Trade war: China must take the bull by its horns

Now, it’s China’s turn to counterattack against America’s economic assault. Clearly, the US wants to delay or contain China’s development. The future state of affairs largely depends on China’s response. How can China respond, and how will the US react?
Now, it’s China’s turn to counterattack, this time against America’s economic assault. (iStock)
Now, it’s China’s turn to counterattack, this time against America’s economic assault. (iStock)

Much of the American elite has advocated waging economic war on China to cripple or even block China’s rise. Given the inimical sentiment, the current US-China “trade war” is much more than a war against trade, but a broader struggle for dominance in commerce, investment, intellectual property and technology. The two major powers seem poised for a full-blown economic war.

America’s economic campaign against China reminds us of the call by modern Chinese elites to engage in “commercial warfare (商战)” with Western powers. Among them was late- Qing’s iconic figure and the most influential reform proponent Cheng Kuan-ying (or Zheng Guanying) (1842-1921), manager of the officially sponsored Shanghai Cotton Cloth Mill and China Merchants Steam Navigation Company and a close ally of the Self-strengthening Movement (洋务运动, a.k.a. Westernisation Movement) advocates. 

But fighting in a war of commerce requires China to abandon traditional prejudices inherent in its culture that encourages agriculture and represses commerce (重农抑商). 

Cheng Kuan-ying: military warfare is inferior to commercial warfare

China’s earliest reformists, who believed that Western economic incursion was the main cause of China’s weakness and poverty, argued for strengthening national defence by adopting Western military technology and armaments to resist military aggression from Western capitalist powers. Reformists also advocated developing industry and commerce to counter Western economic aggression with “commercial warfare”. But Cheng Kuan-ying—whose thoughts on commercial warfare are mostly documented in Words of Warning in Times of Prosperity (《盛世危言》), his magnum opus written in 1893—went further to say that “waging military warfare is inferior to waging commercial warfare (习兵战,不如习商战。)”. 

In Cheng’s view, acquiring Western know-how and pursuing a belligerent policy of buying warships, building forts, arsenal, naval mines, and developing navy power and conducting ground exercise achieves little; the Western world’s purposeful enterprise in commerce is far more effective. But fighting in a war of commerce requires China to abandon traditional prejudices inherent in its culture that encourages agriculture and represses commerce (重农抑商). 

Emulating, matching and over-taking the West have been a dream of the recent generations of Chinese people. The Chinese mind believes that this is the way to avoid being patronised and bullied by Western powers.

Cheng believed that the Western powers saw China as a treasure trove of resources and profit opportunities that merited military and economic aggression, and that economic fights are more covert and more grievous. “Combat seizes and harms overtly, and commerce breaks and defeats quietly,” said Cheng, who was all for tit-for-tat economic retaliation. He also believed that the state must be founded on commerce and commerce backed by industry, and that overpowering the West required self-strengthening best achieved by empowering commerce. 

Cheng’s “commercial warfare” is akin to the mercantilist doctrines that heavily influenced reigning emperor Guangxu and several generations of political and intellectual elites such as Kang Yu-wei, Liang Chi-chao, Sun Yat-sen and Mao Zedong. “Catch-up economics”, as articulated by Chinese economists today, bears semblance to Cheng’s thesis. Emulating, matching and over-taking the West have been a dream of the recent generations of Chinese people. The Chinese mind believes that this is the way to avoid being patronised and bullied by Western powers.

The US is a habitual initiator of trade wars

The situation is reversed today, with the United States provoking and initiating economic wars, and for reasons completely different from those that engendered the “commercial warfare” in late-Qing. Despite its weakening global position, the US remains the largest world power and a leader in almost all spheres, without encountering enemies as potent as those that modern China had to confront and contend with.

America’s problems are domestic problems, but they will be externalised, and will escalate to a global scale if unsolved. Trade war is only one of many outcomes of “externalisation”. Other than warring with China, the US is also juggling multiple trade conflicts with many other countries, including Mexico and India. It hopes to alleviate its domestic problems by launching economic (trade) wars against external parties—even though no one sees it as a viable game plan.

Trade war is a Western concept and conventional tool that Western countries use for dealing with trade differences. China in its long stretch of history has neither invented a similar concept nor employed a similar tactic.

To America, waging an economic war is not an untried tactic. Shortly after independence, it fought an “economic war” with the United Kingdom, then a developed economy. Pursuing mercantilism was America’s way of developing and protecting its national industries. America did not embrace an open and extroverted stance or join the global market at the outset—not until its domestic economy became strong. It rose to become the world’s largest economy during the 1890s, and began actively intervening in global affairs during World War I. After the Second World War, the US assumed leadership of the Western world, and enjoyed unchallenged global hegemony following the Soviet Union’s demise and the end of the Cold War.

In America’s entire journey to hegemony, trade wars or economic wars with other countries were a permanent feature. Much of the Cold War between the US and the USSR was fought in the form of an economic war. What seemed like an arms race was actually a contest for economic dominance. The Soviet Union fell not because of its (external) arms race with the US, but because of internal stagflation and popular rancour. The Berlin Wall fell because the (internal) Soviet-style establishment “imploded”, not because it was razed by external forces.

The US habitually launches precision strikes—never mind friend or foe—in the form of trade war upon sensing that it’s (or is on the verge of) losing primacy in a certain area. The beating that Huawei has taken from America today is not unlike those received by German, French and Japanese companies. Only that Germany, France and Japan are American allies who can find friends within the US government, such as the Department of State and the US military. China, a perceived US “rival”, has no one on the other side to count on for empathy or support.

Trade war is a Western concept and conventional tool that Western countries use for dealing with trade differences. China in its long stretch of history has neither invented a similar concept nor employed a similar tactic. Before the rise of the modern West, China was the world’s most developed state, exporting silk, porcelain, tea and other products to other countries. The four great inventions of ancient China were spread to the West and other parts of the world without reference to “intellectual property right”. 

Recently, China’s much talked about “tributary (朝贡) system” has been criticised as a cloak for unfair trading practice. No doubt this is deliberate distortion on the part of Western countries. The tributary system was, in contemporary rhetoric, China’s unilateral extension of market access privileges, a policy that favoured its smaller neighbours. Foreign envoys would present ritual tribute (贡) to the Chinese emperor and perform “koutou” (kneeling three times, each time bowing their head to the ground thrice), and the emperor would give permission for the envoy’s state to export goods to China. Export reciprocity was not expected of tributaries.

Emperors who could not return “gifts” of equal value when coffers were shallow would reduce the number of tributary missions or prolong the tributary cycle. This extension of a somewhat feudalistic trading arrangement with foreign nations is probably the reason why China did not craft any international rules of trade, despite being a trading power, and an important reason for China falling behind today.

Modernisation of contemporary China took an endogenous path

The current trade war is not the first Western trade offensive against China. The two Opium Wars were typical trade wars. When British goods lost their competitiveness to Qing Imperial China and Great Britain suffered a huge trade deficit, the British East India Company began trading opium illegally, and wantonly, in China. After defeating China in the Opium War, Britain and the allied powers lost no time in dividing China up. The history of modern China began with humiliation.

Modernisation in the West was achieved through imperialist ventures and colonisation, without exception. The modernisation of contemporary China took an endogenous path, through internal accumulation of capital.

Now, it’s China’s turn to counterattack, this time against America’s economic assault. Clearly, the US wants to delay or contain China’s development. The future state of affairs largely depends on China’s response. But China is no longer the weakling it used to be, and we are not in Cheng Kuan-ying’s era. America is not the only actor shaping the future of history; China also plays a principal role.

The current trade war is not the first Western trade offensive against China. The two Opium Wars were typical trade wars. (iStock)
The current trade war is not the first Western trade offensive against China. The two Opium Wars were typical trade wars. (iStock)

China’s response is essential, and must be appropriate. If China’s modernisation process began during Mao’s era, China would have missed the chance to go down the same path of modernisation taken by the Western powers. Modernisation in the West was achieved through imperialist ventures and colonisation, without exception. The modernisation of contemporary China took an endogenous path, through internal accumulation of capital. This went on until the reform and opening-up (改革开放) policy was implemented, when China remodelled its growth strategy.

The Chinese populace has evolved a consensus since the early days of reform and opening-up, acknowledging that isolationism is regressive, and regression invites oppression. 

Notably, China has remained open and welcoming to foreign capital for most times since implementing reform and opening-up. China’s development may have benefited from foreign investment, but it’s driven mainly by the country’s cheap labour and land resources. Foreign investors gain huge profits in the process, and China develops through capital accumulation and transfer of technological know-how from Western countries—despite having paid a heavy price in many ways, especially with environmental degradation. Chinese capital began to “go global” after China acceded to the WTO, but only for several years before the current trade war befell.

China’s mercantilist development strategy went on for a while. The endogeneity of China’s growth model allowed it to reduce dependence on the US or other Western countries, unlike many economies. Although the immense size of China’s economy must ultimately be sustained by domestic demand, closed-door policy is not the answer that China seeks. China must never shut out the world. The Chinese populace has evolved a consensus since the early days of reform and opening-up, acknowledging that isolationism is regressive, and regression invites oppression. 

This consensus is still good today. So when protectionism and economic nationalism become state policy and battle cry in America, Chinese leaders reaffirm China’s open-door policy, and embarked on another round of deeper opening-up.

China’s countermove against America’s economic aggression has been to increase the scale and depth of market liberalisation. Fighting an economic war today is different from past exclusionary mercantilist practices. Today, markets compete on the level of liberalisation, and on which market can best use its liberal policies to attract capital and the finest economic and technological resources to improve its competitiveness either to catch up or to stay ahead.

The West will not forgo the Chinese market 

World economic history has shown that an open country will never be isolated. So long as China remains open, the laws of capital movement will ensure that China stays connected with the world. The US’s economic brawn is partly backed by its gargantuan domestic consumption, which is also crucial for many countries’ survival. By the same token, China is now the second largest economy and the largest trading nation whose domestic consumption contributes to more than 70% of its economic growth. 

Since the West has invested years of efforts to tap China’s market, why should anyone give it up readily?

China has a smaller middle class than the US as a percentage of population, but has come close to or even overtaken the US in absolute terms. This means that China offers a big market with huge profit potential. American goods need the Chinese market; so does American technology. China is too important a market to give up. Even if US capital is politically pressured to exit China, what about Europe, Japan and other countries? Is the US capable of extracting concurrence from the entire Western world to forgo China?

American companies that quit China will face higher costs and lower investment returns, and eventually, decline. Since joining the global system, the US’s buoyant economy has been sustained by continued expansion. Karl Marx once said that the intrinsic property of capital is self-expansion, or the result would be to perish. Drawing from the Western concept, China is the last frontier of capitalism. Since the West has invested years of efforts to tap China’s market, why should anyone give it up readily?

Indeed, no American company has spoken up for China in the current trade war; some even stood up for the US government. But the intent of American businesses is different from that of other groups with vested interests (including those in the security and defence sectors, and politicians). The former hopes to force China to allow greater business access to its market; the latter wants to throttle and contain China. From a capital perspective, the more China relaxes market entry, the harder it is for America to continue fighting the trade battle. 

American companies that quit China will face higher costs and lower investment returns, and eventually, decline. (iStock)
American companies that quit China will face higher costs and lower investment returns, and eventually, decline. (iStock)

On the international front, countries are trying to cope with the potential disintegration of multilateral institutions, especially those dominated by the United States, including the World Trade Organisation. The US has been disentangling itself from multilateral rules and institutions and resorting to bilateral negotiations and unilateral actions. But smaller countries, including European members states, Japan and ASEAN countries, must continue to rely on multilateral institutions and means to resolve problems.

China can do more by joining regional multilateral institutions such as the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP). It can also create new multilateral institutions such as the Asian Infrastructure Investment Bank (AIIB), and engage as many American allies as possible. Even projects as the “Belt and Road Initiative” can be multilateral and made open to other multilateral institutions.

As for US initiated economic hostilities, China must take the bull by its horns. Confronting America’s offence should be guided by rationality and not misdirected by emotional triggers. Rationality is the only intelligent power of man that ensures protection and maximisation of national interests. It’s also the only tool that China, as a major stakeholder, could wield to fulfil its regional and international responsibilities.

Pang Ruizhi, a young Chinese PhD candidate pursuing further studies at Boston University, shares his views on how China can conduct itself on the world stage as a rising power in a two-part article.