US faces credibility trap as China looks a century ahead

SINGAPORE'S former prime minister and now Emeritus Senior Minister Goh Chok Tong sat down with bluenotes managing editor Andrew Cornell at ANZ's Finance and Treasury Forum in Singapore to discuss the omnipresent China-US confrontation.

Here, we share ESM Goh's opening address at the forum.

CHINA is an emerging power. It is bumping into the US but the US will not let its supremacy be strategically challenged. The two worlds are colliding - there will be disruption, collateral damage. And grief. This may come across as apocalyptic but I will share why I've come to the conclusion the question is no longer when the collision will take place but what form it will take.

Some years ago when the US announced its policy pivot to Asia, containing China through a chain of military bases, commentators and analysts warned of the Thucydides trap. Basically, this means an incumbent power and a rising power cannot avoid conflict.

Most believed the Thucydides trap was not inevitable. I was one of them. My reasoning was China had gone out of its way to declare its rise will be peaceful. Then-US President Barack Obama sought to cooperate, to have China as a stakeholder in major global initiatives like the Paris climate accord and the Iran nuclear deal. Such accords encouraged China to act responsibly and observe international norms.

The US accepted China's accession to the WTO as a non-market economy even knowing its state enterprises were economic players. The US and China also benefited from increasing trade and economic interdependence. Meanwhile, China simply lacked the military power to challenge the US.

As events unfold, I've turned pessimistic.

PESSIMISM

My primary reason is the US is resetting its relations with China and the rest of the world. Its new foreign policy is America first. In its execution, it seems to be America only.

US President Donald Trump is applauded by both sides of American politics for standing up to China. This is not just an American president using China as a whipping boy to win the November congressional elections.

Mr Trump is also tapping into the deep vein of fear in the country over the perceived long-term threat posed by China.

At the World Economic Forum Davos meeting in January, a top concern was the clash of major powers. Ninety-three per cent of those surveyed expected relations between major powers - read US and China - to worsen.

Mr Trump is acting on his campaign slogan of America First. He has pulled the US out of the Paris Climate Change Accord. He has withdrawn the country from the Trans-Pacific Partnership, which was ready for signing. He re-negotiated Nafta. He wants Nato to spend more on defence and not expect the US to protect Europe with an American budget. He says US military exercises with South Korea are a waste of money. He has threatened to pull the US out of the WTO.

In short, he is pulling the carpet from under the feet of the multilateral world order which the US has helped to create. This is disruptive diplomacy unfolding before our eyes.

John Bolton, Mr Trump's National Security Advisor, said in 2000 if he was "redoing the UN Security Council today, I would have one permanent member, the US, because that's a real reflection of the distribution of power in the world".

It seems the US has abandoned its "prosper thy neighbour" policy of multilateralism, replacing it with a "beggar thy neighbour" policy of unilateralism.

In practical terms, unilateralism means the strong extracting benefits from the weak. It is like a top rank Yokozuna sumo wrestler grappling with an opponent several ranks down below. The match is unequal. Nor are allies and friends spared.

Besides unilateralism versus multilateralism there is another ideological conflict: between market capitalism and state capitalism. It is short-term benefits or profits for companies versus long-term strategic interests of the state. This is not a level playing field for free market players. The US is trying to level it by redefining the rules of free trade through bilateral negotiation. But China is not Mexico or Canada. It will resist. It thinks, as a late economic player in a global marketplace, a state-driven industrial policy is the way to overcome an unequal contest.

The Trump administration sees relations with China as a competitive, zero-sum game. Analysts say "Trump and his advisers have come to view China as a malign power and direct competitor and adversary whose expanding influence must be blunted through extreme countermeasures". They label China as the "revisionist power" - whatever that means. To me, it is the Thucydides trap.

BALANCE

China's quick rise as the world's second biggest economy, and its huge trade surpluses, have thrown the US off balance. Its rapid technological advancement sets off alarm bells. Its actions in the South China Sea and militarisation of islands there threaten US security interests in Asia.

The country's "Made in China 2025" industrial policy only heightens US fears. China aims to dominate the next 10 future industries, like artificial intelligence, robotics, biotech and aerospace. While this declaration is partly propaganda for domestic consumption, the US sees it as China waving a red flag.

The US will not cede any technological advantage to China. It has accused China of intellectual property theft and forced transfer of technology from companies investing in China. Now, someone in the US has even suggested not granting visas to students from the People's Republic of China. Students learning at the best universities in the US is now feared as "stealing knowledge".

China's Belt-and-Road Initiative is China's strategic answer to the US containment strategy. China has claimed the whole of the South China Sea and has militarised many islands there. It is building up a modern naval force.

It cannot challenge the US's maritime power but can deny the US Navy moving freely in the South China Sea and Taiwan Straits with asymmetrical capabilities. China was never a maritime power but it will be one regionally.

China is showing its model of political and economic governance is viable. As democracy flounders in many Western countries, its socialist capitalism with Chinese characteristics may prove to be an attractive alternative to liberal Western democracy.

Lastly, China is seen to be ruled by one strong authoritarian man with a vision to realise his China dream - that is, Make China Great Again.

WEAPONS

Military conflict is not imminent between the US and China. The Chinese do not want it, nor can the US justify it. So the US has chosen economic weapons, starting with trade tariffs. Trade tariffs are being imposed on the grounds of national security. The World Trade Organisation is being ignored.

The argument is tariffs will not just protect US jobs and industries but also slow down China's growth and damage its economy. Initially, Chinese officials called it "economic terrorism". Now, they change it to "economic bullying". A better term may be "economic containment".

Yes, tariffs are being enforced, ostensibly against everyone who has huge trade surpluses with the US, but the big target is China. Smaller countries like Mexico, Canada and South Korea will bend to the US's will - but not China. It is not just because China is huge. It is also because it's humiliation by foreign powers in the last century is deeply etched in its memory.

President Trump's arithmetic is simple: if you export three times more to me than I export to you, I can hurt you more than you can hurt me. I will surely win in an all-out trade war. And indeed, China is more vulnerable than America in a tariff tit-for-tat.

But, as Martin Wolf wrote in The Financial Times, "the President's demands on tariffs and imports are ridiculous. No sovereign state could accept them". He concluded "this may be a decisive moment for the relations between the world's two greatest powers".

From trade, it could move into other economic and non-economic areas like education, currency manipulation and technology and increased sales of arms to Taiwan. Expect the two countries to lock horns for a long time. President Trump needs the political gain but President Xi cannot lose political face.

The Chinese are worried about President Trump. They do not think he is erratic or impulsive. They look at the people he has picked for his Administration, they see Mr Trump has acted on his election rhetoric. He is the first president to bash China on three fronts - trade, ideology and military.

How is China responding? So far China has responded with restraint, with a statesmanlike manner. It is not looking for a fight but it cannot just turn the other cheek.

China is reacting to the US trade tariffs on its products and levying the same rate of tariffs on American imports up to the same value. At the same time, it is signalling the dispute can be resolved with negotiation - but not with a gun pointed to its head.

China tries to occupy the high moral ground. At Davos earlier this year, Xi Jinping championed the cause of free trade and multilateralism. A few months later, he confirmed China's position in Bo'ao. China's Foreign Minister Wang Yi said: ''China and US can compete but need not be rivals, if anything, we need to be partners".

One People's Liberation Army general proclaimed China will not enter into an arms race. China's defence expenditure is about 1.3 per cent of GDP, while the US and Russia have consistently kept theirs at above 3 per cent. Nevertheless, at the 19th Party Congress last October, President Xi Jinping said "China will complete the modernisation of its armed forces by 2035 and achieve a world-class military by 2050 that could fight and win wars".

This bravado will only reinforce American views that a strategic battle against China must begin now.

Thomas Friedman wrote in The New York Times that US and European government officials and business leaders had made it crystal clear to him what's going on right now is nothing less than a struggle to redefine the rules governing the economic and power relations of the world's oldest and newest superpowers. This is not just a trade tiff.

Ruan Zongze, Executive Vice-President of the Chinese Foreign Ministry's research institute concurs: "This is a defining moment for US-China relations; it is about a lot more than trade and tariffs, this is about the future."

According to Mr Friedman, the trade hardliners in the Trump administration believe this is a fight worth having now, before it is too late, before China gets too big. But is it just the trade hardliners? What about the military hardliners?

The battle is joined. The US is pursuing its trade tariffs aggressively, while China is responding calmly. On the surface anyway.

IMPLICATION

What are the implications for Asia? I will just flag two: one, Asian countries may be forced to take sides. Other than Japan and South Korea, which are allies of the US, they will not want to. Two, if tariffs imposed by the US on China remain, there will be a shift in the present global supply chain.

Countries with cheaper cost production will benefit more. Overall, all countries will suffer collateral damage from trade protectionism and slower global economic growth.

Asian countries are anxious but reacting sensibly. They want the rules-based multilateral trading system to remain. Japan took the lead, to conclude a comprehensive Trans-Pacific Partnership after the US pulled out of the PPP. Asean is working hard to conclude the Regional Comprehensive Economic Partnership. China and India, amongst others, are members. The US is not.

What is the impact on Singapore? Singapore will surely be impacted by the trade war. Trade is three times the size of our GDP. Singapore is also a significant player in the global supply chain.

The impact will be at three levels: first, the impact of a generalised slow-down is applicable to all countries. Second, the impact arising from the disruptions to the global supply chains. And third, the impact from slower global economic growth. However, the Ministry of Trade and Industry has concluded the net impact is likely to be modest. This is in the near term. Where will it all end?

In the FT, Mr Wolf wrote this "is more likely to be the beginning of the end of the rules-governed multilateral trading order that the US itself has created".

US trade representative Robert Lighthizer has said allowing China into the WTO in 2001 was a "mistake". Furthermore, President Trump has reiterated "the agreement establishing the (WTO) was the single worst trade deal ever". He has threatened to pull out of the WTO "if it does not treat the United States better".

French President Emmanuel Macron warned Europe could no longer rely on the US to look out for its security. He wanted to launch an exhaustive review of security, with all partners, and Russia.

The US has remained in the Asia-Pacific. All countries in the region, including China, want the US here. Its presence is essential to the geopolitical stability of the region. Despite the global shift, the US will still be the bigger power for a long time to come, but China will gain weight and influence.

I surmise China's leaders are convinced the US is out to contain it. Two senior figures I met in Hong Kong last month told me that too.

China thinks decades ahead. I sat in a meeting between Deng Xiaoping and Lee Kuan Yew in 1978. Mr Deng gave a historical sweep of China's past travails and his vision for China in the next 100 years.

In contrast, US Presidents think one election at a time. So China will wait out Trump - two, perhaps six, years. Meanwhile, it will upgrade its economy, invest in technology and modernise its armed forces.

The US has been a benign and generous superpower. It is still a superpower but it has become less benign and generous. Its unilateral actions in many areas have hurt allies, friends and rivals alike.

Credibility, reliability, trust and respect are essential for a superpower if it is to be a global leader. America First is diminishing the global stature, moral leadership and influence of the US.

Ironically, the foreign policy of America First - to Make America Great Again - may actually diminish America's greatness on a world stage. Ironically again, the incumbent power, in trying to curb the rise of an emerging power, may end up accelerating it.

China will press in with renewed energy to break out of any US stranglehold. It will not trust the US as the sole policeman of the world.

The US is flexing its muscles, showing might is right. That surely, is not an example the world wants China to emulate. Whatever happens we have to adjust to a new balance of power in the future - at least in Asia.

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