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Bill Emmott: Economic interests no longer behind US-China trade war

Bill Emmott (Mainichi/Naoki Watanabe)

By Bill Emmott

    As an economist, I feel I can make this confession: very often, in assessing political events, people can be fooled by economics into thinking that disputes will surely be settled quite quickly. They are fooled by economics because that topic seems to sum up the underlying true interests of countries and their governments: money, profits, jobs and living standards. So if a dispute promises to make them poorer, the reasoning goes, they will find a resolution. But this is often wrong. Other factors can be equally or more important.

    The issue that has prompted me to make this observation is the U.S.-China trade conflict. Admittedly, one surprise, so far, about this trade war between the world's two economic and political superpowers is that it has made little measurable difference to global economic growth. But the other surprise is that as time has passed, the two sides appear to have become no nearer to a settlement or even a temporary trade ceasefire. Just the opposite: their positions have recently been hardening.

    Six months or so ago, it was widely assumed that despite all President Donald Trump's noisy rhetoric about unfair trade, about the huge U.S.-China trade imbalance and about the justice of imposing tariffs on imports of Chinese goods into the U.S., Americans would eventually seek a deal. It was also assumed that the Chinese would want a deal, too, probably by making some concessions as well as some big symbolic purchases of American goods. The two sides' economic interests would surely guarantee this.

    As the month of May began, there were stories in the media saying that a deal was imminent. It was said that there might even be a special summit meeting between President Xi Jinping of China and President Trump to finalise such a compromise, especially given the value that President Trump places on personal diplomacy.

    But this proved to be an illusion. A resolution is not imminent at all. The two sides have offered differing narratives about what happened. The truth about how the process faltered is less important, however, than trying to achieve an understanding about where the conflict stands and where it might be heading.

    Where it stands is that having begun as a conflict about trade imbalances and about perceived unfairness in trade and investment practices, the conflict has widened into one whose main issue concerns defense, security and ultimately political power. Technological competition was always on the negotiating table, but it had initially been framed as being about intellectual property protection. Now, the United States has chosen to frame it as being chiefly about espionage, not commercial espionage but the political sort.

    That is the only way to explain how the Chinese telecommunications equipment company, Huawei, has come to stand at the center of the U.S.-China conflict, and how President Trump is seeking to ban all companies that do business in America from acting as partners or suppliers to Huawei. Hence the British chip design company ARM, owned by Japan's Softbank, has had to cease its business with Huawei as otherwise it would be banned from doing business in the U.S.

    The United States is also trying to persuade its close allies, such as Britain, Japan and others, against allowing Huawei equipment to be used in their fifth-generation (5G) mobile phone networks. It is even threatening to cease sharing intelligence with those allies that refuse to abide by its request.

    It is possible that this demonization of Huawei will prove to have been just a tactical ploy in the trade conflict. President Trump and his advisers might turn out to believe that by using American power to threaten the commercial future of a major Chinese corporation, one that is at the forefront of technological innovation, the U.S. will be able to bully the Chinese government into a deal on more conventional matters, such as trade imbalances.

    Yet right now, the alternative explanation looks much more plausible. This is that by bringing Huawei to the center of the conflict, the United States has essentially admitted that the real issue in this trade war is not in fact trade but rather geopolitical primacy. The U.S. has thereby declared that despite its apparent superiority in military power, it is afraid that China could quite soon be able to challenge its power and primacy, and that technology could become a key tool in that challenge.

    Whatever the truth of this proposition, the result has been that both the U.S. and China have become more reluctant to make any kind of compromise. Domestic politics in both countries is making both President Trump and President Xi feel obliged to take a very hard, patriotic line. Economic interests are not determining the outcome. Instead, politics and security strategy has become dominant.

    It is an interesting reversal of the historic U.S.-Japan trade relationship. In the 1980s, when the current U.S. Trade Representative, Robert Lighthizer, was deputy USTR and negotiating about perceived Japanese unfairness over trade, the reality was that the U.S.-Japan security alliance provided a limit to how tough the Americans were willing to become. Over China today, it seems to be the opposite. Economic criteria might suggest the U.S. should not be overly tough; but security criteria are incentivising the Americans to be much tougher than they might otherwise be.

    The fact that this trade war is taking place during a strong period of global economic growth means that it is being absorbed more easily than might otherwise be the case. But the fact that politics has taken over from economics as the main driver of this trade war means that the chance of a resolution in the near future now looks small. President Trump has said he will make his decision about raising tariffs after meeting President Xi at the G20 summit in Osaka on June 28-29. He loves to believe in the power of personal diplomacy, especially his own. Yet the issues are too fundamental to expect any real resolution to take place in Osaka, even if a temporary ceasefire could be agreed. This battle is going to be with us for many years.

    (Bill Emmott is an independent writer, lecturer and consultant on international affairs)

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