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Weighing the Risks of Unintended Consequences in the US-China Trade War

Image by PAS China

The opening shots in the “trade war” between Washington and Beijing have raised concerns around the whole world, causing a heated debate about the logic of the Trump Administration’s policy against China. While most analysis has focussed on the economic effects of the trade war, less discussed has been the dispute’s impact on other areas of Sino-American relations. If Trump’s purpose is to correct the imbalances in the US-China trade relationship, his actions could eventually lead to unexpected outcomes. The ideas of Thomas Schelling and Joseph Nye help us understand why.

The “tacit bargaining” concept elaborated by the American economist and professor of strategy Thomas Schelling is useful in helping us to assess the consequences of the raft of US trade tariffs against China. One reading of Schelling’s argument is that if coherent and clear communications do not exist between Washington and Beijing, the interpretation of each country’s actions will be left to subjective perception, resulting in a channel of tacit communication made of conjectures and assumptions about each other’s intentions. Such tacit communication could lead to a situation, as Schelling saw it, where “each party is the prisoner or the beneficiary of their mutual expectations”1.

It is worth recalling that Chinese strategic culture tends towards a comprehensive and indirect approach to problems and issues. Based on his extensive negotiations with Beijing, Henry Kissinger observed that “each factor influences the others, giving rise to subtle shifts in momentum and relative advantage and there are no isolated events”2. According to Kissinger, Chinese strategic culture sees political trends in their entirety and uses a wide array of national power instruments to deal with contingencies. The 2017 US National Security Strategy and the 2018 US National Defense Strategy identify China as a “strategic competitor” trying “to displace Washington in the Indo-Pacific region”3, while also pursuing “predatory economics”4 against its neighbours and the United States. China may therefore read US tariffs through its own strategic assumptions, seeing them as a part of a larger offensive strategy and may act accordingly unless the Trump Administration gives adequate assurances as to the limited scope of its trade measures.

Hence, a tacit communication between Washington and China of the type highlighted by Schelling will increase the risks of trade issues spilling over into other domains and affecting other aspects of Sino-American relations. Moreover, a ‘transactional’ approach ― likely given the business background of the 45th president― could encourage Trump to up the ante and threaten a further escalation in his trade dispute with Beijing. Such an approach can deliver advantages in business deals but, in the context of the the current dispute could increase the danger perceived by China. In fact, if Beijing perceives Trump’s managerial approach as erratic and feels threatened by it, it could consider exploiting apparent US weak spots and raising the stakes itself.

Therefore, this tacit communication, or rather non-communication, together with a business-like mindset by Donald Trump could increase the risks of miscalculation and create incentives for beggar-thy-neighbour policies. This will be more likely if Beijing feels capable of hitting back or if it believes that Trump’s actions create some opportunities for it to gain a strategic advantage. Consequently, a significant element of the current dynamic between the two countries is determined by the Chinese view of its own strength in the global political and economic arena and by its perception of the ‘Trump opportunity’ (i.e. the opportunity of boosting the Chinese position in the international system as a result of Trump’s isolationism and protectionism, and a more general sense of US decline). If Beijing feels stronger than ever and perceives Washington to be weaker than ever, it may act more firmly. This leads to the next point.

An increase in China’s global legitimacy could boost Beijing’s soft power (defined by Joseph Nye as the ability of a country to persuade others to do what it wants without force or coercion) in the world and, especially, among America’s disappointed allies in the EU, Philippines, Turkey and elsewhere. The 2008 financial crisis, in fact, amplified the rhetorical effect of Chinese propaganda about the benefits of its economic development model as an antidote to unrestrained Western capitalism.

The Chinese approach is twofold. On the one hand, China promotes the “Beijing Consensus” to Developing Countries, namely “the high-speed demonstration of how to liberalize economically without surrendering to liberal politics”5. According to Halper, in the “global battle between different visions of the future and different versions of capitalism, China is the protagonist” and with its new non-Western approach to the free market it is “beating the West at its own game”6. On the other hand, Beijing acts increasingly comfortably on Western economic stages, as evidenced by the repeated appearances of Chinese leaders at the World Economic Forum (WEF). Since 2008, Chinese Premiers have spoken three times at Davos: Wen Jiabao (2009) and Li Keqiang (2010, 2015). Furthermore, for the first time, China’s President attended the Forum (Xi Jinping, 2017). During his speech, Xi Jinping defended free trade and economic openness, criticizing Trump for “locking himself in the dark room”7 of protectionism. A Chinese growing political penetration in the West could make Beijing more self-confident and firmer in dealing with the US, especially if Beijing believes it has woven a solid diplomatic network and isolated Washington from its allies and partners (see the recent commercial accords between the German Chancellor Angela Merkel and Chinese Premier Li Keqiang).

After the Renminbi joined the club of IMF reserve currencies on October 1, 2016, China has adopted a policy of internationalization of the Yuan with the long term aim of displacing the dollar as the main international reserve currency. This would allow China to trade more easily at less cost and borrow more easily to bolster its financial development (see the Harvard Belfer Center’s report on RMB internationalization). Additionally, more and more countries are holding an increasing amount of yuan-denominated reserves, illustrating the increased prestige and trust that China has accrued in recent years. In fact, the more a country’s currency is held as reserves by foreign central banks, the more that country is deemed trustworthy by markets and governments. Thus, the more international transactions are conducted in Yuan, the more Yuans are disseminated in the world and, as a result, the more Beijing increases its leverage on the world economy through currency intervention and interest rates adjustments (see Asian Development Bank working paper). For these purposes, Beijing is looking for new Yuan-based economic partnerships overlapping with the Washington-sponsored and dollar-based ones. The extensive Chinese involvement in the Regional Comprehensive Economic Partnership, the creation of the Asian Infrastructure Investment Bank (nominally regional but de facto global), and the launch of the Belt and Road Initiative are all indicators of Beijing’s ambition for an internationalized Yuan.

Moreover, the promotion of alternative economic institutions falls under the concept of agenda framing, described by Nye as the power to define the agenda of negotiations by affecting the framework of rules and procedures within which they take place. It allows the agenda setter to keep some issues off the table and to deeply change the outcome of the negotiation. Evan Feigenbaun lucidly highlighted the massive impact of China-sponsored institutions on the regional and global balance of power. Thus, if Donald Trump continues with protectionist measures, China may use its soft power and agenda-setting capability to gain benefits. If Trump shuts the door on bilateral negotiations or if Beijing believes that, given the harsh rhetoric by the US administration, a deal is impossible or disadvantageous, it may use these institutions so as to affect America’s economy and international legitimacy. Within these institutions, for example, new procedures and rules could be set up to exclude and damage US trade, while currency intervention could be used to gain advantages against the dollar. Moreover, if new Beijing-sponsored institutions are created, the proportion of global trade conducted in dollars could decline, especially in strategic areas like East Asia or Europe.

To sum up, a communication that leaves no scope for misunderstanding will be the sine qua non for achieving stable Sino-American relations. Otherwise, egotism and misperceptions may drive China not only to hit back but also to hit back harder, and in other areas of their bilateral relations, increasing the likelihood of unwanted outcomes for both countries. A dangerous spill-over effect may occur due to two elements: Trump’s erratic behaviour and Chinese strategic culture.  Moreover, Chinese self-perception as a rising power and its weight in global economic institutions could lead to a harsher confrontation if Trump is unwilling to compromise or recognise the risks of escalation. In the end, Beijing could also exploit rising discontent among US allies and partners to isolate Washington, not only through bilateral diplomacy but also through the institutions it has created in recent years.

A earlier version of this article appeared at Geopolitica.info

Image courtesy of PAS China (President Donald J. Trump visits China | 2017) [Public domain], via Wikimedia Commons

  1. Schelling, T. (1957). Bargaining, Communication, and Limited War. Conflict Resolution, 1(1), p.23
  2. Kissinger, H. (2011). On China. London: Allen Lane. section 69.8
  3. Trump, D. (2017) National Security Strategy of the USA, p. 25
  4. DoD (2018) Summary of the National Defense Strategy of the USA, p. 9
  5. Halper, S. (2010) Beijing Consensus, p. 32
  6. ibidem, p. 11
  7. Available here

About Lorenzo Termine

Lorenzo Termine is an Italian student in International Relations (MD), and a Chinese Foreign and Defense policy analyst for various Italian magazines. His main interests are the IR theory and Strategic Studies, mostly regarding the relationship between U.S. hegemony and China. He is also a Junior Fellow at Geopolitica.info, a think tank on IR and Geopolitics based in Rome. You can follow him on Twitter at @LorenzoTerm and LinkedIn.

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