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Why China's not for turning, and its tiff with the US is going to change everything
IT'S easy to get caught up in the details of how US-China trade tensions have devolved like a dinner party gone wrong.
With the World Bank cutting its forecast for global growth in 2019 to 2.6 per cent in the wake of rising trade barriers and sharper-than-expected slowdowns in several major economies, many now see the G20 event in Osaka later this week as one hope of staving off disaster. That's especially since US President Donald Trump and China's Xi Jinping have confirmed that they will come together for an "extended meeting".
But if you asked me if the outlook is positive, I'd have to caution against taking too rosy a view. What is for certain is that there will be more ups, downs, headlines and bluster. In my view, we can cut through all that and - by an examination of history, trends and personalities - draw two sobering sets of conclusions. Steel yourselves, folks.
China's not for turning
Conclusion No 1 is that China - despite all that you have read about how its economy may be vulnerable and hurting - is unlikely to budge in a significant way. I will cite just three factors for thinking so.
For starters, China's leaders think beyond the short term and are acutely aware of the vagaries of the American political cycle. The US elections are due in November 2020. In the months to come, negotiations with President Trump's team will be especially fraught with political calculation in Washington. Also, Mr Trump's re-election is anything but a sure thing; Beijing is aware that - after the polls - priorities or the appetite for a trade dispute may change. That means a deal struck may need to be renegotiated anyway - or a better deal might become possible. None of this will make Beijing more keen to make concessions.
Next, we also need to understand that the current standoff arose in such a way as to put Chinese pride on the line. The Chinese public (and media) have taken particular interest in the relations between the nations. And so, China's leadership knows its legitimacy as national guardian will be undermined if it is seen as backing down. Instead, it has had to step up its rhetoric, sending out travel warnings to its citizens, citing tensions between the superpowers and shootings in the US.
Finally, there's the Trump personality factor - the man's established reputation for being obdurate and making deals on the fly. His ultimatums and threats are taken as negotiation tactics or mercurial mood swings rather than true drop-dead red lines. This means it is hard to divine the outlines of an actual deal.
Things will never be the same
The second and more significant issue is that regardless of the outcome of tensions, talks or deals, permanent changes have already been baked in.
Gone is the comforting consensus that an all-out economic cold war involving the biggest powers could never really happen. The severity of the steps already taken and the harshness of the language go beyond anything China and the US have ever been willing to inflict on each other.
Furthermore, allies have been marshalled. Look, for instance, at how companies in the UK and Japan have reportedly moved to suspend their business relationships with Huawei - one of the key flashpoints this time round - following restrictions announced by the US, citing alleged security concerns. Nations have found themselves picking a side, so that the tiff has expanded to a larger space of the global trading arena. The combatants may back down this time. Even if they do, however, everyone will be cognisant that there was a real possibility that the whole post-world construct could have been seriously damaged. And if this could happen once, it could again - and things could go further.
The technology connection between China and Western countries has already been weakened in several ways. China's tech giants may end up sourcing their key tech domestically, so that they will never again be held to ransom in the way American giants like Google (with its Android environment) or Qualcomm have threatened to pull the rug from under Huawei. And the global supply chain - even if it does not get shattered this time round - will be modified preventively. US companies will continue to operate in China, but they will increasingly adopt an "In China, for China" strategy to localise manufacturing and sourcing within China to mainly serve the China market. This would be to protect themselves from new tariffs, but it could well mean a loss in cost-efficiency. Consumers in general will pay through their pockets.
Lastly, what has happened will escalate China's strategic moves to build diplomatic and economic alliances and frameworks outside the US-dominated system that holds sway today. In order to counter the impact of de-globalisation, China will step up its cooperation with the region via the Belt and Road Initiative, which has helped it deepen ties with more than 150 countries. Notwithstanding criticisms, its investments in emerging markets like Latin America (where China is the largest creditor and where venture capital from China is spurring a tech boom), Asia, the Middle East and Africa are amounting to the country amassing valuable partners in trade.
Seen impartially, not all of this is necessarily gloom and doom for our part of the world. As global companies move supply chains that are not destined for China and production away from the Middle Kingdom, South-east Asian companies may benefit.
A survey from the American Chamber of Commerce shows that 24.7 per cent of US companies in China are considering relocating or have relocated manufacturing facilities outside China to the region. Also, China's outward push and initiatives like the Belt and Road have already meant a boost in regional projects and funding.
Nonetheless, the "dinner party going wrong" injects significant uncertainty that will last at least as long as geopolitical realities evolve and the permanent changes I mentioned come to be. We must all be extra nimble, alert and aware.
- The writer is head of Greater China Research at OCBC Bank.