Seeking Stability

Trade war between US and China portents challenges, opportunities for Taiwan

Hon-min Yau

US President Donald J. Trump and PRC President Xi Jinping pose for a photo during a cultural performance at the Great Hall of the People in Beijing.

photo: Andrea Hanks

Since early 2018, the United States and China have been engaged in something of a trade war as the result of US President Donald Trump’s America First Policy. It first started in January of 2018 when the US increased tariffs on foreign solar panels, including imports from China. Not long after, the US imposed an extra tariff on steel and aluminum from the European Union, Canada, Mexico, and China. Beijing quickly retaliated with a similar sized tariff on US goods in July 2018. However, Washington did not back down, and the office of the US Trade Representative later published a list of US$200 billion in Chinese products and threatened to impose additional tariffs.

In spite of China’s persistent protests, on 17 September, 2018, the US finally decided to escalate the ongoing dispute by announcing 24 September the imposition of a 10% tariff, which could be increased to 25% by the end of the year. In the wake of these rising tensions and constant competition, it is crucial to understand their impact on the AsiaPacific region. As Taiwan and China have been in a mutually complementary economic relationship for many years, it is also important to think about how Taiwan should react.

Many political analysts and commentators have been predicting a more isolationist and protectionist policy by the US administration since Trump’s election victory in 2016. This prediction was bolstered when the US withdrew from the Trans-Pacific Partnership in January 2017. At the same time, Trump is also facing a new set of developments from a rising China.

New developments

First, China is a rising global economic power, and its economy is the second largest in the world. It holds more than a trillion dollars in US debt and represents the largest bilateral trade deficit for the United States. In 2017, total US imports from China reached US$506 billion, while total US exports to China was only US$130 billion. In August 2018 alone, China’s trade surplus with the US hit a new record of over US$30 billion.

Second, the growth of China’s economic power did not fulfill the liberal prediction that increasing mutual interdependence would provide a strong foundation for global prosperity, stability, and security. Instead, China leverages its economic gains to improve its military capabilities in Asia, space, cyberspace, and under the sea. It has increased its military build-up in the South China Sea, conducted sophisticated cyber espionage, advanced space systems, designed new aircraft carriers, commissioned more nuclear submarines, and stands ready to build or acquire more. Third, while Xi Jinping is calling for a “rejuvenation of the Chinese nation,” China’s foreign policy behavior has departed from Deng Xiaoping’s “hiding one’s strength and biding one’s time” strategy and begun to exercise power more assertively. China is seeking both military dominance and economic greatness. Its sophisticated naval, space and cyber capabilities are creating an anti-access/area denial area along its periphery, and its Belt and Road Initiative, Asian Infrastructure Investment Bank, and Made in China 2025 strategic policy help to project its economic superiority in the global arena. China is looking to achieve the status of great power in and beyond Asia. On September 25, 2018, Donald Trump argued in the United Nations for a doctrine of “principled realism.” This message was ambiguous, without offering a clear definition regarding the actual essence of this foreign policy proposal. However, if the realism in Trump’s speech refers to the kind of realism in international politics, one thing is for sure: American’s interests will take precedence above all other considerations.

Workers make computer peripherals at the G.Tech Technology Factory in Zhuhai, China. US firms continue to rely on cheap Chinese manufacturing.

photo: Chris

Classic thinkers in international relations like Thucydides have illustrated that “what made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.” In this analogy, the role of the Athenians is being played by China, and the Spartans by the United States. As predicted by offensive realism, when a rising power challenges a status quo power, conflicts are inevitable. Hence, Trump’s imposition of tariffs can be interpreted as an attempt to limit an opponent’s global influence or an agenda to undermine an adversary’s legitimacy. As such, US strategy towards China is certainly going to be more like containment, and less like the engagement preferred by former President Barack Obama’s liberal approach to China.

Since China’s entry into the World Trade Organization (WTO) in 2001, China has continuously been accused by the United States and European Union of infringing on intellectual property and practicing unfair and discriminatory practices towards foreign companies in China’s domestic market. It seems that, after more than 17 years of WTO membership, China is still a conditional market economy. So who is more vulnerable? China is an export-oriented market with a strong reliance on the US market, but US firms rely on Chinese manufacturing and an inexpensive Chinese workforce to guarantee constant growth. However, although the US economy will suffer greatly when encountering China’s retaliation, without an equal footing for American firms in China, whatever short-term gains obtained now, warrant no future success.

Taiwan continually seeks to raise its international profile by hosting events such as the 2018 Taipei International Travel Fair.

photo: ROC Presidential Office

In contrast, shrinking US participation in the Chinese market means less know-how to lose, less of a trade imbalance with China, a reduction of China’s financial repository to boost its military investments, a decrease in China’s available funds for the Belt and Road initiative, and securing US dominance in the high-tech sector. Since the US economy is performing strongly, and the Shanghai and Hong Kong Stock Indices have delivered a general down trend since 2018 as a reflection of the market’s perception, it is very rational from the after cost-effect calculation that the Trump administration will continue to put economic policy with China at the forefront, as the US perceives that it can maintain the pressure.

US President Ronald Reagan greets Japanese leaders, including Prime Minister Nakasone, Foreign Minister Abe in London in 1984.

photo: User18765

Fueling conflict

While Trump is troubled by the domestic political attacks related to the 2016 presidential election campaign, the political pressure at home may easily fuel this trade conflict in an effort to divert media attention and appeal to his supporters. The escalation of economic tensions reflects Trump’s decision to make good on his campaign promise to deliver “a tougher stance on the trade relationship with China,” which is attractive to blue-collar voters.

Historically speaking, the latest case of a large trade dispute was in the 1980s, between the United States and Japan, and the endgame was Japan’s compromise to US demands. However, back then, Japan relied heavily on the United States for security. The situation between the US and China is different. Furthermore, the international order was dominated by the Cold War structure, there was no WTO in the 1980s, and the US was a superpower during the Cold War. Today, both the United States and China are global powers on a closer footing. It is doubtful that the United States will have full supremacy in future trade talks with China in today’s international order.

An F/A-18 Super Hornet approaches for a landing on the flight deck of the aircraft carrier USS Ronald Reagan (CVN 76).

photo: Richard Gourley

So why did the WTO not get involved in resolving the tensions? Unfortunately, there is no quick fix that this organization can deliver in this matter. The United States and other countries have complained about China’s unfair practices, and China and other trade partners complain about the US imposition of an extra tariff. However, the WTO’s dispute settlement body has been flooded with a huge surge of complaints and recent data indicates that the time it takes to complete case proceedings has increased from an average of 13 months in 2010 to about 20 months in 2014. Furthermore, WTO regulations allow member states to appeal the results. However, as reported by Reuters on 27 August, 2018, the US has successfully blocked the appointment of appellate members and further delayed the normal functioning of dispute settlement within the current international mechanism.

So what are the implications at this point? First, although CCP leaders see the United States as a declining state on the global stage, China is still very cautious in approaching a confrontation with the United States. This perception is supported by Beijing’s downplaying of political rhetoric as official mouthpieces have constantly restrained from being excessively hawkish and using patriotic sentiment. On 24 September, China published a white paper to explain what it terms “trade friction” and called for a reasonable solution. However, this does not mean that any agreement can be reached between the United States and China anytime soon. It may be too early to make any assertion as the Chinese government may be very likely in the process of figuring out exactly what Trump is doing. In addition, any compromise by the Chinese government can be interpreted internally as owing to a foreign power. Jack Ma, co-founder of Alibaba, warned on 18 September, 2018, that the dispute could last 20 years and persist beyond the presidency of Donald Trump. Many American allies are also affected by the US imposition of tariffs. Hence, although the US constantly raises the stakes and intensifies its political rhetoric, the misperception between the US and China has the potential to prolong this trade war and turn it into a long-term stalemate.

Second, although many Asian countries are concerned with China’s military buildup and assertive actions in recent years, many of them opt not to comment openly so as not to jeopardize their economic ties with China. Balancing or bandwagoning with either the United States or China carries with it the potential danger of agitating the other.

Regional countries urgently need a hedging strategy to mitigate future uncertainties. To mitigate the coming impact, countries in the region need to develop a closer working relationship to substitute the future market loss in either China or the United States. NonChinese firms will soon look for a substitute for the loss of China’s manufacturing power, and a regional division of labor in Asia can offer potential stability to mitigate the global impact in this trade dispute.

Taiwan’s New Southbound policy may be a timely orientation to readjust its economic resources and refresh the long-lasting relations with Southeast Asia. Although Taiwan has played an important role in the supply chain of the global manufacturing industry via its practice of vertical division of labor with China, people may overlook the already developed long-term partnership between Taiwan and Southeast Asia.

Taking Vietnam as an example, in 2017 a research report from the interior ministry indicated that 70% of all naturalized citizens in Taiwan come from Vietnam. After China, Vietnam is also the second most popular destination for Taiwanese foreign investment. There are more than 60,000 Taiwanese businessmen in Vietnam, and more than 300,000 Vietnamese in Taiwan. There are more than 400,000 Taiwanese tourists who visit Vietnam every year. The strong bond between Taiwan and Southeast Asian countries deserves careful maintenance and continuous investment in the current economic upheaval.

To sum up, current tensions between the world’s biggest economies requires every country to develop a survival strategy to deal with the uncertainty. There are surely very few things that other states or countries can do amid the current power play between the US and China. Since many countries are considering transferring their overseas investments to locations other than China, it would be wise for Taiwan to grasp this opportunity and attract new investments. This can be achieved via the improvement of its infrastructure and overall investment environment, and by developing a closer partnership with countries in the region.

View of Ho Chi Minh City from Bitexco Financial Tower, Vietnam. Much of the manufacturing once done in China is moving to countries like Vietnam.

photo: Diego Delso

Hon-min Yau is an assistant professor in the ROC National Defense University. He can be reached for comment at cf22517855@gmail.com