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Bannon Says the U.S. Is at ‘Economic War with China.’ Is He Right?

A ChinaFile Conversation

Steve Bannon, whose controversial views on China remain hugely influential in the White House, is visiting Hong Kong this week to speak at a China investment conference. In August, before he left his White House position as chief strategist, Bannon said the U.S. is “at economic war with China.” He added, “One of us is going to be a hegemon in 25 or 30 years and it’s gonna be them if we go down this path.” Are the United States and China in a state of economic war? If not, is that a likely outcome if tensions between the two nations continue to rise? —The Editors

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The United States is not at economic war with China. The benefits that the U.S. economy gains from trade with China are hidden in many cases, but nonetheless significant. Many “made in China” goods, for example, have parts or services that come from other countries, including the United States. While these goods are assembled in China, the larger part of every dollar spent on them goes into the pockets of U.S. companies. China also invests tens of billions of dollars in the United States each year, which is responsible for creating middle class jobs for thousands of Americans. Retaliatory measures against China are likely to reduce such investment—and job creation, and also setback progress on opening Chinese domestic markets to U.S. firms.

Due to the nature of the global economy and supply chains, pursuing retaliatory measures against China to address trade deficits or irritants would likely lead to fewer dollars in the pockets of average Americans and significant U.S. job losses. Tariffs on Chinese goods would be passed on to Americans in the form of higher prices. If Americans were to buy fewer Chinese products, it would hurt China’s economic growth, and in turn reduce Chinese imports of U.S. products. In 2009, the United States placed a 35 percent tariff on Chinese tires in an attempt to level the playing field for U.S. manufacturers. The experiment cost American consumers an additional U.S.$1 billion in higher prices, but only saved 1,200 jobs, or, U.S.$900,000 per job saved.

We do not need to engage in an economic war with China. We would both end up as losers. What we need is a proactive and smart strategy to address the imbalances and asymmetries in our economic and trade relationships with China. We need a well coordinated approach to ensure China lives up to the bilateral and multilateral commitments it has made on international trade and economic issues. We need to work with allies and partners to make sure that China plays by widely agreed upon rules. A decision to launch economic warfare with China would be a classic case of “cutting off the nose to spite the face.”

Most Americans will reflexively answer this question in the negative. The contemporary Western view is that economic interactions are positive sum—a rising tide lifts all boats. Economics is the province of profit-seeking by utility-maximizing rational actors who conduct their business within a framework of laws and respect for property rights, which in turn guarantees stability and a flow of transactions, the outcome of which is conducive to the general good. War, by contrast, is a domain of fear, violence, and coercion. Americans thus tend to see “economic war” as practically a contradiction in terms. But Mr. Bannon’s framing shows his familiarity with the language of Chinese Communist Party decision makers, hence his question about who will be the “hegemon” (霸) in 25-30 years. Chinese strategists call the United States the hegemon. When Xi Jinping refers to the “Chinese Dream,” or the “Great Rejuvenation of the Chinese People,” and invokes the ancient slogan “Rich State, Strong Military” (富国强兵), he is not speaking the language of 21st-century cosmopolitan globalism. He is summoning the lessons of the Warring States period from a formative moment of Chinese history. The Warring States period featured competition and warfare among a handful of states that had commercial and popular links with one another, but which were locked in a zero-sum struggle waged through various forms of diplomacy and also through violence. In other words, this was a time when might—and guile—made right. Ultimately, the winner claimed hegemony, and the losers were subjugated.

Does it matter if one side conducts an economic relationship believing that it is win-win, and the other side conceives of it as zero sum and part of a contest for political-military dominance? A Western approach would be to evaluate the relationship on the basis of statistics that show that both sides benefit. Still, as Americans we might want to consider:

  • What are the implications of these two different perspectives for how written agreements will be treated?
  • If economic engagement entails access to dual-use (commercially and militarily applicable) technologies and other potentially sensitive information and physical property, will the two sides exploit this access in parallel ways or to the same degree?
  • How should we incorporate into our calculations of the gains on both sides statements to the effect that one side is the world’s largest source of IP theft, which has led to the greatest transfer of wealth in history?
  • Does it matter that the government of one side is postured to treat economic matters as strictly separate from defense concerns, while the ruling structure of the other side is designed to facilitate an integrated approach?

I am not sure that economists alone can help us address those questions.

A final barrier to understanding on our side may be the American tendency to think of World War II when we hear the term war, while the Chinese reference point is likely the People’s War-style contestation waged under Mao during World War II and the Chinese Civil War. The war part of the concept of economic war may be less like World War II and more like People’s War, consisting of guerrilla struggle through a combination of covert and overt means, by forces that at times seek to deny their status as combatants.

There are certain kinds of political rhetoric to which word “war” is necessary. Bannon’s rhetoric of self-conscious anti-globalism and “economic nationalism” needs it desperately. But war is war. Embargoes and sanctions are near war —aggressive containment by indirect military action and legal harassment. Economic competition is not war.

Bannon is surely in agreement with a large portion of American commentators who decry China’s apparent exploitation of loopholes in trade regulations and outright disregard of international agreements intended to protect intellectual property rights, market integrity, price stability, investment incentives, sustainable natural environments, and worker safety. None of that is good. It is not war—it is unprincipled and cynically unfair economic competition.

Taking Jackie’s characterization of Bannon’s views as persuasive, one marvels at the two-dimensional quality of the conceptualizations. Suppose it is true (since there is a lot of truth in it) that China is a ruthless and unprincipled economic competitor whose practices disadvantage the U.S.A. Does it mean that every job disappearing from the U.S.A. pops up in China? Does it mean that China and America are in a two-way competition to be economic hegemon? Does it mean this is a zero-sum game between two countries, one of which takes it all and one of which gets nothing? Does it mean this is an existential crisis for one country or the other?

Bannon can whine all he wants about China pinching the U.S.A. in this market or that, but Zambia, Nigeria, Cambodia and Laos, among others, would like to point out that they are truly in an existential struggle with Chinese investors, managers and products. They might also like to point out that they all share that 20-25% portion of world trade left after the EU, China, the USA, and Japan have taken their cut. So far none of these minority economies are calling for “economic war” or any other kind of war.

But neither do they have any illusions about America and China being in an economic war. America and China are participants in a system that keeps themselves wealthy in terms of national GDPs, and keeps most of the rest of the world confined to a narrow band of investment, income and expenditure. Whatever complaints the U.S.A. or China may have against each other are trivial; they like the global system just the way it is. In fact, far from enemies in war, they are partners in wealth and development. It’s a funny old war when a wound to one party causes the other to bleed.

For what country, anywhere, would charges that another country does not conform to regulations of the WTO, the IMF, WHO, or any other international convention be answered by initiating “economic war” against the accused? What sense would “economic nationalism” make? The answer does not lie in unilateral action but in collective enforcement of flouted rules. The answer does not lie in subsidizing Americans to produce useless coal while Chinese are mining and cornering rare earths. The answers lie in the opposite direction from where Bannon’s nationalism and war cant lead.

We should not confuse an argument for the economic benefits of free trade with the question of whether the United States is at economic war with China. The United States may not be at economic war with China, but China is at economic war with the United States. Despite the well intentioned arguments across the U.S. political spectrum for economic engagement, China does little to hide its policy of economic warfare.

The mountain of evidence that China is at economic warfare with China is simply undeniable. Abroad Chinese state institutions and actors actively engage in acts of economic theft targeting intellectual property. Ranging from computer hacking of trade secrets to actual breaking and entering of U.S. companies, these acts are committed by everyone from Chinese state actors to state owned enterprises. Most widely used Chinese tech apps or hardware manufacturers come with security back doors allowing Chinese hackers the ability to steal information. While China claims inability to enforce intellectual property standards, for a country that can pass and enforce legislation on internet capabilities with great speed, it belies any common sense that China is doing anything less than engaging in organized state theft.

Inside of China, the state forces companies to hand over trade secrets and with the national security apparatus targeting foreign companies. Firms that refuse to comply with are dealt with harshly from being targeted by compliant state media to discovering a barrage of inspectors shuttering operations on flimsy pretexts. For a country seemingly proud of it financial strength and seeking to acquire national security companies at the urging of Beijing, the domestic investment market remains closed to investors seeking to invest in such national security industries as dance troops.

These acts of economic warfare have real national security spillovers. For years, official and state linked actors in China have either facilitated or actively turned a blind eye to North Korean smuggling and military build up. China is actively using odious debt levels to forcibly acquire foreign assets and compliance in countries ranging from Venezuela to Sri Lanka. Hacking of personnel information has placed everyone from corporate executives to government employees at risk. It is no exaggeration to say Chinese acts of economic warfare have real economic and national security risks.

Worryingly, this process is accelerating. The Party is now forcing foreign companies to rewrite corporate formation documents placing Party representation above corporate management. The new credit rating systems extending to firms forces them to turn over even more data and grades their compliance with Party directives. These moves effectively make foreign firms tools of the Communist Party economic and foreign policy. This extends well beyond traditional protectionist economic policy but force foreign firms to become agents of the Chinese state. If this mountain of evidence of behavior does not qualify as economic warfare, we should question what the concept means.

As a strong believer in free trade and investment markets, we can debate the merits of how the United States should respond to China, but it is the pinnacle of naivety to pretend this is not happening, has not been happening, and is doing anything but accelerating.

I have to agree with Jackie here. Of course there is no war on the economic front between the U.S. and China because war implies immediate destruction of a rival's capabilities. However there likely is, at least on the Chinese side, a long-term economic competition between the U.S. and China.

How do we know that? Well, the Chinese government says so.  In the introduction to the State Council plan "Made in China 2025," the Chinese government states "we must fashion China into a manufacturing power which leads global manufacturing so as to create a firm foundation for the China Dream of realizing the great rejuvenation of the Chinese people."  The objective of this rejuvenation clearly is to reinstate China as the premier power in the world.

To accomplish this goal, China provides gargantuan financial subsidies to its manufacturers which provide Chinese firms unfair advantages in the global  market place.  Chinese industrial and high tech manufacturers have received over $300 billion in financial subsidies.

Much of the subsidies comes from cheap loans to companies or projects which never could have secured financing or at such cheap rates in a market economy.  But under the guidance of China's benevolent planners, massive amount of cheap funding is thrown at Chinese companies, allowing them to price outputs below those of foreign competitors.  The largest provider of subsidized loans is the $2 plus trillion China Development Bank.  It had $163 billion in loans to "emerging strategic industries" as of 2015 with an increase of $36 billion in 2015 alone.  Another government controlled bank, the Export-Import Bank of China, provided 50 billion dollars to promote the export of Chinese goods as of 2015 and another $34 billion to help export manufacturers upgrade their facilities.  The $247 billion in financial subsidies from the policy banks alone likely grew by well over $50 billion in 2016, putting China's financial subsidies to its manufacturers at above $300 billion.  Moreover, once policy banks provide loans, commercial banks are happy to follow with loans priced at or below benchmark interest rates because loans from the policy banks act as quasi guarantees from the central government.

Other government policies also afford tech and industrial manufacturers cheap financing from commercial banks.  For one, if a product is placed on the priority list in China's archaic yet omnipresent five-year plan or the Made in China 2025 plan, banks will expedite loans and bond issuance of companies producing such products.  BYD, for example, received hundreds of millions in loans from various banks to finance production lines for electric cars and electric trains because these products are on the priority lists.  Thus, the financing for these production lines is not only cheaper than the financing costs of foreign competitors; its financing costs are lower than that of domestic competitors producing non electric vehicles or even competitors producing similar products but are not on the qualified producer list.

To be sure, the U.S. also has a policy bank, the Export-Import Bank, but its total authorization is only $5 billion, a tiny drop compared to China's massive financial subsidies. A market oriented financial sector would never have put so much money into inherent money losing ventures, such as China's steel and solar panel industries.  Yet, for a government obsessed with seizing the economic high ground, financial losses are small price to pay to grab global market shares.   So, no economic war with China indeed, but China is heavily subsidizing economic competition with the U.S.

I question the motives of the messenger. The discussion above, to the credit of its participants, has revolved so far around the merits of using “economic war” as a concept in the discourse of U.S.-China relations and the extents to which China is competing on a fair playing field. But we should be wary of Bannon, a regressive political figure and “alt-right” enabler who craves conflict within the U.S. and apparently war with China, of dishing up a conversation on the policy nuances toward China. Somewhat like the race-based theories of social organization to which his Breitbart faithful adhere, Bannon seems to selectively use bits and pieces of acknowledged fact to advertise a normative argument for deeper conflict, in this case with China.

Many people within the policy and political science community have engaged for years in discussion of the U.S. trade stance toward China and its bucking of international norms and standards. This conversation should continue, inclusive of those across the policy spectrum. But we ought to remain circumspect toward those who may not be engaging in good faith, who do not intend to maintain a just and peaceful world or resort to conflict as a last resort, those who undermine democracy with ethnocentric populism and envision a world divided along such lines. Bannon's Hong Kong speech is an effort to stay relevant after leaving the chaos he helped mold in the White House.

One doesn’t have to look very far for evidence that China all too often takes a zero-sum, I-win-you-lose approach to trade. Just last week, it abruptly banned all soft cheese imports (like Brie) for no apparently good reason, presumably to boost a domestic industry that barely exists. It regularly steals technology or forces its handover as a condition of accessing Chinese markets. So there’s no question: China is a problematic actor when it comes to trade.

While it’s easy to see the parties, in the U.S. and elsewhere, that are directly harmed by this kind of behavior, it’s also easy to forget how much it harms China as well. In fact, in the same interviews Bannon said China is “at war” with the U.S., he has expressed admiration for China’s (in his eyes) winning economic strategy. Running chronic trade surpluses isn’t “winning,” in the way most people imagine. Instead, it’s created a Chinese economy that’s overly dependent on limitless overseas demand to sustain investment returns. Rather than enjoying better living standards at home, by importing what other countries have to offer, China must constantly lend more and more money abroad, or else face crippling overcapacity and capital flight. These imbalances are well recognized by China’s leaders, yet fixing them requires breaking with the mercantalist mindset that sees every good or service that China imports as somehow a loss to the Chinese economy. It’s amazing how so many Americans, like Bannon, have become enchanted by China’s dangerously lopsided economic achievements just as their limits are becoming more and more evident. If this is economic war, China is shooting itself in the foot.

Those who in the U.S. who would emulate China’s misguided protectionism can frequently be heard saying “We can’t launch a trade war with China, because we’re already in a trade war.” No doubt, things are far from perfect, but let’s not forget that last year, the U.S. and China did nearly $650 billion in trade. True, the U.S. imported much more than it exported, but Americans are consumers as well as producers. A real trade war that saw this trade cut off would do a lot of damage. Yes, the U.S. needs to help, encourage, and, yes, pressure China to open and rebalance its economy, for both of our sakes. It’s disappointing and frustrating when China resists moving in that direction, as it knows it must. But no, we haven’t seen a trade war, and let’s hope we never do.