In the new trade war between the United States and China there have been many misconceptions about what's happening, how we came to this point and what's the way forward and out. On the one side is an ignorant and ill-informed United States populace hunkering down on pseudo-patriotic posturing (if you love China so much go and live there), and on the other a nativist, anti-globalization inward looking cabal that believes simply poking China in the eye is somehow a winning tactic of a trade war.
First, a little education about China is noteworthy. Forty years ago China was the sick man of Asia, a largely agrarian nation with a huge population of peasants and backward production methods. The country was just a blip on the world economy and was laughed at by western powers that underestimated its rise and the determination of the Community Party. Forty years ago China sent thousands of students abroad to study in western universities and it embarked on a sustained, well- organized system of incremental modernization.
Today, China has the second largest economy. Its manufacturing sector is the envy of the world you iPhone is made there its military is modern and combat ready, its rail and air transport systems are replicated around the word, its mag-giant technology company Huawei owns about 51% of the global 5G networks and is building it in Europe in spite of US pressure to desist and its space program is improving in leaps and bounds. In less than 50 years China has lifted its people out of poverty.
These are facts not my opinion. The perception of China as some backwoods, hick country is based on the fact that news and information in the United States is so censored and controlled by a few U.S. corporations that has shaped the public perception not only of China but countries like Iran.
So now a bellicose and jingoistic President Trump has threatened to slap a 25% tariffs on the remaining $325 billion in goods coming from China, announcing the plans the same day the US more than doubled duties on $200 billion in Chinese goods as trade talks ended in a screeching deadlock. And as sections of the American public applaud Trump for being tough on China, they ignore two critical facts: The first is the political and social realities of both countries. In the case of China they take the long view of this US-China trade war and would "wait out" Trump and face little backlash at home when nationalistic feelings and "saving face/not giving in" holds great currency.
The second is often overlooked and the most devastating "weapon" that China holds - $1 Trillion U.S. debt that China holds and is a potential trump card, pardon the pun, that it can use. But the million-dollar question is this: will China use it? Trump has doubled down on his promises to work to eliminate the trade deficit with China, warning that the trade deal between the two countries would "become far worse" for Beijing if it had to be negotiated in his second term and telling the Chinese not to daydream about him being defeated in the 2020 election so that a Democrat may give them a better agreement.
But not withstanding President Trump's tough guy stance and the gleeful chorus of his supporters egging him on to "slap China around," China has its own range of financial firepower at its disposal to punish the US for the tariffs war, including its massive $1.123 trillion piggybank of US Treasury bills. So, theoretically, if China were to dump this debt onto the market, US bond prices would drop and force the government to substantially increase yields. That, in turn, would make loans for US corporations and private borrowers more expensive, cooling US growth. That's one very difficult scenario that can trigger market volatility in the short term. Still, it is entirely in the realm of possibility that this can happen if China runs out of options.
A far more effective option for China is to allow its national currency - the Yuan - to depreciate against the dollar to offset the negative impact of the increased tariffs to keep Chinese exports competitive in the US market. Over the past 20 years or so successive US administrations have demanded that China limit the depreciation of the Yuan, with President Trump accusing Beijing of deliberately manipulating its currency to outcompete US producers. If US tariff policy remains unchanged, Chinese authorities may simply disregard US requests in future. If there is no currency stabilization pact negotiated, then this is certainly one way China will plan for what many analysts think is going to be a pretty serious escalation of tariffs.
China's Vice Premier Liu He, the top trade negotiator, said he was "confident that the Chinese economy will maintain sustainable and healthy development" in spite of what he called "existing pressure" from Washington. He also referenced China's "gigantic internal market" and "large investment market" as two prospects for continued growth, and stressed that China was "not afraid" of an economic downturn over the medium and long terms.
China is adept at playing the long game. Consider the following: China's scientific leap forward comes accompanied by a persistent effort to catch up with the best and the brightest in at least two related fields: innovation and higher education. When it comes to innovation, the World Economic Forum reports that China is now the second-largest R&D investor in the world, after the United States. In many metrics, such as patents, China is rapidly catching up to the United States.
In the domain of higher education, China now has four universities which stand among the world's top 100 research-led institutions namely Tsinghua (24th), Peking (39th), Fudan (43th) and Jiao Tong (61st) according to Quacquarelli Symonds, Britain's education consulting company. Just a decade ago, there were no Chinese institutions among the top 100. [Source: The Diplomat]
Recall, back in the 1980s Chinese leaders calculated that it would take half a century to match and surpass the West in military power. Back then co*k-sure and arrogant Westerners laughed at such an idea. Impossible they said, Chinese pipe dream they quipped. Now, in 2019, it is generally accepted that by the 2030s China will achieve that goal. That does not mean China will use that military power to conquer the world. No, the Chinese plan is to possess military power that will, like the United States today, impress upon other nations that China is not to be defied and that if it wants something its going to get it.
That is also being done by the Chinese OBOR (One Belt, One Road) plan that is reestablishing the fabled Chinese Silk Road but on modern, 21st century land and maritime variations. The principles and philosophy is the same but the methodologies changed to reflect the nuances of the modern world and its realities. The land version involves investing over half a trillion dollars in building transportation (and other infrastructure) from China into Central Asia, Southeast Asia, South Asia and even parts of Europe. The local investments give China enormous political and economic leverage. Long terms it means China has finally sound something worth exporting along the Silk Road: Chinese economic and if needed, military power.
The maritime version of the new Silk Road is there to ensure access to areas outside Eurasia. The reality of today's China is that over half the Chinese population are wealthier than they ever imagined. In two generations most Chinese families had gone from poverty to affluence. Their children are better educated than any before. This is the rise of China and a trade war is just a distraction.