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Situation fragile as American bull returns to China’s shop

Do we need to talk about Donald again? In the wake of yet an..

Do we need to talk about Donald again? In the wake of yet another Presidential broadside against China in an increasingly ill-conceived trade war, it appears we do.

President Trump began last week by proposing $50 billion worth of US tariffs on hundreds of Chinese imports. China responded in kind to this bluster with a similar show of strength, causing the American aerospace giant Boeings stock price to plummet.

Now US officials have been instructed by the White House to consider a further $100 billion of tariffs against China in a bid to address Americas trade deficit with China, which currently stands at close to $400 billion.

Mr Trumps successful presidential election campaign was built in large part on appealing to the disillusioned blue collar workers in Americas rust belt and he has been quick to trumpet his proposed tariffs as a win for the US steel and aluminium industries.

The reality is that technological advancements have affected this type of business just as much as China supposedly flooding the market with cheap steel and aluminium; the work is now less labour intensive, and history suggests that the Trumpian brand of protectionism will be just as ineffective as that of previous US administrations.

China has shown it is not afraid to meet American sabre-rattling with similar demonstrations of strength, and the repercussions of any trade war could be felt not just by the US but by its allies, with the Chinese economy now enjoying a truly global web of trade relationships.

In fact, the USA realistically needs China more than the other way around, and the smarter long-term play for President Trump would be to keep that crucial market on side.

There are two immediate problems with the US position here: one is economic, the other cultural.

Challenges ahead

First the economic. As the largest consumer market in the world (for now) Americas trade deficit with the rest of the world, let alone China, is going to be pretty big. Even someone with a basic grasp of economics can understand that.

Chinas workforce is cheaper, so US companies – as well as Chinese ones – can make goods more cheaply in the country and export them to the West at lower prices. US appetite for those goods shows no sign of abating and thus the US has become a net importer of goods.

This is what happens to mature economies. Rather than bleat about it, the US government might instead want to think about investing in its future. In order to do that it needs to invest in creating a better educated, higher skilled workforce that can cope with the technological revolution the world is currently in the grip of.

If not, it risks being eclipsed in less than 20 years by a Chinese economy that is investing in educating its younger generation – Chinese children typically start school at 8am and continue until as late as 9pm, so they mean business.

Second the cultural: Negotiations and contracts are viewed very differently in the West and in China. In Western culture two parties get together, negotiate a deal and thats the end of the matter. But for the Chinese tan pan – negotiation – is an ongoing process.

So, when you sign a contract in China, the other party considers that just the first stage in ongoing negotiations and discussions with the view to a long-term, evolving partnership.

This is perhaps one of the reasons China hasnt reacted quite as strongly to the US trade tariffs as might have been expected. It views those trade tariffs as unnecessary certainly, but equally Beijing will probably view them as nothing more than a negotiating tactic.

Right now, Beijing needs to maintain friendly relations with the US, so responding too aggressively serves little purpose.

A bit like in a game of chess – which academics believe was either invented in China or imported there from India in the 6th Century – the Chinese are happy to sacrifice a pawn or two for the greater prize of dominating the board in years to come.

Sour grapes

Constantly complaining that your competition is beating you and isnt playing by the rules – of a game to which you seem to be the only person who knows the rules – seems decidedly like sour grapes.

What is happening to the US is much the same as what happened to the British Empire a century ago when it was the US that was the developing, upstart economy. Britain complained too. So much so that in the years before the First World War, some believed there was a greater chance of Britain going to war with the US than with Germany.

Whether you believe it was fate, luck or simply an overly ambitious German Emperor that intervened to change the course of history doesnt really matter. At some point the Realpolitik calculations took over and the British realised the better option was to become an ally of the US.

The US is now the declining power and China the rising one. It might be better to strike a long-term partnership and hold negotiations behind closed doors, rather than complain openly of unfair treatment. China already seems to be growing tired of such grandstanding.

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