When Donald Trump solemnly announced the reasons behind his trade war with China in late March 2018, he accused China of ‘economic aggression’. This concept has not figured in formal US economic diplomacy since 1943, when a senior US official accused Nazi Germany of this practice during the war. Since then, the United States has avoided the term in its own diplomatic positions, a stance staked out in its reluctance to include economic aggression as an international crime for the Nuremberg war crimes tribunal.
It was more commonly the Soviet Union, China and other countries, such as Iran, that have levied the charge of economic aggression against the United States whenever it applied sanctions against them. Somewhat ironically, in terms of the current China case, an international legal scholar, writing in 1934, identified China and Chinese merchants as the leading practitioners of economic boycotts that had evolved into an increasingly common state practice. In 1935, a Chinese newspaper described ‘American economic aggression in China [as] more serious than Japanese military policy’.
The historical allusions are important. Today, as in earlier times, there is no common understanding of economic aggression or of the rules of trade wars. We have rules for trade dispute settlement under the World Trade Organization (WTO), but the Trump administration’s actions have thrown these to the wind and risk a breakdown of the WTO system.
High economic stakes
The Trump trade war, as mapped out in March 2018, has two fronts. The first is the battle to bring down the US trade deficit with China, and it is on this field of combat that the Phase One agreement signed by Trump last week stands as a ceasefire agreement. The second front is the battle to dominate high technology, principally the ICT sector. A ceasefire here will be more difficult to imagine, even as its stakes remain much higher.
What the administration painted at the outset as one conflict with two fronts is in fact two different types of hostilities: a trade war and a ‘tech war’. The first has been tried before and the second is unprecedented. Both are complicated by global supply chains and entanglement of economic interest. But the immediate economic stakes of the tech war are much higher.
The trade war is merely about two-way exchanges of goods and services worth just under one trillion dollars per year in 2019. By contrast, the tech war directly impacts the continuity of global financial services involving the world’s two richest economies, and therefore the rest of the world. The total value of daily exchanges that depend on a standardized, non-combative and relatively secure global ICT environment is almost nine times the annual value of bilateral US-China trade, standing at almost nine trillion US dollars. The order of difference between the two on an annualized basis is nine times 365: a factor in excess of 3,000
Twists and turns of Trump’s tech war
The tech war took its first radical turn in early May 2019 when Trump signed an executive order that foreshadowed the possible termination of all ICT trade and technology transfers between the US and China on national-security grounds. There is growing political support in the US among more ideologically minded campaigners around Trump and in the Congress simply to trim back ICT trade involving China, even though that would make the trade imbalance worse.
While such ‘decoupling’ may never come to pass, the Trump threat represented a shock for global affairs and high-level corporate interests.
In January 2020, Apple stocks reached an all-time high after iPhone sales in China spiked. The same month, Goldman Sachs was reported to be planning to double its staff in China. In September 2019, IBM and the Bank of China, the guardian of China’s economic prosperity, jointly announced that they would ‘expand their existing relationship to co-create a new innovation model for the financial industry’, including collaboration on ‘digital transformation, … business innovation, eco-system construction and cognitive technology deployment’. None of these business events can happen without fairly free trade in ICT services.
The second radical turn in the tech war occurred two days before Trump signed the trade war ceasefire. Secretary of State Pompeo made a speech in Silicon Valley calling on US tech corporations to distance themselves from any business in China that might strengthen China’s military, ‘tighten the regime’s grip of repression’, or help to ‘power a truly Orwellian surveillance state’.
Fine, even laudable, in principle, but where do we draw the line and who draws it? In the same speech, Pompeo said that’s why ‘we’re putting our allies and partners on notice about the massive security and privacy risks connected to letting Huawei construct their 5G networks inside of their countries.’
The bigger losses are likely to be systemic: the undermining of the global trading system
Defining victory in a conflict so unprecedented in nature is difficult. However, if we take the US campaign to lock Huawei out of global 5G networks as one measure of victory, we can see first that the campaign will fail and second that – for the most part – everybody would lose if Huawei were to be locked out. In the past week, in the United Kingdom, we have had the head of MI5, Andrew Parker, and the Prime Minister, Boris Johnson, making public statements indicating that the UK would not submit to the campaign being led by the US.
Meanwhile, there is a credible economic analysis of likely losses to various countries in the event that they lock Huawei 5G out of their plans. But the bigger losses are likely to be systemic: the undermining of the global trading system, the weakening of WTO dispute settlement procedures, and a loss of predictability and relatively solid political stability in relations between the US and China.