In an engaging dialogue with veteran Indian diplomat and ex-Foreign Secretary Shyam Saran, former Australian Prime Minister Kevin Rudd asserted that 2018 marked a critical year in the history of the US-China relationship and located the current trade war between the two countries against the context of complex changes taking place both at the global level among the major powers as also at the bilateral. Both men are acknowledged as China experts.
Rudd made three main arguments – first, there is spectrum-spanning political consensus in the USA that China has attained a critical strategic mass and is displaying visible eagerness to dominate in the field of international politics, transplanting the US. Second, it would be a mistake to believe that the Trump administration’s policies in this domain are episodic and will be overwritten in due course of time when there is a change of guard in the White House.
Rudd argued that the impact of Trump’s policies will far outlive his presidency. And third, the ongoing trade war shows no signs of abating in the near future. He noted that the domestic political consensus on the Trump China policy, in a period of severe polarization in American politics, shows how deeply rooted are the problems which stalk US-China ties. Democrats and Republicans are agreed that the previous American policy of engagement with Beijing has not succeeded in checking Chinese ambitions of undermining US global authority and upending the current international order - a proposition that Beijing denies.
The Trump administration’s answer has been to pursue a policy of strategic competition. The trade war with China is a result of this policy. Ostensibly, the US objective of using a heavy hand is to narrow the trade deficit, reportedly coming to $376 billion in the trade in goods for 2017, and to push China towards rolling out structural changes that would open up the Chinese economy favorably for American businesses. Although Trump triumphantly claims that the tariff barrier applied on Chinese goods has hurt Beijing, evidenced by its declining growth rate, Rudd asserted that the decline is more due to intrinsic factors than Trump policies.
Traditionally there are only three elements that contribute towards high economic growth rates – growth in population, increasing rate of growth in workforce participation and gains made in productivity. On all these fronts the Chinese economy is on the back foot. China’s population is aging, not much increase is being observed in the workforce participation rate and productivity is on the decline as more stimulus measures are taken to stave off falling economic growth rates and upsetting the domestic political status quo.
Shyam Saran was in general agreement with Rudd’s assessment of the situation, though he was not of the opinion that Trump policies will cast a long lasting shadow on the future trajectory of Sino-US bilateral ties. He averred that the different aspects of the confrontation being witnessed today are characteristics of the current bilateral and not reflective of structural changes in the relationship.
Saran summed up the current scenario by suggesting that perhaps China has been premature in being more assertive and shifting away from Deng’s prudent “bide your time” strategy and, conversely, the USA has been too late in fully recognizing the critical mass China has slowly been accruing. It is perhaps this confused state of affairs accompanied by the particular style of Trump’s leadership that has led to the current trade war.
Saran brought India into the conversation by arguing that the trade war does not benefit New Delhi as the larger lattice of global trade networks are being upset. India benefits neither from extreme Sino-US collusion nor from extreme Sino-US confrontation but would gain from a golden sweet-spot somewhere in the middle. In asserting that the USA has been late in recognizing China’s power, Saran cites focused national efforts, as outlined in the ‘China 2025’ initiative to develop and leverage high-technology in China’s growth. Chinese investment into artificial intelligence, machine learning, quantum computing et al outstrips similar allocations made in the US. China has also set out on a focused drive to attract and import scientists from the US, Europe and Russia to contribute towards these efforts. Although there is a certain brittleness in the Chinese economy due to the excessive debt overhang and the continued policy of stimulus efforts, Saran believes that the Chinese economy can bounce back if certain bitter pills regarding structural reforms are swallowed.
Rudd demurred at the thought that China was premature in shifting from Deng’s policy and USA being late to recognize China’s critical mass. Xi Jinping is a formidable leader of his people and has displayed his political acumen and resolve in steadily neutralizing domestic political opposition. If Xi was indeed being adventurous and his policies resisted, there would be more internal disagreement with the radical turn Chinese global engagement is taking. On the other hand, Xi’s widespread support suggests that the Chinese people are in broad agreement with his vision. China is not a status-quo power, as the Chinese believe they are now capable of bringing reform to the nature of great-power relations that was established in the post-World War II era under a US umbrella. At the same time, Rudd added there is a general tendency to underestimate American power. In the field of high tech, especially, their capabilities are unparalleled. As it now stands, China is no doubt allocating more funds in high tech research and development but the quality of those investments and their outcome is questionable. The US democratic-capitalist system is more refined and has fine-tuned the practice of productive investment in hi-tech which China could not be expected to emulate. An economist in the audience echoed this assessment and stated that "capital misallocation is indeed the Achilles’ heel of Chinese economic growth".
The discussion concluded with Rudd’s observation that the US and China seem to be drifting apart as each follows policies in pursuit of their own national interests. The previous template of bilateral ties between the two seems to be shaken up and has opened up an era of confusion. This confusion bodes ill and the trade war is set to escalate before de-escalating.
The discussion was organised by the Asia Society and CII.
(Reported by Rashmi Muraleedharemail@example.com)