What’s Really at Stake in the US-China Trade War?

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What is going to happen during the final phase of the U.S.-China trade talks? What really happened on China’s side in the past few months after Xi Jinping accepted almost all U.S. demands? Is there a small window where the U.S. can give China the maximum pressure? And who is the biggest lobbyist for the CCP in the U.S.? In this edition of Zooming In, we will explore these questions.

A Rare Opportunity

On May 1, the U.S. trade team returned home from the latest negotiations in Beijing with three key messages: One, both sides are hopeful that a final U.S.-China trade deal could be struck in a couple of weeks; two: China’s subsidies to key industries remain unresolved; and three, the two sides disagree on whether to immediately remove existing tariffs or keep them in place as an enforcement measure to make sure Beijing honors its word.

On May 8, Chinese Vice Premier Liu He will led more than 100 officials to Washington for another round of negotiations. Major news outlets predicted a likely deal and the U.S. may accept terms less sweeping than it had originally sought.

While problems still lie ahead, China is now on or ahead of schedule for completing the deleveraging and stabilizing of its economy. It has successfully persuaded the U.S. to pause tariffs at its most vulnerable moment while domestic pressure for President Trump to make a deal with China is increasing. Who are the proponents of such a deal?

At a recent event by the organization “Committee on the Present Danger: China,” Roger Robinson, an expert on financial security, who helped craft Ronald Reagan’s policy for dismantling the Soviet Union, pointed out one group that is getting increasingly Intertwined with Chinese companies.

Roger Robinson: How many people, how many people do we have in our country, in the markets today? 180 million and 200 million Americans. I don’t know the number, but you can appreciate that it’s disturbingly high and when you look at the pace at which the Chinese are coming into our markets for dollar financing at which they’re desperate for you, you start to see a trend where trillions of dollars are going to flow into our markets over the next two to three years to such an extent that there it is conceivable that one morning the American people wake up and find whether it’s 12 percent, 15 percent, 17 percent, some high number of their investment portfolios of their retirement portfolios are Chinese securities. Well guess what happens that day? The China lobby, as we know it today, appears to be a trivial asterisk next to what’s coming when, again, these folks realize that any American penalties or sanctions toward China based on its malevolent behavior could and probably would devalue or damage the value.

How much pressure does President Trump receive from Wall Street on the U.S.-China trade talks?

Roger Robinson: It’s a matter of record that the president has been under a great deal of pressure on the trade talks from various lobbies. Everything from agriculture to finance financiers on Wall Street. So I do believe that this level of engagement particularly on the financial side is such that there is a huge constituency that wants a trade agreement. Almost irrespective of its content. And soon. So I do think there is a great interest there but there is relatively little connection. Between China’s activities in the capital markets and the trade talks in the minds of most people. I think that Wall Street is making huge fees on the China dimension. And they are seeing some impressive returns in some cases as well. So there’s great enthusiasm and you can see it in the number of Chinese companies that are being added to the MSCI Emerging Market Index. And more recently the Bloomberg Barclays Global aggregate index.

Can the CCP Ever Be Trusted?

On Oct. 9, 2018, at the Center for Strategic and International Studies, Dr. Peter Navarro, assistant to the president and Director of Trade and Industrial Policy recounted the promises China has made to the U.S. in recent years.

Peter Navarro: The game that China has played—and they played people in the Bush administration like a violin—is to do the tap dance of economic dialogue. That’s all they want to do. They want to get us to the bargaining table, sound reasonable, and talk their way while they keep having their way with us. And this is—this is—I mean, look, here’s all you need to know when you think about the prospect of a deal, OK? We had a high-ranking member of the Chinese government agree with Barack Obama on two things back in 2015. Two things, OK? The Chinese official agreed to no militarization of the South China Sea. Within two years those artificial islands were armed to the teeth. The second thing that official agreed to was to stop hacking American businesses. Yeah, well, that lasted about six months, and now the U.S. government will tell you unequivocally that those hacks are back up, they’re serious, and they’re coming to get us.

To people who are familiar with the history of the Chinese Communist Party, this behavior is not surprising. It has been consistent throughout its history. In the wake of the second World War, this is one of the key tactics the CCP used to defeat the Kuomintang to take control of China.

Today, the Trump administration demanded structural changes to the U.S.-China trade relations. This was essentially asking the CCP to change the way it runs its economy, the way it runs its country and basically a political reform of some sort. I asked Gordon Chang, a columnist and China expert if China will really do it, and he said this:

Gordon Chang: I don’t think Beijing has any intention of honoring his promises on changing the structure of its economy. Remember, Xi Jinping believes in a state dominated system. And during his tenure, we’ve seen state enterprises crowd out the private sector, not just foreign companies, but also the domestic Chinese private sector. So what we’re asking for in our trade talks with the Chinese is for them to completely change the state dominated system and go to a free market economy. That’s just impossible. Xi Jinping is not going to do that. So I don’t think that we can change China with a trade agreement. We had so many trade agreements with the Chinese and they violated them all. Why would they start honoring their deals under Xi Jinping who is a believer of the Maoist state dominated China?

Reagan’s Economic Warfare Against the Soviet Union

Thirty-two years ago, when President Reagan gained insight into how vulnerable the Soviet Union’s economy was and how they feared his SDI program, he didn’t hesitate to make a decisive move to bring down the whole thing. Is Reagan’s rationale still relevant today? Let’s revisit what happened in the 1980s.

By the winter of 1986, President Reagan had come a long way in combating the Soviet Union during the cold war. Reagan agreed with Churchill that the Soviet Union only respected strength and resolve in their dealings with other nations.

President Reagan started a multi-billion-dollar modernization of  U.S. strategic forces to regain a military advantage over the then more powerful Soviet Union. Among those efforts was the Strategic Defense Initiative (SDI), also known as Star Wars, an initiative aimed at rendering nuclear weapons impotent and obsolete.

While trying to keep up with the Star Wars program, the Soviets went bankrupt. The Soviet Union increased defense spending by 45 percent. They also suffered from Reagan’s other measures. They lost billions in oil sales thanks to Reagan’s strategy in boosting Saudi oil production. They had to spend billions more on third world dictators. They could not keep up.

It is not an overstatement that President Reagan’s economic warfare brought the Soviet Union down. Is his thinking still relevant today? Ten months ago, I came across this short video of Steve Bannon being interviewed at the Delivering Alpha conference. It reminded me of Reagan’s thinking in 1987. He said, “We can take this whole thing down.”

One thing you said during that interview is we can take down the whole thing. We can take down the whole thing. I don’t know if you still remember it, but that line just struck me. At that moment I thought about 1989, Ronald Reagan, you know he doubled down SDI after he walked away from Gorbachev and stuff. I even did a program comparing these two historic moment: Trump’s trade war and the 1989 moment. So I want to ask you what you mean exactly when you said we can take down the whole thing?

Steven Bannon: It’s just like 1989. Remember the Soviet Union collapsed because the West put pressure, but it was the people enslaved in Eastern Europe and Russia and the rest of the Soviet Union that brought the system down. At some point of the day they said, we’re not going to do this anymore. And the whole system collapsed in a couple of months. It was so dramatic. you know, no shots fired.

Steven Bannon: The way that the radical cadre that has enslaved the Chinese people, and that’s what happened here. They’ve enslaved the Chinese people. The way to bring it down is the Chinese people have to do that, and what the West has to do, and I think you’re seeing start to come together, not just President Trump’s trade, you know, now to engage in this confrontation China’s had in this trade war.

Press play to listen to listen to the whole episode. Do you think the Trump administration is taking the right approach with China? Please comment below.