The sanest way to analyse the trade war
The trade war cannot be analysed using traditional economic tools. What’s needed is methods used in political science, to help understand things from a long-term perspective, as well as other areas of expertise to study shorter-term effects: negotiation techniques, game theory and even cultural analysis, to understand HOW things are happening.
So, let us keep in mind the long-term scenario of a clash of global powers between a declining but still very dominant hegemony and another country catching up with it. Both have strengths and weaknesses, making the result of the clash uncertain. There is thus no point betting on the outcome at this stage, especially given that the two rivals have different power strategies and are still highly interdependent.
The United States is clearly still dominant in the monetary arena and in terms of cultural and educational soft power. It has also made up some lost ground on energy. And, above all, it has a geopolitical strategy that has long been underpinned by a huge military budget. The US still has security agreements with 66 countries and bases or facilities in 130 states*. China is gradually catching up in the military domain, notably in terms of its naval capability, with a strategy focused on controlling its local area, namely the China Sea. However, Beijing has also learned lessons from the USSR, which exhausted itself economically in its quest to be a major military power. Its policy is instead focused on catching up technologically, developing international infrastructure and proposing an “alternative” soft power.
Short term: separating out noise from real signals
That being the case, to try to understand something in the short term, we need to separate out the noise from the real signals. In concrete terms, this means separating out events and/or statements that are of no importance from those that can give us clues as to the direction of negotiations or more far-reaching strategies. There are two essential prerequisites to all this:
1- Since this is not an exact science, there is simply no way to predict how the negotiations will play out. All the probabilities around which market stances are currently organised are speculative. All we can do is draw up scenarios and adjust them on an as-and-when basis, to see how reality might unfold.
2- It would be wrong to think two economically dependent nations cannot be in conflict, including militarily. We are no longer living in the age of Montesquieu and his “soft trade”! And the First World War blew this idea apart. This is an important point: while true in the short term, the idea that the US and China will be stopped by economic rationality seems to us to be highly questionable in the long term.
In the short term, it is clearly an opposing force, with each country trying not to go too far for fear of hurting its own economy, which supports the idea of a phase 1 deal. Furthermore, domestic policy plays a powerful role. This is all too clear with Trump… Xi, on the other hand, can seek to shore up his popularity and his position within the Party by playing on the nationalist theme, in the face of declining growth and growing difficulties in the urban labour market. Moreover, managing the political balance within the Party is a key issue at the moment, often underestimated because it is so obviously opaque. However, the recent leak of documents about Xinjiang and the repression happening there is very surprising, especially with tensions in Hong Kong at their height. Where have these documents come from? What do they tell us about the balance of power within the Party?
In the long term, we prefer to operate under the assumption that polical rationality will prevail. This means the declining hegemonic power will, in any event, attack its competitor in every area of power (the economy, currency, diplomacy, the military, etc.). When agreement is reached in one area, this should therefore be seen as a threshold effect, with tension very likely to be displaced to another area.
So a trade deal does not rule out diplomatic tensions, and this is exactly what we saw last week when the US Senate voted unanimously to defend human rights in Hong Kong: diplomatic tension went up a notch, threatening the outcome of the trade talks. And Trump now has an ace up his sleeve, at least until next week, when the Act in question is ratified or otherwise…
What really happened last week?
With these methodological foundations in place, how do we make sense of the latest news?
1 – China and the US are unanimous in their agreement that there are “constructive” elements. To put it plainly, this means the talks are continuing, with neither side taking responsibility for the current impasse.
2 – The US has issued a warning: China is not making enough effort on intellectual property and technology transfers, in exchange for lower tariffs. This is the key issue for the US, probably as important as – or more important than – the size of its trade deficit! This is because control over technology will be the foundation for the dominant power of the future. And the pertinent example here is not Russia but rather Japan in the 1980s, suffocated by the US reaction to technological gains and accumulating trade deficits. Japan eventually agreed to commit to a tricky currency rebalancing through the Plaza Accord and subsequently the Louvre Accord, but this also led to the 1987 stock market crash…
On the Chinese side, technology is also central and Beijing will not be making many concessions: technology is the key to higher productivity gains and potential growth over the coming years, and thus to offsetting the effects of the current slowdown… Ever since the China 2025 programme was published, we have known that the Chinese are pursuing a strategy of rapid technological development. It was undoubtedly the publication of this programme that caused the US to take a tougher line, well before Trump. It is thus in this area that many issues are going to be decided, including both Chinese growth and the outcome of the hegemonic conflict. This is perfectly illustrated by the Huawei affair.
3 - Lastly, an important point arose last week concerning negotiation techniques. On the one hand, we have a tweet from Hu Xijin, editor-in-chief of the Global Times (which is a good indicator of what message the Chinese State wants to pass to its people), and on the other, a tweet from Trump. From China: “Few Chinese believe that China and the US can reach a deal soon. […] China wants a deal but is prepared for the worst-case scenario, a prolonged trade war.” The message is very clear: Beijing will hold out if necessary. Remember that Sun Tzu recommends discreetly biding one’s time so as to end up in a dominant position where one can divide the enemy and win the clash without a war…
On the US side, the president made a statement placing responsibility for delays on the Chinese. And there is the Senate vote. So: a tougher line, pressure, and a ratcheting-up of the balance of power, all of which adds up to a fairly standard negotiating stance under the Trump administration. A “cowboy negotiation”, if our American friends will forgive us the expression. The stance of a dominant power – and, above all, the stance of a worried power.
It remains to be seen how the players will move their pieces between now and 15 December, when US tariffs are set to increase on $156 billion-worth of Chinese imports, including tinsel. In the meantime, let us hope any ramp-up of diplomatic and military tension is limited: coming back from the political brink is much harder in these areas than it is in trade.
And let us not forget this comment, sometimes attributed to Comrade Stalin at Yalta: it seems a chess player always beats a poker player. Merry Christmas…
* Pascal Boniface’s preface to “L’art de la guerre – De Sun Tzu à Xi Jinping”, Ekho, 2019.
Tania Sollogoub - email@example.com