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Business News/ News / World/  Hold that handshake, trade wars have just begun

Hold that handshake, trade wars have just begun

Why a trade war between the ruling but declining the US and rising China will continue to persist for years to come in one form or the other

US President Donald Trump and China’s President Xi Jinping at the Great Hall of the People in Beijing on 9 November 2017. Photo: ReutersPremium
US President Donald Trump and China’s President Xi Jinping at the Great Hall of the People in Beijing on 9 November 2017. Photo: Reuters

Geneva: There is no end in sight. On 10 July, US President Donald Trump escalated the incipient trade war by directing his trade representative ambassador Robert Lighthizer to begin the process of imposing tariffs on additional $200 billion worth of Chinese imports. This would involve an extra 10% tariff on a wide array of Chinese goods, ranging from agricultural products and seafood to chemicals to tires to travel goods.

Beijing has said it will match every act of “trade bullying" in equal and balanced dose of trade retaliatory measures. So, China also imposed new tariffs of 25% on US goods worth an equivalent $34 billion, including soybeans, automobiles, and marine products such as lobsters. To make matters worse, Trump also threatened his allies with dire consequences after they decided to retaliate against the US’ punitive duties of 25% on steel and 10% on aluminium under what are called Section 232 national security provisions. He intends to hit imports of automobiles and auto parts from Germany, Japan, and South Korea.

Little wonder Trump’s trade war against its principal enemy China, and also allies such as Germany, Canada, Japan and Mexico among others on the periphery, is rapidly morphing into a Thucydides’ Trap—a term that refers to that ancient Greek historian whose magnum opus on the Peloponnesian War in the 5th century BC provided valuable insight as to what would happen between a rising power and a ruling power.

In his book Destined for War, Harvard academic Graham Allison offers an illuminating account of the tensions that will rise inexorably between a ruling power like the US and a rising power like China. Allison lists 16 instances where tensions between a ruling power and the rising power at that specific point of time led to an “inevitable" war in 12 cases.

Boston Tea Party, 1773, was a historic trade war in which a British tax on tea led to an unstoppable retaliatory action. Photo: AFP
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Boston Tea Party, 1773, was a historic trade war in which a British tax on tea led to an unstoppable retaliatory action. Photo: AFP

What history tells us

Out of the 12 wars that Allison attributes on account of the Thucydides trap, he lists three due to what he calls “global empire and trade". Those trade wars include the war between a ruling power Portugal and a rising power Spain in late 15th century; the Dutch Republic, which was the ruling power in mid-to late 17th century, and then rising power England; and early 20th century between the UK which was the ruling power almost till 1870 and the rising power, the US.

Surprisingly, the Harvard academic did not mention the Boston Tea Party of 16 December 1773, which is one of the historic trade wars in which a measure imposed by a ruling colonial power, the British government, led to an unstoppable retaliatory action that ultimately culminated in building the ruling power called the US.

Subsequently, there was the Opium Wars in which then Qing Dynasty tried to prohibit British merchants from selling opium to Chinese in the 1830s. This ultimately led to the destruction of the imperial Summer Palace in Beijing in 1860. That century of humiliation for China starting “from 1854 to 1949 when the US gunboats cruised China’s inland rivers to protect American interests", according to the American diplomat Stapleton Roy, came to an end only when Chairman Mao Zedong declared that “Chinese people have stood up" in 1949.

The open door policy

The US has exerted its hegemony largely on account of trade interests under the banner of “open door" policy since 1898, which was initially meant to allow for all trading partners with China to have equal privileges. The US’ “open door" policy continued to manifest under different avatars. It wore, for example, a reformist mask since the setting up of the United Nations, the Bretton Wood institutions of the International Monetary Fund (IMF) and World Bank, and followed by the General Agreement on Tariffs and Trade in January, 1948.

During the last seven decades, the US, the most powerful nation in history, went on to refine/perfect the “open door" policy in ways that suited its overall trade/economic interests and strategic considerations, including its immediate military and trade priorities, says Allison.

The creation of the World Trade Organization (WTO) following the Uruguay Round of Trade Negotiations in 1995 is an apogee of that onward march which began almost a century ago. Although the Uruguay Round started during the reign of the Republican administration in 1986, it was concluded by a Democratic president at the official level in December, 1993. Unsurprisingly, there is always an underlying chain of continuity in the economic and trade policies followed by the global hegemon since the late 19th century.

The US control over these so-called multilateral trade institutions is pervasive in almost all aspects. Barring some minor hiccups here and there, Washington ensured a brutal grip on decisions taken at the IMF, the World Bank, and the WTO.

Little wonder then that before one enters the WTO director general’s office, one has to cross the room of a deputy director general which remained permanently occupied by successive US nominees. Indeed, every small and big decision at the WTO has to be vetted by that deputy director general who is the link between the US embassy in Geneva and the director general’s office, according to several past and present trade envoys.

The Opium Wars, in the 1830s, took place when the Qing Dynasty tried to prohibit British merchants from selling opium to Chinese. Photo: AFP
View Full Image
The Opium Wars, in the 1830s, took place when the Qing Dynasty tried to prohibit British merchants from selling opium to Chinese. Photo: AFP

Trump turns the tables

Against this backdrop of continued influence and control over the WTO by the world’s sole superpower, it appears surreal now to witness the destructive campaign that the Trump administration is engaged in. It threatened last week to withdraw from the WTO unless it behaves well. The main charge against the WTO is that it enabled China to accumulate staggering surpluses running into trillions of dollars.

“The Trump administration will aggressively defend American sovereignty over matters of trade policy," the new policy says, insisting that the “overarching purpose of our trade policy—the guiding principle behind all our actions in this key area (global trade)—will be to expand trade in a way that is freer and fairer for all Americans [only]….Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the US, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and services industry exports," it has argued.

The four major goals to achieve its objectives in global trade, according to the document submitted to the Congress are “(1) defend US National sovereignty over trade policy; (2) strictly enforce US Trade laws; (3) use all possible sources of leverage to encourage other countries to open their markets to US exports of goods and services, and provide adequate and effective protection and enforcement of US intellectual property rights; and (4) negotiate new and better trade deals (bilaterally) with countries in key markets around the world."

Under the banner of “America First" trade policy, Trump and his advisors have intensified their trade war against China on several grounds. They include the rising trade surpluses, particularly since 2001 when China joined the WTO, to its latest “Made in China 2025" industrial policies that are made possible because of “government intervention and substantial government financial and other support".

The US accuses China for aggressively promoting 10 advanced manufacturing industries domestically “to replace foreign products with Chinese companies’ products in the China market through a variety of fair and unfair means, including through the extraction of foreign technologies," according to 2017 report to the US Congress by the office of the US trade representative in January, 2018.

Therefore, the continued ballooning of the US trade deficit which touched $648 billion in manufactured goods last year and the loss of 5 million jobs during the last 16 years demonstrates that multilateral, regional, and even bilateral trade agreements with Korea and others, have only brought deindustrialization and destruction.

In short, the US is suggesting that its ever increasing trade deficits are an offshoot of the manner in which it was duped, cheated, and deceived by its trade partners who refused to play by the rules governing the so-called “fair and free trade".

How will it all end

It is an undeniable fact that China made dramatic advances since 1978. “China has soared from 10% the size of the US to 60% in 2007, 100% in 2014, and 115% today," says Allison. “If the current trend continues," he says, “China’s economy will be full 50% larger than that of the US by 2023… By 2040 it could be nearly three times as large. That would mean a China with triple America’s resources to use in influencing outcomes in international relations," Allison has pointed.

China has also resorted to some questionable policies for providing market access to foreign companies. It also helped its domestic companies to grow in size, scale, and effectiveness globally. But this is what the US and other industrialized countries did for more than 200 years by stealing technologies and production processes. The destructive role played by Britain in India’s cotton textile industry is well documented.

Thus, a trade war between the ruling but declining US and rising China will continue to persist for years to come in one form or the other. Even as the European Union (EU) and Japan come under Trump’s trade war zone, it remains to be seen whether they will join China when it wants to build a broad ‘coalition of the willing’ countries to fight unilateralism.

As Thucydides rightly said about the Peloponnesian War that resulted from “the rise of Athens (China now) and the fear that this instilled in Sparta (the US)," it is also fair to conclude that in a trade war, “the strong do what they can, and the weak suffer what they must".

Clearly, the weak are the wretched of the earth such as the developing countries, including India and other poor nations.

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Published: 12 Jul 2018, 09:34 AM IST
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