Sintegration?

Free trade with China has become a populist issue, so much so that the Republican Presidential Candidate has pledged to place a 45% tariff on Chinese goods.[1] It is generous to ascribe any sort of strategic merit to the man, but playing on manufacturing job losses among his voter base to push protectionist trade policies has certainly been effective. However, Trump’s policies are not the only example of US resistance to China’s rise. Obama too has failed to adequately engage with China through global institutions. The Middle Kingdom responded single-mindedly, using its ambitious new institutions and investment policies to establish its own order in the East. If it wants to retain its position, the US must actively accept China into the Western system, choosing cooperation and interdependence over economic and diplomatic conflict.

The U.S: Integration to Isolation

Trump justifies his policies in terms he understands: ‘Our trade deficit with China is like having a business that continues to lose money every single year’[2]. This is not an accurate way to characterise how trade works between countries. Trump talks of absolute wins and losses, presenting trade as a zero-sum game. The reality is that both sides are better off due to comparative advantage, making protectionism irrational. When each side can produce a different good relatively efficiently, both sides benefit overall. Therefore, the fact that the US has a negative trade balance does not mean it is the ‘loser’ in trade. The real explanation for the US trade imbalance is that the US has high levels of consumption that reflects its higher GDP. As a result, its investment is higher than its savings, which is very common and not considered dangerous2.

Trump aims to put tariffs on Chinese goods to make US-made products more appealing. However, a tariff as high as 45% would raise costs significantly on consumer goods and raise production costs in the US, hitting those with low incomes the most. On the international level, it would break WTO rules and international norms, harming the US’s relationship with both China, and its own allies.[3] It is true that, due to the specialisation entailed by comparative advantage, jobs in manufacturing goods are lost to countries that can produce them more efficiently. In a recent article to his successor, Obama insists on the overall benefit from trade: ‘While some communities have suffered from foreign competition, trade has helped our economy much more than it has hurt.’[4] However, the vocal minority who are affected have understandable concerns. Since 2008, many blue collar workers will have endured significant economic hardship; nine million people lost their jobs between 2007 and 2009, while debt remains a burden. With growth remaining slow, many do not feel the effects of the recovery, stoking the idea that the elite works only for itself.

However, Trump’s trade policies are popular for broader reasons. The correlation between blue-collar jobs and traditional, often nationalistic values shows that his voter base is primed to accept isolationist ideas, blaming the outsider for their economic hardships. This is the same cohort that opposed Bill Clinton over NAFTA and trade with China in the 90s and early 2000s. In a country where each child might expect to be better off than its parents, Trump promises to bring back the land of opportunity. In reality, opportunity could be achieved with more practical policies such as retraining schemes and initiatives for worker rights. In comparison, the candidate’s policies would place workers in uncompetitive jobs, becoming redundant once mechanisation quickly catches up.

China: Isolation to integration

This fear of China getting the upper hand is not uncommon. There are compelling reasons to view the two countries as competing powers in the East and West; one diminishing, another rising.  Since the mid-20th Century, the US has held a dominant position in the world order. Its power and liberal ideals have been cemented in the UN, IMF and WTO. Adapting to this paradigm has been crucial for countries that require support from the West to develop.

China’s ‘Middle Kingdom’ mentality is therefore problematic for the US; not only does China pose an economic threat, it is reluctant to act on Western terms. Since market reforms were adopted in 1978, China has seen almost 10 percent growth per year.[6] Considering the US’s short history, it is understandable for them to view this as novel. In contrast, the Chinese view their trajectory as more of a resurgence, and the US as an ‘upstart nation’[7]. Reasonably so: up to 1820, they held 30 percent of the world’s GDP in their own subsistent cycle, and enjoyed an enlightenment around 200 years before the West’s similar version[8]. This success was hampered significantly during the Mongol invasion. Years of political unrest and ideological upheaval – the stagnant Qing Dynasty, the Civil War, life under Mao – have only now given way to a renewed prosperity. However, China’s pride in its history and desire for national stability has remained its priority throughout the fluctuating years, irrespective of ideology. Xi JInping has made ‘the great rejuvenation’7 a central theme of his presidency, demonstrating the importance of understanding this quaisi-nationalist mentality in making diplomatic decisions.

Considering this, it appears that the US is responding unwisely to China’s economic threat, excluding it from its liberal institutions and agreements. For instance, it has refused to give China a greater voting share in the IMF, and effectively blocked it from the Trans-Pacific Partnership [9]. The irony is that the liberal system is the solution to the problem of Chinese hegemony. It was built to create an economic and political interdependence that would ensure peace and prosperity, and preserve free trade and democracy. Encouraging China’s participation would therefore ensure that China continues to develop within liberal norms, and that each could prosper without compromising the other. Instead, the US has merely given China the opportunity to create different institutions and trade links on its own terms.

Unsurprisingly, given its ‘Middle Kingdom’ mentality, China has taken up the opportunity. For instance, it has set up the the Asia Infrastructure Investment Bank, which has a similar role to the World Bank in funding development projects in the region. Since these countries require $800bn annually to reach their development targets, China has a leading role in securing the region’s future. Similarly, the Belt and Road initiative aims to send $4bn of investment in transport and energy infrastructure throughout Asia to central Europe. It will be further supported by the Silk Road Fund and the New Development Bank (formerly the BRICS Development Bank). The US has failed to acknowledge the significance of the B&R in bilateral talks and within Congress, but this does not diminish the project in the slightest. By putting its head in the sand, the US is only distancing itself from the region’s development. This reduces the impetus for not only China, but its neighbours, to engage in Western institutions, compromising the validity of the liberal system10.

The US and China have seemingly swapped roles – populism and economic stagnation in the US has led to isolationism, while China continues to takes advantage of globalisation. If the US feels threatened by the Chinese resurgence, it must change its approach dramatically. For one thing, it must continue to pursue tariff-free trade with China, and handle the consequences of specialisation with intelligent domestic policies. Ideally, it should make room for China in its own liberal order, allowing the economic and political interdependence to prevent conflict and secure mutual prosperity. It could, however, be too late. The US should therefore waste no time in offering diplomatic support for the new eastern institutions, and invest in China’s development initiatives. Otherwise, it risks allowing the emergence of a system to rival its own, incompatible and arguably more likely to succeed.

Charlotte Baker is Editor at the Business and Economics Policy Centre.

[1] ‘The Ugly Truth About Donald Trump’s China Policies’, Sara Hsu, Forbes, 1 September 2016 http://www.forbes.com/sites/sarahsu/2016/09/01/the-ugly-truth-about-donald-trumps-china-policies/#73b577573c9d

[2]  ‘The Truth About Trade’, Douglas A Irwin, Foreign Affairs, July/August 2016

[3] ‘Donald Trump has floated big tariffs: what could the impact be?’, Louis Jacobson, Politifact, 21 June 2016 http://www.politifact.com/truth-o-meter/article/2016/jun/21/donald-trump-has-floated-big-tariffs-what-could-im/

[4] ‘Barack Obama’s open letter to his successor’, The Economist, 6 October 2016 http://www.economist.com/blogs/democracyinamerica/2016/10/preparing-pass-baton?zid=311&ah=308cac674cccf554ce65cf926868bbc2

[5] Burchill, Theories of International Relations (2005), Ch3: ‘Liberalism’

[6] The World Bank http://www.worldbank.org/en/country/china/overview

[7] Rachman, G Easternisation (2016) p2

[8] Jacques, M When China Rules the World (2009)

[9] ‘China’s Infrastructure Play’, Gal Luft, Foreign Affairs, September/October 2016

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