The China trade reality show
David P. Goldman
Dec. 4, 2018
For at least a month, there has been no doubt that Presidents Donald Trump and Xi Jinping would agree to agree at the Buenos Aires summit. The threats, remonstrations and hints of high officials were for the most part scripted. Buenos Aires was less negotiation than reality show.
When the dust settles, America and China will have a deal that allows Trump to claim victory and allows China to become the world’s dominant economy.
Two things changed to bring America and China back to negotiations.
First, Trump learned that he was in the position of the Lord High Executioner in Gilbert and Sullivan’s “Mikado,” that is, “he can’t cut off another’s head until he’s cut his own off.” Trade war with China contributed to the correction in the S&P 500, which lost 10% peak-to-trough through last Wednesday. It also produced so much uncertainty about the future of supply chains that capital investment plunged around the world, as I reported November 30.
If Trump made good on his threat to impose tariffs on all Chinese imports, including most of American purchases of consumer electronics, the impact on household budgets would have been severe. Trump wants a second term, and trade war risked a recession just before the 2020 elections.
Second, China concluded that Trump wants to look like a winner, and decided to give him what he wanted. Senior advisers to the Chinese government explained this to me last October. The new Chinese consensus holds that the world’s largest country can afford to be patient, concentrate on raising productivity and per capita income, and forego bragging rights about its growing economic power. As I wrote from Beijing:
“The United States during the 19th century did not attempt to impose its will on other countries, [one advisor] noted. Only after the Second World War did the United States act like a major power. China, he concluded, will have to take a more modest role in world affairs ‘until 2035, when it will be a much more powerful country.’”
There is a coterie of advisers in and around the Trump Administration that appeared to believe that trade war would damage China’s economy so severely as to destabilize the rule of Xi Jinping. For years, the American consensus held that China’s opening to the world economy inevitably would lead to a democratic transformation of this ancient empire. When that failed to happen, the same advisers argued that the Chinese system must collapse of its own weight because (as they believe) the American way of doing things is the only right one.
Among the president’s senior staff only National Security Adviser John Bolton takes this sort of talk seriously. Before taking office, Bolton advocated stronger support for Taiwan against the mainland. The resounding victory in Taiwan’s local elections last month of the Kuomintang, a party that eschews calls for independence and supports closer ties with the mainland, took this idea off the agenda.
It is unclear to what extent the revolt of America’s allies influenced Washington’s thinking. Beijing showed its seriousness about opening its financial industry to foreign firms last week by offering a license to the German insurance giant Allianz. There will be something of a gold rush of global firms into the Chinese market, and American companies do not want to be at the end of the queue.
What the US and China actually will negotiate during the next 90 days will include the following:
1) More US exports to China, especially LNG. China might invest in LNG facilities on the US West Coast to increase capacity.
2) An intellectual property agreement dictated by the United States. China will crack down on technology theft, at least where official institutions are concerned, and leave Apple and Qualcomm to sue each other over patent infringement.
3) Further opening of the Chinese market to US trade and investment.
4) The abandonment of the “Made in China 2025” slogan, although the same investments will proceed with less fanfare.
None of this will do America much good in the long run. Trump asked for the wrong things and Xi agreed to concede them.
According to industry experts, China is spending upwards of US$50 billion for semiconductor fabrication each year, compared to less than US$5 billion in the US. Some experts believe that the fabrication of semiconductors will come to an end in the US within five years.
Asian companies will dominate key new technologies, including 5G mobile broadband, which is critical for the so-called Internet of things. American media reported today that Apple will wait until some unspecified future date to offer handsets that use the 5G technology. China’s telecommunications giant Huawei, which now sells more handsets than Apple, is trying to position itself as the leader in the field. So is South Korea’s Samsung.
America, in short, is losing ground not only in semiconductor and other high-tech electronic production, but also in design.
When America really was great back in the 1980s, federal R&D (overwhelmingly defense and NASA) amounted to 1.2% of GDP, versus just 0.7% today. Most of the R&D budget has been diverted to things like climate change, or status-quo weapons systems like the F-35. As matters stand, nothing will prevent China from becoming the dominant world economy by 2035 except, of course, missteps by China itself.