Sino-U.S. trade negotiations took a sharp downturn at the beginning of May. The Donald Trump administration accused China of “breaking the deal” reached previously, and increased tariffs on Chinese goods worth $200 billion from 10% to 25%. Moreover, the Office of the U.S. Trade Representative is currently accepting public comments regarding a proposed tariff hike on another $300 billion worth of Chinese goods.

Along with the trade friction, the U.S. has intensified suppression of Chinese technology industries. On May 15, Trump signed an executive order—“Securing the Information and Communications Technology and Services Supply Chain”—declaring a national emergency and prohibiting U.S. enterprises from using telecommunications equipment made by companies deemed a threat to national security.

Facing mounting and aggressive pressure from the U.S., China responded with a combination of countermeasures, and on June 1, new duties of 10%, 20% and 25% on U.S. goods worth $60 billion took effect. In addition, on May 31 the Ministry of Commerce announced that the Chinese government will establish a list of “unreliable” entities. Foreign enterprises, organizations and individuals that do not comply with market rules, violate the spirit of contracts, block or cut supplies to Chinese firms for noncommercial purposes or seriously damage the legitimate rights and interests of Chinese enterprises will be added to it. The move came after President Trump signed an executive order on May 15 that effectively bans electronics giant Huawei from U.S. supply chains.

As the world’s largest producer and supplier of rare-earth minerals—key components of smartphones, jet engines and cameras—China could potentially cut off supplies that are needed by huge swaths of the U.S. economy, if it deems it necessary.

It is clear that China’s countermeasures aim to defend its national interests. “China is open to negotiations, but will also fight to the end if needed,” stated a white paper, “China’s Position on the China-U.S. Economic and Trade Consultations,” published June 2 by China’s State Council Information Office. “China will act rationally in the interests of the Chinese people, the American people and all other peoples around the world,” it continued. “Guided by a spirit of mutual respect, equality and mutual benefit, the two countries should push forward consultations based on good faith and credibility in a bid to address issues.”

Concerns

Chinese Vice Premier Liu He, head of the Chinese team during the China-U.S. Comprehensive Economic Dialogue, raised three concerns from the Chinese side after the 11th round of trade talks in Washington, D.C. in May. Failing to reach consensus on these three concerns was the major reason for the breakdown of this round of negotiations.

First, China called on the U.S. to remove all additional tariffs imposed on Chinese exports. Since these tariffs are the starting point of bilateral trade friction, they should all be lifted when an agreement is reached. Second, China’s purchases of U.S. goods should be realistic; the U.S. should not make purchase demands impossible for China to satisfy. Third, a proper balance should be struck in the text of the agreement.

The State Council Information Office white paper reiterated China’s position on these concerns: “Both China and the U.S. should see and recognize their countries’ differences in national development and stage of development, and respect each other’s development paths and basic institutions. While no one expects to resolve all issues in one single agreement, it is necessary to ensure that an agreement satisfies the needs of both sides and achieves a balance.”

Chinese President Xi Jinping and U.S. President Donald Trump are likely to meet on the sidelines at the Group of 20 summit that will be held in Osaka, Japan at the end of June. The meeting is expected to play a role in managing and controlling bilateral differences and friction, but is unlikely to produce an agreement. Since tensions are flaring not only in economic and trade relations, but also in overall bilateral ties, the window of opportunity for China and the U.S. to reach an agreement might not reopen until the 21st Asia-Pacific Economic Cooperation forum in Chile on November 11–17. Thus, it is anticipated that China and the U.S. will engage in negotiations while fighting, as trade friction becomes a longstanding issue between the two countries.

Adjustment

Actually, the more severe challenge that China faces is the U.S. adjustment of its strategy toward China. In 2018, the Trump administration unveiled its National Security Strategy, which described China as a “strategic competitor.” Since then, U.S. government departments have joined in efforts to contain China on many fronts, as the White House has encouraged various administrative branches to make policies and initiate actions to strengthen the containment of China. On May 7, the U.S. House of Representatives passed the Taiwan Assurance Act of 2019 without objection, making its already shaky one-China policy more fragile.

In the framework of America’s Indo-Pacific Strategy, the U.S. military has mounted strategic containment efforts around China’s periphery in a provocative manner, leading to confrontations in the western Pacific, especially in the South China Sea, with the possibility of armed conflict rising.

Earlier, Chinese strategists believed that a cold war between the two countries could be avoided. Now, many forecast that some form of cold war may be imminent, and that a technology cold war—which is much worse than trade friction—is actually happening. Moreover, experts now believe that U.S. strategy toward China has fundamentally changed, and that the recent U.S. strategic adjustment toward China was not Trump’s personal choice alone, but a cross-party, long-term strategic decision to suppress China’s development in order to maintain U.S. superiority.

Going forward, competition between China and the U.S. will not be simply about national interests or geopolitical gains. Instead, it will be a race between two sets of development models, values and orders. Even if a trade agreement can be reached, it will not be the end of bilateral trade and economic friction, but only the start of a larger-scale and longer-term strategic game.

Willpower

The U.S. demands in negotiations are not realistic, including the purchase of U.S. goods far beyond China’s capability, extensive revision of China’s domestic laws and acceptance of U.S. supervision and verification. Such requests touch on China’s core interests. China has to persist in achieving a two-way balance, resist pressure from the U.S. through countermeasures, fight on different fronts, such as trade, technology and other fields, and accumulate strength. China will also enhance its fundamental research capability for indigenous innovation and nurture the domestic market as it turns pressure into opportunities.

By doing so, it will transform its own development and international cooperation model. In this sense, the trade friction and technology war initiated by the Trump administration is helping to forge consensus among the Chinese, and giving rise to a strong cohesion to power the country forward.

As it encounters extensive changes, from economic to security areas in both domestic and external arenas, what China needs most is solid willpower and reform momentum. After several rounds of pressure tests, China’s confidence in coping with the trade friction and its derivatives is recovering. The white paper pointed out that “The fundamental solution to economic and trade tension is to grow stronger through reform and opening up.”

The white paper also stressed China’s confidence. “With the enormous demand from the domestic market, deeper supply-side structural reform will comprehensively enhance the competitiveness of Chinese products and companies. We still have sufficient room for fiscal and monetary policy maneuvers,” it reassured. “China can maintain sound momentum for sustainable and healthy economic development, and its economic prospects are bright.”

The author is an op-ed contributor to Beijing Review and a researcher with the Pangoal Institution.

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