China’s strengths in a trade spat are also its weaknesses

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China’s strengths in a trade spat are also its weaknesses

By Daniel Moss

For the first time since the Opium Wars of the 19th century, China’s borders and territory are unchallenged. No conflict frays the country’s edges. This stability has allowed for rapid industrialization, foreign investment and the rise of an urban Chinese middle class. Why would China jeopardize this in a trade spat with the US?

Hard-won political unity created the conditions in China for the reforms of the Deng Xiaoping era and the country’s huge economic success. Those gains, in turn, make China confident and strengthen its hand in talks with the Trump administration that will ultimately come.

The advances are also the biggest thing China has to lose. The stronger China’s position, the more it has the scope — and necessity — to offer concessions to stave off a conflict.

The conventional wisdom is that the US has a lot to lose as President Donald Trump pressures Beijing with tariff threats and Beijing responds in kind. At the Harvard College China Forum this past weekend in Boston, speakers pointed out that China isn’t entirely unassailable.

China’s current geographic security, especially in contrast to the past two tumultuous centuries, may offer a potential route out of a trade conflict that would injure both countries. After all, Beijing has a much greater strategic game to play: the Belt & Road Initiative. This trillion-dollar vision would open new connections to Asia, Europe and Africa, via railways, roads, ports and power grids.

That sort of long-term investment is what political unity — however it is garnered — enables. In contrast, the US looks more like a nation of divided tribes where decision making is increasingly messy.

In particular, with almost two months until a proposed $50 billion of tariffs go into effect, American-based multinationals that anchor global supply chains can lobby to their heart’s content. Keep at least one eye on Congress, which has ultimate authority over trade. Trade wars that hurt constituents are rarely loved on the Hill.

The broadest measure of China’s trade picture, the current-account surplus, is diminishing to the point of being almost negligible. It was about 1.3% of gross domestic product at the end of 2017. The country’s economy is increasingly dominated by services, consumption and technology.

Despite broadsides from the White House assailing China’s predatory approach on technology and Beijing’s defiance, their interests have already begun to align. Chinese companies overtook Japan last year as the world’s second-largest filers of patents, according to the World Intellectual Property Organization. On current trends, it will overtake the US within three years.

China may then be looking for strong protection of intellectual property, according to Fred Hu, founder and chairman of Beijing-based Primavera Capital. One of Trump’s central complaints about China is what the White House calls state-led efforts to coerce the transfer or even theft of intellectual property.

On this, China’s and America’s shared interests may help provide grounds for a broader compromise on trade, Hu told the Harvard gathering.

It’s the strength and increasing breadth of China’s influence that put it in the box seat. Strength can be deployed to defuse a trade war, as well as wage it. Advantage: Xi.