Threat to the economic system
CONFRONTATION BETWEEN THE UNITED STATES AND CHINA AS A THREAT TO DEVELOPMENT, GLOBAL STABILITY AND PROGRESS IN SOLVING ACTUAL WORLD AND REGIONAL PROBLEMS
Expert’s Report
1. Introduction
2. Threat to the economic system
3. Threat to the stability of the world order and the possibility of multilateral solving of international problems
4. Conclusion
Introduction
Rivalry between the United States and China has become a paradigm of international relations over the past two years. It shapes strategic debates and real political, military and economic dynamics, and is likely to continue to do so for some time. That is not to say that the competition between Washington and Beijing, or even great power rivalry in general, determine all other international problems and conflicts. But the rivalry does increasingly frequently form the lens through which other actors view important developments and events. At least for the United States, it can be said that strategic rivalry with China has edged out the “War on Terror” paradigm that had prevailed since 2001.
The Trump Administration has confronted all America’s major trading partners with unilateral demands and measures. But China has borne the brunt of trade confrontations. The new US National Security Strategy published in December 2017 identifies China’s trade and economic policies as one of America’s central foreign policy and security challenges and threats[1]. The investigation report under Section 301 of the Trade Act of 1974, published by the United States Trade Representative, in March 2018, describes China’s industrial and technology policy as “unfair and inequitable”. These two government documents mark the definitive end of American engagement policy towards China. America’s trade policy towards China is now definitely in “decoupling mode”. In order to correct what it sees as unfair, disadvantageous trade, financial and technology exchange with China, the Trump Administration has imposed a series of measures directed against China:
· Incremental and escalating extraordinary tariffs of up to 25 percent on about half of US imports from China.
· State controls on foreign direct investment in security-relevant sectors have been tightened using administrative measures and legislation, leading to a significant decline in Chinese investment in the United States.
· Department of Commerce controls on export and licensing of security-relevant technologies to China.
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· In the area of public procurement Washington has restricted the use of particular Chinese products (telecommunications, visual surveillance).
· Chinese businesses and individuals listed in the Department of Commerce’s “Entity List” are prohibited from making purchases in the United States or from US companies. The Chinese technology supplier Huawei was put on the Entity List in mid-May 2019.
China’s response to these measures has to date been comparatively restrained. China has refrained from pouring additional oil onto the fire, likely out of concern to avoid a further escalation that would harm its own economy. Thus China has “only” imposed reciprocal retaliatory tariffs on imports from the United States. At the same time, it unilaterally reduced its tariffs on imports from third states, which has the effect of additionally disadvantaging imports from the United States. And Chinese businesses are actively seeking suppliers capable of substituting imports from the United States. Beijing has also considered placing an export embargo on rare earths, which are crucial for high-tech manufacturing. China responded to Huawei’s inclusion in the Entity List with an announcement that it would create its own “Unreliable Entities List” of all businesses, organizations and individuals that comply with US boycotts calls, for example against Huawei. The listed entities would face disadvantages in the Chinese market[2]. Chinese consumers also launched campaigns calling for boycotts of American goods.
Another escalation of the confrontation between the US and China cannot be excluded. This escalation threatens to the global finance and economic system, the stability of existing world order, global and regional security.
Threat to the economic system
Sino-American foreign economic and finance relations have never been free of conflict. But for a very long time they could be regarded as a stabilizing factor within the bilateral Sino-US relationship, from which both sides could draw enormous benefits. US businesses made fabulous profits from exports to and investments in the Chinese market, and transferred capital, management expertise and technology. By exporting to a US market whose capacity to absorb goods appeared infinite, China in turn accumulated immense surpluses which it reinvested in US treasury bonds and thus co-financed America’s consumption-driven economic boom. That symbiotic relationship – sometimes referred to as “Chimerica” – no longer exists. Rather the Sino-American rivalry is currently nowhere as openly confrontational as at the economic level. What is more, both sides instrumentalise trade policy in their technology competition as well as for foreign policy and security purposes.
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The expected continuation of the conflict, and even more so its potential escalation, threaten the very institutional foundations of the world trade and finance system. The Sino-American trade, economic and technology conflict has already caused considerable economic harm, affecting third parties as well as the antagonists themselves.
The tit-for-tat extraordinary tariffs imposed by the United States and China have led to significant reductions in bilateral trade and in some cases drastically increased the cost of the respective imports. Importers have switched to alternative suppliers, to the benefit of states such as Vietnam, Mexico and the European Union. To some extent production has also been relocated. Altogether the supply and sales risks of foreign trade have increased the world over. Investors play for time, investments are being reduced to a risk-limiting minimum. This uncertainty has contributed significantly to the economic slow-down in 2019.
Both China and the United States have caused damage to the WTO and the multilateral world trading system through their trade policies: China by its disregard of the fundamental WTO principles of non-discrimination and transparency, the United States through its repeated violations of core terms of the WTO treaty and not least through its punitive tariffs. The indifference of the world’s two largest trading powers towards the WTO rules casts a shadow over the organization’s future viability and legitimacy as a multilateral system. The unappetizing prospect is a gradual dissolution of the WTO trade framework through bilateral and multilateral trade agreements that are agreed, enforced and broken by virtue of arbitrary political power. A new trade world of that kind might offer some advantages to the United States and China as major political powers, but harm all the others.
It is possible – if not in fact likely – that the struggle over techno-political spheres of influence will see the United States impose further sanctions and supplier boycotts against other Chinese companies and step up its pressure on third states to do the same. Companies in third states could soon find themselves facing the uncomfortable choice of doing business with either America or China. In the case of critical technologies this would create a world divided between Chinese and US standards and systems.
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