creating a level playing field with China is a thinly veiled demand that China completely shakes up its economic, political and social system and remakes itself to replicate Japan, US's principal client state in Asia. In fact, the field has always been tilted in favour of the US since the end of the WW II and it wants to keep it that way. Trump's trade war against China is more to maintain its unchallenged global economic dominance, a position increasingly coming under threat.

John Bolton, a throwback from the Reagan and Bush era and a unilateralist who firmly believes in a global order run by the US, is now Trump's National Security Adviser. In fact he made a full-time career out of defending and advancing American empire. He came down to the core issues at the heart of the talks in his remarks to the Washington Post recently. He said while overcoming the current economic problem was critical to rebalance the relationship, China would have to play by the rules (quite understandably, set by the US) but also to prevent any imbalance in military power in the future as well. These two aspects are very closely tied together, he further added.

Despite the seeming progress in trade talks, both the US and China still remain miles apart on issues of China's alleged technology theft and winding back its programmes for industrial and technological development as outlined in "China 2025", which the US considers as a threat to its economic and military dominance. The US agenda for trade negotiations with China incorporates three major issues: technology transfer, market access and government support. These three issues are viewed quite differently by China and the US. From the US perspective each of these issues also has strategic/security dimension. Now the US has inserted a long list of non-trade issues along with trade issues.

If one takes a historical perspective, Trump's trade offensive against China has historical precedence and very consistent with trade policy shifts in the past. Quite periodically the US trade policy planners undertake a major restructuring of US trade relations. Such a restructuring happens when the US feels it is under challenge (i.e. as now from China) or at a time of global economy slowing down (as is forecast to happen this year). Therefore, they rearrange the rules of the game to enable them to safeguard their global market share. 

Such trade policy reorientation took place under Nixon in the 1970s targeting Europe. President Nixon unilaterally abandoned the Bretton Woods exchange rate system in 1971 thus changing the rules of game and shifting the cost of exchange rate adjustment to industrialised European economies, in particular Germany. He institutionalised the rearranged exchange rate system through the Smithsonian Agreement which made the US Federal Reserve the dominant central bank which other central banks would have to follow in relation to the exchange rate determination. In fact, under the new system, the US dollar has become the reference currency in all international transactions. In a similar fashion President Ronald Reagan in 1985 passed on the cost of exchange rate adjustment to Japan to deal with the US loss of competitiveness arising from high inflation. The new rearranged trade arrangement with Japan was called the Plaza Accord (1985).  But the Plaza Accord resulted in an overkill causing an almost free fall of the US dollar and to remedy the situation again a similar accord to shift the burden of adjustment to major European countries (Italy declined to join in), Canada and Japan were signed in 1987 in Paris called the Louvre Accord. President Nixon's and President Reagan's policy gave some temporary relief only and the core problems re-emerged where European countries and Japan also suffered financial and economic crises in the early 1990s as a direct consequence of these accords. In effect US Trade policy has always been an arm of the State Department and Pentagon

The Pax Americana is facing challenges now at multiple fronts. To face those challenges, the US must continue to maintain its economic and military dominance across the world. Trump's trade war is less to do with trade deficits but more to do with maintaining its superior military advantage by monopolising the next generation of technology. Military threats are increasingly moving from conventional warfare based on bombing, including atomic bombing, towards cyber warfare which can pull the plug out to disconnect all economic (e.g. banking and finance) and military connections (telecommunication) not to speak of other consequences relating to electricity and water etc.

Tariffs are a tactic, but the strategic objective is to thwart China's drive towards developing the next generation of technologies such as Artificial Intelligence, 5G wireless network etc.  The New York Times in a recent article articulated the US strategic position by saying that this is the new face of arms race involving new technology rather than conventional weapons. It further said across the US defence (read war) and intelligence establishment there is a firm conviction that "there must be single winner in this arms race - and the loser must be banished''.  It has become clearly evident that the current trade war is more driven by Pentagon and the US war-making industry than by the Department of Commerce.

In this context, the arrest of Sabrina Meng Wenzhou, a senior executive of China's leading technology company Huawei, is a matter of great symbolism. In July last year the US successfully persuaded Australia, Canada, New Zealand and the UK to prevent Huawei to new 5G network. Many analysts consider the US attacks on Huawei are actions of a new cold war spoiling for a war. Indeed, US Vice President Mike Pence, in his speech at the Hudson Institute last October virtually declared a war on China. To tighten the grip further on China the US is now also demanding that whatever regulatory changes China might bring in will not be sufficient, mechanisms must be established through which the US can directly take responsibility for enforcing those regulatory changes. This means a US-led inspection regime which will not only infringe the authority of the Chinese government but also violate China's national sovereignty.

The Trump administration appears not to have come to realise that it will be a far more difficult to pull off a trade deal with China purely on US terms than the same that Nixon did with Europe and Reagan did with Japan. The same relationship of relative power simply does not exit any more for the US in today's world as it did during the Nixon and Reagan eras. In all likelihood the process of relative decline of the US will be further hastened by the policies put in place by President Trump and his advisers like John Bolton and Elliott Abrams.

If the trade talks break down, it will be on issues of technology and definitely not on trade issues. But the current pessimistic global economic outlook may drive both countries to reach some kind of a temporary truce promising some future actions. This will enable both sides to declare a victory and get on with their business as usual.

Muhammad Mahmood is an independent economic and political analyst.


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