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From The Socialist newspaper, 22 May 2019

What lies behind the US-China trade war?

US President Donald J. Trump and China's President Xi Jinping

US President Donald J. Trump and China's President Xi Jinping   (Click to enlarge)

Robin Clapp, Socialist Party national committee

The stakes have been raised in the increasingly ill-tempered and rapidly escalating trade war between the world's two most powerful economies. US President Donald Trump announced that, under the rarely invoked International Emergency Economic Powers Act, the Chinese telecoms giant Huawei and 70 of its affiliated companies are to be added to the 'Entity List'.

This effectively bans them from acquiring components and technology from American firms without obtaining prior government approval.

Blocking Huawei from purchasing semiconductors from US firms will have an immediate and damaging impact on its ability to develop important parts of its manufacturing process. Companies based in America that wish to continue trading with Huawei will henceforth have to apply to the Commerce Department for a licence to sell their technologies.

This dramatic move follows the Presidential announcement two weeks ago, that September's import tariffs of 10% on $200 billion of Chinese goods sold in the US, could be raised to 25%. Among the commodities affected would be food ingredients, construction materials, bike parts and burglar alarms.

Trump insists that unless China reduces its level of exports to the US, a further 25% tariff may be affixed on basically every commodity arriving from Beijing.


There will be $50 billion of US tariffs on specific Chinese technology goods covering aerospace, automobiles, communications technologies and robotics. Imposed in June 2018, they signalled the beginning of this more acute phase of protectionism, which is inextricably linked to a wider geo-political struggle between the rival super powers.

The clash between the US and China lays bare the different strategic objectives of these rival super powers. Threats and mutual distrust characterise the current relationship.

China has immediately responded to Trump's provocations by declaring new tariffs on $60 billion worth of US imports beginning on 1 June. $110 billion-worth of tariffs are due to commence at the end of this month.

There have been hints too from Beijing that if pushed into a corner, it could also respond by beginning to sell some of its vast US Treasury Bond hoard. A potential meltdown in the US bond market is feared to be the second most likely trigger for the next crash.

According to Trump, the dispute is rooted in China's deeply unfair trading practice of seeing the US as an easy dumping ground for its commodities.

Fears of a deep downturn are growing. Trump is playing for very high stakes in his confrontation with China. Protectionism hurts both economies. A deep recession in China would have a huge impact on the US and the entire global economy.

An escalating trade war can quickly result in higher prices for US consumers. Eleven million US workers are in industries that produce goods which have been or will be targeted for reprisal by China. 59% of US manufacturers have seen rising production costs.

The 2020 Presidential election presents a challenge for Trump. China-bashing plays well with the Republican right. Many Democrats, seeking to shore up their electoral bases, have also demanded firm sanctions against Beijing. Big US firms that don't have substantial trade links in China have also supported a tough line against Beijing.

The wider narrative is that America feels threatened by the rise of the Chinese economy and its growing military strength.

Consumer and industrial activity in both the US and China slowed in April. Market analysts warn that a prolonged trade war is now the most likely trigger for an impending global recession.

With all the world's major economic blocs already performing sluggishly, it will be difficult for the US to maintain annual GDP growth above 2% through the rest of Trump's term of office.

Debt (sovereign, corporate and consumer) is an ever-present threat to the stability of the world economy. In the US alone, retail investors own $2 trillion of corporate debt. The pool of more risky debt is now roughly equal to the sub-prime mortgage debt figure in 2007, the financial detonator for the crash which was to follow a year later.

China's economy

China's entire economy is worth $14 trillion, making it the largest competitor to the US. It has grown at a 10% compound annual rate since 1980 when Deng Xiaopeng opened the door to rural businesses (township and village enterprises) and foreign firms (mainly in the coastal zones, to begin with). It is now the biggest manufacturing nation on the globe.

Clearly the transition from a fully nationalised, planned economy towards capitalism has gone a long way and can appear complete. But the rule of the Communist Party elite prevails, with substantial elements of state banks and industries remaining intact. Many of these strategically important state-owned enterprises, mostly in heavy manufacturing or energy production, have been kept alive since 2008 through heavy doses of central bank borrowing.

The state remains firmly in charge of economic management. The overall approach is top-down, authoritarian and target driven.

The state's primary concern is to maintain the economic reins and not to unleash those economic liberalising forces that precipitated the collapse of the planned economy in the Soviet Union in 1991, leading to the restoration of capitalism there. No threats to social stability will be tolerated.

An unprecedented stimulus programme launched by Beijing both largely inoculated China from the worst effects of western contagion and also threw an economic lifeline to the rest of the world. Without that, the recession may have developed into a full-blown 1930s style Depression.

Even without the dangers of a tariff war with the US, China is having to confront many economic challenges.

The most pressing is the slowdown in its growth rate. Stripped of the creative accounting that accompanies Chinese statistics for growth, it is believed the economy's underlining trend growth rate is now just around 3%. Lower year-on-year growth will follow until 2021, with the adverse impact felt both in the west and in developing economies.

Beijing has sought to reverse this dangerous trajectory in a number of ways. A new stimulus programme totalling $477 billion of loans was hurriedly brought forward in January.

The Central Bank also cut the amount of cash that banks have to hold in reserves for the fifth time in a year, freeing up more liquidity. Borrowing rates for small businesses have been cut and in February interest rates were surreptitiously cut by the use of complex financial instruments.

A further economic package of stimulus measures aimed at the private sector to cushion the blow from American tariffs now seems likely, particularly in the light of April's retail sales figure, a 16-year low.

Political fears have become paramount. The overheating of the property market in 2018 created steep price rises in the big cities, prompting concern about social unrest. Measures were introduced to dampen the market and the over-heating shadow banking system.

But now, with wages rising by only about 2% last year and sales of mobile phones static, the government is wrestling with and seeking to neutralise the rising political temperature, reflected in a growing number of bitter strikes, largely unreported but a source of great fear for the elite.

Export growth is crucial for China - trade with the US is running at around $2 billion a day. The state has responded by tightening its grip. Government-owned firms' share of new bank loans has risen from 30% to 70%.

The private sector is being increasingly stifled. Its share of output has stagnated and rules have been enforced that insist companies must establish party cells which may then have a say over hiring, firing and key investment decisions.

The Chinese leadership is well aware that a slowing growth rate creates a perilous position for its rule. President Xi Jinping will seek to steer the economy away from its dependency on investment and exports, but the dizzying growth rates over the last 40 years were initially based upon moving the population out of low-productivity jobs in agriculture into higher-productivity jobs in manufacturing. That has now happened in key areas of the country.

Despite spectacular infrastructural projects, cutting edge robotic and AI technologies, and massive advances in science and technique, the necessary transition to a consumer-led, service-driven economy is extremely difficult given the present geo-political situation.

The emergence of an America which sees China as an economic and military rival that has to be curbed compounds this.

On the international stage, Chinese influence and prestige has been massively bolstered through the multibillion-dollar 'Belt and Road' Initiative, a state-backed campaign that seeks to promote China's influence around the world, while benefiting its economy. Huge new infrastructural links between Asia, Europe and Africa have been undertaken.

In this sphere too the US is attempting to limit Chinese expansionism. It has warned the UK of serious security consequences if it allows Huawei to have a role in the 5G technology roll-out and sought restrictions on the EU's interactions with Chinese firms.

Post-2008 the world economy and inter-imperialist relations are hugely more complex. Imperialism cannot resolve its own contradictions. The period of super charged globalisation that developed after the collapse of the Soviet Union has been partially derailed by the 2007-2008 recession.

Where will this end?

It is not clear how far the present threats of full-blown trade war will go; whether Trump will fully deliver on his ultimatums and how China will respond, but rooted in this conflict is an ideological rivalry expressed through a economics, territorial spheres of influence and military/technical imperatives. George Bush's unipolar world has been replaced by instability and competing interests between the imperialist powers.

It is vital in China, the USA and everywhere else, the working-class struggle is stepped up to confront, expose and overthrow this capitalist system.

Rising numbers of strikes in the US, including among workers who voted for Trump, show the potential power of the organised working class, learning to rearm itself in this new era. Socialist ideas are eagerly taken up as young people search for alternatives to capitalism.

In China too, despite the totalitarian state seeking to imprison and eradicate all dissent, a rash of heroic industrial disputes, strikes and protests show that the struggle to change society can never disappear.

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In The Socialist 22 May 2019:

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