The economic fight of the century has now begun. After more than a month of lobbing threats of tariffs and investment restrictions back and forth — and over a year of preparation by U.S. President Donald Trump — China and the United States finally have kicked off negotiations on contentious economic issues. The underlying competition between the world’s two largest economies has been building for quite some time. While Washington and Beijing may find some common ground, both view the rhubarb as a potentially barbaric fight for economic supremacy in the 21st century. It won’t be a battle either side will take lightly, and it won’t be without its economic and political casualties.

Facing the Inevitable

A collision between the United States and China may well have been inevitable from the moment China joined the World Trade Organization in 2001. The United States, whose support in no small part enabled the accession, believed that bringing China into the WTO fold would boost jobs and exports at home. Admitting China to the organization, after all, would unlock its enormous market of, at the time, more than 1.25 billion people. And though the move did pay off for the U.S. economy, it may also prove to be Washington’s biggest strategic blunder in the past 30 years.

At the turn of the 21st century, opinions varied on how long China’s economic miracle would last and whether the double-digit growth would continue. Stratfor, for example, highlighted the structural and social challenges the country would need to deal with to sustain its economy’s rapid expansion. Entering the WTO improved China’s chances of keeping up the pace by giving it cheap access to global markets, while also encouraging Beijing to liberalize its economy. Other countries took note of the Chinese economy’s precipitous rise, which quickly became a strategic concern. In his first eight months in office, President George W. Bush began turning U.S. policy toward the Asia-Pacific — before the 9/11 attacks diverted the United States’ attention.

But either way, the United States’ response couldn’t have prevented China’s economic ascendancy. To label China’s fabled economic rise as such is a mischaracterization. It was, in fact, a return to the status quo. Throughout history China has often been the dominant economic and military power of the Asia-Pacific; the Maddison Historical Statistics Project at the University of Groningen in the Netherlands estimates that China accounted for about one-third of the global economy 200 years ago. Industrialization and imperialism in Europe and in the Americas reduced that share over the intervening years until Chinese leader Deng Xiaoping ushered in a period of economic reform and opening starting in 1978. And even before it began its return to dominance, the country contributed about 5 percent of the global economy. Membership in the WTO may have expedited China’s climb to become the world’s largest economic power once more, but the country would have gotten back there eventually with or without it.

The Eagle Provokes the Dragon

At the same time, China’s technological capabilities have steadily increased. Though the United States still has the edge in many commercial and military technologies, the gap with China is narrowing at a rate alarming to the Trump administration. Beijing’s “Made in China 2025” plan — a state-led effort to channel the country’s vast economic resources into innovation — is a source of particular concern for Washington because its goal is to leapfrog the United States in cutting edge technologies such as robotics and artificial intelligence. With the technology to match its economic clout, China would be a truly formidable foe for the United States. It’s hardly surprising, then, that a trade fight has broken out between the two countries.

Nor is it any surprise that China’s technology and industrial policies are at the center of the dispute. After a lengthy investigation into Chinese policies that promoted forced technology transfers in joint ventures with U.S. firms, Trump approved a plan to put 25 percent tariffs on roughly $50 billion worth of imports from China, which could go into effect by late May or early June. China responded in kind, by announcing 25 percent tariffs on nearly $50 billion worth of imports from the United States. Most trade spats would have stopped there. Trump, however, responded to Beijing’s retaliation, a customary response, by directing the U.S. trade representative to determine whether to apply 25 percent tariffs on an additional $100 billion of Chinese goods. The added tariffs would bring the total value of the targeted products up to about one-third of the value of all of China’s imports. U.S. Treasury Secretary Steven Mnuchin, meanwhile, is set to unveil new measures later this month to restrict Chinese investment and acquisitions in strategic sectors such as technology. In addition, the United States is cracking down on Chinese tech companies and considering reducing the number of visas it issues to Chinese students, researchers and academics.

The U.S. strategy has been a maximalist one. Washington wants to bring as much pressure to bear on China as possible before entering into negotiations with Beijing. And now that it has, it’s hoping that China will offer some concessions. A leaked list of demands that the Trump administration made of Beijing — all of them nonstarters, as is often the case in trade negotiations — revealed two primary objectives for the United States: to reduce the U.S. trade deficit with China and to reduce China’s trade barriers to U.S. goods.

For China, though, conflicting interests will complicate the U.S. strategy. The country wants to avoid a trade war and to ease tensions with the United States, since an escalating trade war offers it little benefit. Even so, it can’t afford to jeopardize its position on the global stage by giving in to U.S. demands. Beijing doesn’t want to repeat the mistake the Japanese government made in negotiations with Washington during the 1980s and 1990s, when Tokyo changed its economic policy to suit the United States. Furthermore, China believes it has the economic heft to go toe-to-toe with the United States if push comes to shove.

The Dance of the Eagle and Dragon

Should Trump decide to follow through with the second round of tariffs, China will find itself with a difficult decision to make. It could follow through on its threats to match the U.S. tariffs, but that move would mean slapping tariffs on everything it imports from the country, since it imports less than $150 billion in U.S. goods each year. The danger there is that Washington would respond by imposing tariffs on all its imports from China — the exact outcome Beijing wants to avoid. Instead, China probably will try to drag out negotiations. That way, it can buy some time — while still ostensibly making a good faith effort to discuss Washington’s concerns — in hopes that the next U.S. presidential election will bring in an administration more amenable to China’s point of view. Hashing out their issues at length also may enable the country not only to keep additional U.S. trade measures at bay but also perhaps to roll back some of the ones the Trump administration has already laid out.

But making concessions will be easier for China in some areas than in others. The country, for example, would have no problem making promises to boost its imports of U.S. goods. Trade in energy, where the United States is a growing exporter of crude oil and liquefied natural gas and China a growing importer, is one subject on which Beijing can easily offer to compromise. Similarly, it could consider reducing import tariffs in certain sectors to facilitate U.S. imports, as it already has pledged to with the automotive industry. China may even yield to U.S. demands on its economic policies — such as its calls to liberalize the financial sector and to better protect intellectual property — where doing so would align with President Xi Jinping’s reform priorities. These agreements, however, won’t happen overnight. In the meantime, tariffs between the United States and China are all but inevitable.

And on other issues, Beijing will stand firm no matter what Washington threatens. China won’t cave to the United States on its Made in China 2025 program or on its crucial industrial and tech policies. It would sooner bear the pain of tariffs — even on $150 billion worth of exports. By most economists’ estimates, the first round of tariffs will cut Chinese economic growth by just a fraction of a percent and will have only localized consequences in specific Chinese cities. Beijing is unlikely to concede on its core economic issues without first guaranteeing that Washington will ease its pressure on China in return. Under the current U.S. administration, though, the Chinese government will be hard-pressed to get that kind of assurance.

Trump’s fixation on trade deficits is something of a rarity among U.S. presidents and politicians past and present, and the policies it inspires may blow over once a new administration comes in. The underlying economic competition between the United States and China, on the other hand, is here to stay. The current trade dispute is just the first round of an economic fight that will last years, if not decades, as the two economic powers lurch forward on their long-term collision course.

Source: Matthew Bey, Stratfor | May 10, 2018