The world will soon witness a historic test of wills between China and the US, two superpowers whose leaders see themselves as supreme. In the immediate sense, it will be a battle over trade, but also at stake is the strategic leadership of East Asia and, eventually, the international order.
As things stand, China holds a stronger position than many people realize. The question is whether Chinese President Xi Jinping (習近平) will feel confident or brazen enough to want to prove it.
The test of wills was hardly China’s choice; but nor does it come as a surprise. US President Donald Trump’s recently announced import tariffs on steel, aluminum, and other Chinese-made goods are in keeping with his brand of economic nationalism.
His decision to accept North Korea’s invitation to hold bilateral talks on its nuclear program reflects the same “bring it on” attitude that he applied to the North’s earlier threats of war.
The upcoming test will be historic because it promises to reveal the true strengths and attitudes of the world’s rising power vis-a-vis the weakened, but still leading incumbent power. For better or worse, the result could shape the world for decades to come.
On the trade front, China’s large bilateral surplus with the US could mean that it has more to lose from a trade war, simply because it has more exports that can be penalized. It is often said that surplus countries will always be the biggest losers in any tit-for-tat escalation of tariffs and other barriers.
However, this assumption misses multiple points. For one thing, China is more economically resilient to the effects of a trade war than it used to be. Trade as a share of its total economic activity has halved in the past decade, from more than 60 percent of GDP in 2007 to just over 30 percent today.
China also has major advantages in terms of domestic politics and international diplomacy. As a dictatorship, China can ignore protests by workers and companies suffering from US tariffs.
In the US, where midterm congressional elections will be held in November, the outcry from exporters, importers and consumers facing higher costs will be heard loud and clear.
Of course, Trump, too, might ignore protests against his trade war if he is convinced that taking on China will please his core voters and win him re-election in 2020.
However, congressional Republicans will probably feel differently, especially if their states or districts are among those being singled out by Chinese import tariffs.
In terms of international diplomacy, Trump’s trade war will help China present itself as the defender of the rules-based international order and multilateral institutions such as the WTO.
To be sure, not all countries would follow China’s lead. The WTO does not recognize China as a market economy, owing to the Chinese government’s significant involvement in industry and alleged theft of intellectual property.
However, China is going to have a chance to play the victim, while arguing that the US now poses the single largest threat to the global trading system that it helped create.
If a US-initiated trade war drags on, China’s case will become only stronger as more countries suffer the disruptive effects of tariffs.
Of course, China might choose not to fight Trump’s trade war at all. With symbolic concessions — such as an agreement to import US-produced liquefied natural gas or promises to offer new guarantees for intellectual-property rights — it could convince Trump to stand down.