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Why China Is Feeling Internal Pressure To Keep Raising The Trade War Stakes


In what must be a disappointing turn of events to the affected parties, the United States-China trade dispute has turned into a high-stakes poker game, with the health of the global economy in the balance. Predictably, some Democrats and their allies in the media are blaming President Trump for this setback to the trade talks, just as they are regrettably doing the same for the horrific mass shootings in El Paso, Texas, and Dayton, Ohio.

Trump’s relentless use of tariffs as a primary negotiating tool is a matter of fair debate. However, it was not Washington but China that led the dispute into the latest worrisome cycle. It started with Beijing’s abrupt disavowal of a draft agreement both sides had been working on for months. This decision by China should be the subject of proper inquiry, not just Trumpian impatience and temper tantrums.

By some media accounts, President Xi Jinping was persuaded that he had a stronger hand than previously thought—that he could afford to wait out Trump until he is replaced by a less adversarial, Democratic president. With America polarized between “Trump-haters” and “Trump-fans,” and trade advocates anxious to return to a quieter, pre-Trump status quo ante, it probably looked like a good bet.

Other media reports take note of a confluence of events that has heightened a sense of insecurity, if not paranoia, in President Xi and other Chinese Communist Party leaders. In their annual retreat at the beach resort of Beidaihe, Xi is probably hearing it from his in-house critics.

The Chinese have hawks and doves, too. One set of them is assuredly pressing the chairman to stand his ground against humiliating concessions to the waiguoren, or foreigners. As the Communist Party has welcomed trade-minded businesspeople into its ranks, Xi might be hearing more conciliatory views as well.

The gravity of preparing for the massive celebration of the People’s Republic of China centennial on October 3 must also be bearing on the party leaders’ nerves. There is immense pressure to not betray any weakness as they lie on the cusp of global preeminence.

Tensions have also been heightened due to Western democracies castigating Beijing for incarcerating more than 1 million ethnic Uighurs in reeducation camps. The mere mention of the subject by U.S Secretary of State Mike Pompeo at the ASEAN foreign ministers meeting set the Chinese Foreign Ministry on an angry riff about “slander” and “vilification.”

The real mood-dampener, however, is likely the resistance of millions of Hong Kong citizens to Beijing’s heavy-handed efforts to cow them into submission. Beijing may deploy the People’s Liberation Army to quash the demonstrators, but it won’t be able to get off as easily as it did after the 1989 Tiananmen Massacre. There is simply too much at stake for the future of global trade.

A possible consequence of anything resembling the Tiananmen bloodbath is to be “decoupled” from the United States and the rest of the freedom-honoring world. Neither the United States nor China wants such a parting of ways.

China is no longer the indispensable gross domestic product monster it was when it contributed up to one-third of global growth. It is, however, still an important market for U.S. manufacturers of consumer products—not to mention the produce of already battered American farmers suffering from the current trade war.

China would suffer gravely if it were separated from its largest export market and its most critical sources of borrowed or stolen technology. Therefore, it is even more puzzling that Beijing took a conspicuous step towards decoupling when it let known its intent to stop buying American farm products. It could have been just a bluff, as Trump’s threat to slap a 10 percent tariff on an additional $300 billion in Chinese goods might have been as well.

The problem at hand is so complex and sensitive that the Chinese Foreign Ministry suggested it can best be settled by the “heads of state” themselves—meaning Xi and Trump. This contest of economic brinkmanship will keep the world on edge until it is finally resolved.

The process of decoupling is already underway in some sectors. In the realm of telecommunications, the Trump administration banned the incorporation of Huawei equipment in domestic infrastructure and is urging U.S. allies to do likewise.

It’s too early to assess the full impact of the dampened investment climate in China but, according to the National Committee on United States-China Relations, U.S. companies including Dell, Hewlett-Packard, Apple, Google, and Amazon have already announced plans to downsize their mainland operations. The committee also reported a decline in venture capital investment, particularly in the realms of health, pharmaceuticals, and biotech.

The expected opening of the first wholly foreign-owned auto plant in Shanghai (by Tesla) and the expectations of J.P. Morgan and Stanley Morgan to increase their stakes in financial services are about the only bright spots in an otherwise dismal investment picture.

If Chinese party leaders they think they have the Democrats fully on their side or need only wait patiently for Trump to be “shamed” out of office, they are seriously misreading American electoral politics. Some Democratic presidential hopefuls like Joe Biden are dismissive of Trump’s (so far) unproductive deal-making, but Senate Minority Leader Chuck Schumer and other senior Dem leaders share Republican frustrations with the current state of trade relations with China.

The National Retail Federation is unhappy with Trump escalating the trade war just before the holiday season, as it would raise prices for toys, iPhones, and other consumer products, depressing fourth-quarter earnings. It’s hard to find anyone else in the manufacturing or service industries satisfied with the status quo. Problematic trade issues with China have gone on for so long, however, that some pain may be worth bearing to fix the issues once and for all.