Title

Is the Trade War Hurting Xi Jinping Politically?

A ChinaFile Conversation

The Trump administration looks poised to slap a new round of tariffs of 25 percent on up to an additional $200 billion of Chinese goods, intensifying a trade standoff in which neither the U.S. nor China shows signs of backing down. “The Chinese government in its totality must not underestimate President Trump’s toughness and willingness to continue this battle,” the Director of the White House’s National Economic Council Larry Kudlow said in August, adding in a September 6 interview that, while the two sides are still talking, Trump is “dead serious” about forcing China to change its trade policies.

In the U.S., some Republican strategists worry that trade tensions will hurt Trump’s popularity, especially in several Midwestern states that are big soybean producers. What are the domestic politics for Xi Jinping of a trade war? How much is the trade war actually hurting China’s economy? And what other effects is this having on China, and on Xi’s ability to govern? —The Editors

Comments

Pundits and experts debate who will suffer more in a trade war: China or the United States. Proponents of the tariffs believe China will suffer because the Chinese economy is dependent on exports. What’s more, they argue, Chinese consumers will pay higher prices, and China is already pressured to negotiate on key issues. Opponents point to China’s retaliatory efforts, which at best maintain the status quo in the trade balance and at worst worsen the U.S.’s trade deficit.

The reality is somewhere in between. In the context of the two countries’ global trade, the overall economic effects of the trade war are small. The $500 billion of goods China sold to the U.S. last year account for 25 percent of China’s exports. While not insignificant, this is roughly 4 percent of China’s GDP. The tit-for-tat tariffs are projected to decrease China’s 2018 economic growth rate by 0.1 percent to 0.5 percent of total GDP.

For the United States, data released this week shows monthly deficits with China widened in July. However, quarterly deficits decreased, with an increase in exports and a decrease in imports. This is likely a policy distortion from a bump in soybean exports in anticipation of new Chinese tariffs.

The political outlook for Xi (and Donald Trump) of a looming trade war is also mixed. Some of Xi’s critics in the Communist Party have taken advantage of the trade war to question his anti-corruption campaign and centralization of power. Whether Xi’s authority is vulnerable or he has successfully consolidated his power, the recent revision of Party regulations on disciplinary action for the first time in three years, which stipulate the importance of “resolutely” upholding Xi’s core status in the Party, shows Xi fighting back.

Moreover, an accelerating trade war and the way in which Xi has responded may even bolster his popularity in the eyes of the Chinese citizenry. The rift with the United States shifts some of the attention away from the slowing Chinese economy and recent domestic scandals involving tainted vaccines and protests over online investments gone sour in the shadow banking system.

Thus far, Chinese tariffs target sectors and products, including soy, cars, and chemicals, that are produced in regions within the United States where Trump has the most ardent supporters. Earlier this year, and again this week, U.S. trade and sector associations urged Trump to consider their plight.

Trade and investment conditions for U.S. companies doing business in China have yet to witness a sea change. Xi has not departed from China’s modus operandi in economic policies designed to enhance the national technology base and bolster the competitiveness of domestic industry. The government continues to calibrate access to Chinese markets in favor of domestic business and implement industrial policies. It also maintains control of the Chinese currency, this time shoring it up to encourage domestic consumption, stem capital flight, and maintain the renminbi’s value.

Just as Trump created a war scare around North Korea and then declared it resolved without anything changing in North Korea’s nuclear arms program; just as he created a sense of crisis about trade with Mexico and then declared it resolved without anything fundamental changing in U.S.-Mexico trade relations; just as he created a sense of crisis about the American coal industry and then declared it solved without anything changing in the coal business—so too, Trump has created a sense of crisis around the trade deficit with China and will declare it resolved without anything fundamental changing. I expect that to happen before the November elections.

Chinese policymakers have taken Trump’s measure. While matching his tariffs, as they had to, they have stayed rhetorically cool. The Chinese economy is going through adjustments (as it is always doing), but the impact of the tariffs has so far been minor. I do not share the view of many commentators that Xi is coming under political pressure for mishandling the U.S. portfolio. On the contrary, he is far more secure than Trump, and can afford to wait out the drama while he attends to important matters at home and on the world scene.

What will the denouement look like? China will not abandon its drive for technological dominance in new-economy fields (the “Made in China 2025” program). It can’t destroy the multinational supply chains that it is part of; these are evolving on their own as the price of Chinese labor and sophistication of Chinese manufacturing go up. It will open its domestic market at its own pace, as it has been doing all along. When the time comes that Trump wants to declare victory, China will revive some version of its June 2018 offer to buy $70 billion of U.S. soybeans, corn, oil, and gas. Trump will brag about this deal, and Beijing will not contradict him. The impact on the trade deficit will be undetectable. The impact on China’s economic rise will be nil. The impact on the November elections may be significant.

The political consequences of the Sino-U.S. trade war—which could soon widen to engulf roughly half of bilateral trade, if not all of it before too long—are of growing importance.

China was either not prepared for, or under-estimated, the persistence of President Donald Trump’s trade assault and the nature of his strategy. Where should the blame lie other than with Xi Jinping?

In the wake of China’s shortcomings, there has been much speculation surrounding the authority or credibility of Beijing’s chief ideologue, Wang Huning, its powerful economics overlord, Liu He, and Xi himself. The tales surrounding Xi have been especially curious, coming a mere six months since he was hailed as unassailable and all-powerful. For the most part, though, such speculation still seems fanciful, and premature. Wang and Liu still have high profiles, and Xi’s status seems as strong as ever, following his return from a visit to Africa in late July.

Yet, this is not to say that all is well. Beijing failed in at least three rounds of negotiations. Its tit-for-tat tariff options are nearly exhausted. If Trump subjects another $200 billion of Chinese imports to 25 percent of tariffs this month, as he has threatened, let alone a further amount so that the entirety of trade would be affected, China cannot follow suit. Since home consumers tend to pay for tariffs, China’s freedom to maneuver is also limited. China has targeted foreign firms before in international spats, and is likely to raise the regulatory and “nuisance” temperature for U.S. firms operating in China. Yet, if it oversteps the mark, it risks further serious U.S. retaliation, as well as torpedoing its own hard-slog attempt to build international credibility. The economic, financial, and political stability Xi craves would be at serious risk.

Even if his status looks secure, intellectuals who have become more vocal, and political rivals, may continue to question his authority and leadership style and tactics—especially if the trade war, which deep down is about China’s technology and industrial policies, intensifies. And while the trade war will likely only inflict peripheral damage on reported GDP growth, it is happening at a bad time for a slowing economy, and raising the risks for increasingly indebted households, Chinese firms, and financial markets—especially the stock market and the Yuan.

It is in this context that we should keep an eye on Xi’s command and control. The issue raised by his political elevation (almost a deification) was always going to be about the compatibility of “new era” governance with China’s contemporary challenges, now made edgier by a trade war. He will have to demonstrate that fears of policy instability, incoherence, and ineffectiveness are unfounded, that reform and opening up are alive and well, and that the drive to deleverage is rock solid. The evidence to date is not auspicious.

Apparently, the Chinese government under President Xi Jinping has not been fully prepared for the trade war with the United States. Considering Donald Trump a clever businessman whose sole interest is to get more business concessions through tough negotiations, the Chinese side has been reluctantly dragged into this trade war. What Chinese leaders can not understand is why President Trump has constantly ignored the signals from China’s top leaders that China is willing to open its market further to foreign products, including those from the United States.

In contrast to President Trump, who has been regularly tweeting about his trade war with China, Chinese leaders such as President Xi and Vice Premier Liu He have maintained a very low profile on this issue. It is not in China’s interest to lose the U.S. market. Therefore, the Chinese government is trying everything possible to bring the trade war to a close.

Because of failures of previous rounds of negotiations by delegations led by Liu, a member of the Politburo, the Chinese government has now sent a new delegation of a much lower rank. Vice Minister of Commerce and Deputy Trade Negotiator Wang Shouwen, once an interpreter for Wu Yi, former Vice Premier in charge of China-U.S. trade negotiations, led a new round of trade negotiations with the United States in Washington on August 23-24.

In the longer run, the trade war will end. The question is whether China will be willing to accept President Trump’s terms of reciprocal treatment. China has considered itself the largest developing country as well as the second largest economy in the world. As a developing country, it should enjoy the benefit of being treated as such within the framework of the World Trade Organization (WTO). As the second largest economy with the possibility of overtaking the first within a few years, China should be treated as a trading partner of equal standing with the United States.

Having consolidated his power at the 19th National Congress of the Chinese Communist Party in October 2017 and at the National People’s Congress in March 2018, President Xi has no apparent domestic challengers. However, Chinese society has been torn over how to comprehend Trump’s motivation for starting a trade war with China. Some blame Chinese scholars who exaggerated China’s power so as to invite President Trump’s attention to China as the United States’ challenger. Others insist that the United States will try to sabotage China’s dream of becoming a strong nation again in the world regardless of what China does or does not do.

It is easy to write off Donald Trump’s tariff offensive as a passing gambit he will abandon once he moves on to other things. But the fight with China may represent something more profound on both sides.

It marks the end of the “constructive engagement” phase of U.S.-China relations. Trump’s ear belongs to his hawkish advisers in the White House who want to choke off China’s development to prevent it becoming even more of a challenge to the United States. The more emollient Treasury approach has been marginalized. Though business got some comfort from the timing of the latest round of tariffs and specific product exclusions from this week’s list of $200 billion of imports, Trump linked the rise to a 25 percent rate with reprisal measures to which China had already committed itself and which it duly enacted.

China’s position in the U.S. has changed radically. It has no friends in Congress. Trump may be criticized for the impact of tariffs on the U.S. economy, but no Democrat is going to support Beijing. The administration identifies China as the number one strategic challenger, which nobody can challenge. The Committee on Foreign Investment in the United States (CFIUS) is being strengthened. Legislation has been passed to block technology transfers. And Trump reportedly said most Chinese students in America are spies.

Xi Jinping and his colleagues were slow to pick up on this change, believing they could strike a deal on the old lines with Treasury Secretary Steven Mnuchin, giving concessions that suited it in return for a free pass on its economic-political model. Trump put them right on that.

Optimists posing as realists may wave this week’s moves as posturing that will be abandoned in a mutually beneficial deal when Trump and Xi meet at the G20 later this year. But while calling off the conflict might be a win for common sense, it would bring few benefits and risk substantial downsides.

The mid-term elections would be over, Trump would have his eyes on re-election, and China would remain a potent bogey to wave in front of voters, especially core supporters. A slowing of the domestic economy and rising inflation may puncture his balloon, but why should he relax the attack when he considers it one of the best arrows in his quiver—and when he says the continuing slowdown of China’s economy proves the success of his tariffs?

For its part, China needs a new approach, and to win friends abroad. That involves difficult internal debate—like on allowing the currency to depreciate on market lines in preference to credit-powered stimulus. Xi will find it difficult to bend sufficiently to enable Trump to claim victory. That would undermine Xi’s strong leader-strong nation template and risk chipping away at the statist economic model on which the Party—and he—base their power.

The headline news in the trade fight is economic, but the real struggle is political, both internationally and domestically. Increasingly, this tussle looks symptomatic of something deeper and more intractable than tariffs.

In a recent conversation in the United States, a former Chinese diplomat remarked that the Trump administration is changing the rulebook for Sino-U.S. relations, and Donald Trump is “really driving those who deal with this relationship crazy.”

“Unlike U.S.-Russia, for a long time Sino-U.S. relations have been stable and mature,” he said. This shift partly explains why President Xi Jinping and his trusted allies in top positions in Beijing have stayed silent following President Trump’s repeated recent assaults on China.

One day after Trump’s announcement of a $200 billion tariff levy, the Justice Department ordered China Central Television (now known as China Global Television Network) and Xinhua News Agency (the official news wire service) to register as foreign agents. This indicates that the U.S.-China dispute has gone beyond trade. It also echoes the U.S.’s requirement on Kremlin-sponsored RT late last year.

Perhaps coincidentally, China joined Russia in what many have called “the biggest war games since the Cold War” in mid-September. This move signals a rearrangement of the U.S.-China relations brokered by Henry Kissinger, which saw the rapprochement of Beijing and Washington and the isolation of Moscow in the early 1970s.

Although analysts cast doubt on the fundamentals of Sino-Russia relations, one might sense a deep frustration from Beijing. If the trade war continues beyond the November mid-term elections, Beijing might take further steps towards what Chinese analysts call “de-linking” with the United States, both economically and geopolitically.

At the heart of Washington’s concern lies its worry about China’s growing presence on the global economic, technological, and diplomatic scenes. It is a concern that goes against China’s ultimate ambition: “great rejuvenation of the Chinese nation” through state-sponsored projects such as Made in China 2025 and the Belt and Road Initiative.

Many China watchers hope that this is merely one of Trump’s many manufactured crises ahead of the midterm elections in November. Possibly. But it could also be the beginning of a process of power (re-)balance between the superpowers. This is a time when the rules of the game of the world’s two superpowers are being redrafted and rewritten. Here, talk of the Thucydides Trap is not only talk of history.

This does not mean there is no space for cooperation between the U.S. and China. Unlike during the Cold War, countries these days do not necessarily cooperate along shared ideological lines, but more on practical matters such as environment and trade.

Between the U.S. and China, economic activity remains vibrant even while both are retaliating against each other. Smart businesspeople are trying to figure out ways to minimize the impact of tariff hikes by rerouting imports and exports through third countries.

President Trump’s anxiety about China is evident. Fundamental questions remain, however. What is Washington trying to achieve through this trade war? And, on China’s side, how can it realize President Xi’s ambition of “rejuvenation” through rocking the boat but not capsizing it?