Navigating the US-China Trade War

The initial tariffs-focused trade war between Washington and Beijing has evolved and developed into other dimensions of political and economic engagement between the two countries.

The rivalry between the two superpowers presents unprecedented challenges and dilemmas to the “middle state” that attempts to navigate between them on economic and security engagement. New Zealand is among those nations in the Asia-Pacific. Dr Hongzhi Gao and Dr Monica Ren have this update. 

There is of course no doubt – the world is facing a new and alarming level of political tension, involving economic and ideological conflicts between superpowers. One of the most significant of these non-military conflicts is the US-PRC trade war which began in early 2018, and is still developing today.

US Trade Representative Katherine Tai said earlier this month that stiff tariffs the US has imposed on Chinese imports will not be lifted until Beijing adopts more “market-oriented trade and economic policies.”

“What we really want from China in terms of economics and trade is for the Chinese economy to operate like ours, and along the assumptions and the norms that we feel are embodied in organisations like the World Trade Organisation - which is open market-based with a pretty clean separation between government and state and the market and the economy,” Tai said.

President Biden has also failed to act on US tariffs set up by his predecessor, insisting recently that China’s “unfair economic practices” are bad for American workers and bad for the US in general. The view in Washington seems centred around using tariffs as a weapon in the economic recovery of the US post-covid. That weaponry includes the tough “Section 301” tariffs introduced by Donald Trump.

An initial round of tariffs on $50 billion worth of strategic and industrial goods from China resulted in a so-called “Section 301” investigation of Beijing's misappropriation of U.S. technology and intellectual property, which in turn led to retaliation from Beijing. With the current Biden administration looking at ways to curb inflation, many observers suggested lifting some of the bigger tariffs would have been a positive way forward. 

One school of thought in international trade theory is that when one country’s trade barriers are up, foreign firms are pressed or incentivised to invest directly in the country to circumvent the tariff and other non-tariff barriers in trade. The idea is that if a country does not like the import of goods or services from another country for local employment or limited foreign reserve reasons, the country usually welcomes foreign direct investment allowing foreign capital and technologies to be brought in to benefit local employment and economies, and helping to increase exports.  

Unfortunately, this idea just won’t fly given the state of  US-PRC geopolitical relations, as the US does not want the Chinese money, certainly not the money backed by the Chinese government taking an interest in the US-based technologies that might advance the Chinese in security-concerning industries like semiconductors.

Put simply, our conventional understanding of the motives and barriers of foreign direct investment (FDI) have to be re-conceptualised and re-evaluated when geopolitical conflicts and security threats are brought into the equation – issues that matter so much for a country’s sovereignty and geopolitical power. Investors and analysts are scratching their heads to find solutions to mitigate the impact of security concerns on their international investments and operations. 

The impact of the deteriorated relations between the two countries on FDI flows between the two countries was enormous. For example, China’s FDI inflows to the US dropped into negative territory in 2020, from the peak value of USD 18b in 2016 (OECD data, 2022). Chinese companies were investing less and selling off more of their direct investments in the US.

The Chinese FDI into the US now appears to be increasing, but the political stand-off continues with crises such as China's expansion into the South China Sea, and the stand-off over Taiwan. At the same time, China's economy faces some serious domestic headwinds. A drop in the housing market, lower consumer spending, Covid lockdowns and inflation are all combining to cool the Chinese economy.

US laws require foreign companies listed on the US stock exchanges to certify that they are not under the control of a foreign government or submit to audits from a US accounting agency to determine that.

The Beijing-based Byte Dance (who owns the famous app TikTok) was under massive political pressure from the former Trump administration to transfer the storage and control of personal user data to a US operator (eventually stored in Oracle’s servers in 2022) or sell ownership to a US company to avoid a complete ban in the US market.

While many economists or political scientists attribute the two countries’ rivalry to “populist” leadership by both Trump in the US and Xi in China, the differences in political and economic ideology, and methods of governance, cannot be ignored in comprehending the escalation of the political tensions.

During negotiations for a truce in the first phase of the tariff war, Washington insisted that Beijing should ‘overhaul a web of laws and regulations to give far greater protection for US companies from these threats—including higher penalties for any infractions and a mechanism to ensure that Beijing complies with its commitments.'

China has basically rejected requests for any significant institutional change from the US, citing national sovereignty - the same reason cited by Washington when it scrutinised investments from Chinese companies in the US. 

Underlying the extreme difficulty in resolving the key disagreements in trade and investment between the two countries is the large institutional distance between them, with China upholding and promoting an authoritarian, state-capitalism ideology on one end and the US advocating a democratic, free-market capitalism ideology on the other end.

The two countries remain far apart from each other in terms of political and economic governance, and the rivalry has moved on from the initial concerns over bilateral trade imbalances. These days it’s about global influence and the seemingly unstoppable rise of China as an economic power with regional aspirations.

The questions for the middle state (like NZ) engaging with both countries have then been: which country they are moving closer to for security, prosperity and model of governance? What should they do to mitigate the collateral damage of the big guys’ fight?

Dr Hongzhi Gao is Associate Professor of International Business, at Victoria University of Wellington, and a founding member of Tui China Research, which has been researching the forms, scope, essence, implications, and effect of the US-China rivalry since 2018, by teaming up with colleagues from New Zealand, Australia, Taiwan, and Italy.  

Dr Monica Ren, Lecturer International Business, from Macquarie University in Sydney, and has been collaborating with Dr Gao to research the impact of the US-China trade war on Australian and New Zealand firms, and the global semiconductor industry since 2018.

The opinions expressed are those of the authors 

- Asia Media Centre