Vincent Kolo is a regular contributor at chinaworker.info

President Trump’s “bombshell” decision to increase punitive tariffs against China from one minute past midnight on Friday, May 10 marks a dramatic escalation of the 10-month old trade war between the world’s biggest economies. This follows months of talks and the widespread impression, encouraged by Trump and his officials, that a trade deal was close to hand.

The U.S. and China are playing “Russian roulette with the world economy”, protested the president of the European Union Chamber of Commerce in China. The real losers, rather than the capitalists who are complaining about reduced profits, are workers and consumers in the U.S., China and worldwide whose jobs and living standards are at stake.

The U.S. tariffs are raised to 25 percent from 10 percent, the level set last September, on $200 billion worth of Chinese imports. This covers consumer goods ranging from vacuum cleaners and furniture to capital goods and components such as auto parts and building materials. A further $50 billion of Chinese imports are already covered by a tariff of 25 percent. Trump has also threatened to up the ante by extending tariffs to the remaining $325 billion of Chinese imports – taxing everything.

The Chinese regime retaliated last year in tit-for-tat fashion and also vowed this time to take new as yet unspecified countermeasures. The scale and form of these countermeasures will give an indication of whether Beijing believes the negotiations that restarted last December have irrevocably collapsed or that Trump’s tariff hike is a tactic to speed up the talks.

China sells almost four times as much to the U.S. than it buys in return and therefore any tariff war between the two countries is ‘asymmetrical’, increasing the possibility that China could retaliate in other ways – through depreciation of its currency or taking measures against U.S. companies based in China – although at this stage neither of these options is likely.

The escalation of the conflict has sent jitters through global financial markets, hitting stocks, currencies and commodity prices. Bloomberg calculated that almost $1.5 trillion was wiped from global stock indexes in the four trading days following Trump’s tweet the previous Sunday threatening higher tariffs. That works out at 13 billion dollars per word!

Threat to World Growth

For the strategists of global capitalism this turn of events is alarming as underlined by the comment of the French Finance Minister Bruno Le Maire, “There is no greater threat to world growth”. A full-blown trade war between the two superpowers, a reality if Trump makes good on his threat to extend tariffs to all remaining Chinese goods, could translate into a contraction of global trade by two percent and cause global GDP to slow by 0.8 percent according to the Guardian.

Even before the latest tariff escalation, the IMF had downgraded its 2019 growth forecasts three times in six months, predicting in April that the global economy will grow 3.3 percent this year, the weakest rate of growth since 2009.

The U.S. economy could be hit just as hard as China’s. Many economists predict inflation will tick upwards as the tariffs feed into higher U.S. consumer prices. One study calculates the cost to the average U.S. household of higher tariffs on Chinese products to be $767 a year. Faster inflation could put additional pressure on the Federal Reserve to increase interest rates despite Trump’s efforts to get it do just the opposite. The stock market boom since the start of the year is built more than anything else on hopes for a rapid resumption of the Fed’s loose money regime, which has acted like rocket fuel for financial speculation and an ever more parasitic capitalism.

Wide sections of the U.S. ruling class support Trump’s harder line against China, especially while the U.S. economy appears to be strong – although the real position is much weaker – but many also complain that the president’s tariffs are a “blunt instrument” and would prefer a united front approach against China to enlist the support of other Western powers.

These events underline how unstable and volatile world relations have become as “the world’s most important bilateral relationship” between the U.S. and China spirals downwards. Other potentially very big trade disputes loom, over cars for example, with Trump threatening more tariffs against Japanese and European manufacturers. Aircraft and steel are other areas of conflict between the U.S. and the EU. These are precisely the “allies” the U.S. should bloc with to exert pressure on China according to many of Trump’s capitalist critics.

“Two Autocratic Men”

The sudden possible collapse of the détente process initiated by Trump and Xi last December, which has seen eleven rounds of intensive shuttle diplomacy described incessantly as “productive” and “going very well” not least by the U.S. president himself, points to increasingly serious political and economic pressures on both sides of the Pacific. Both the Trump and Xi regimes risk being swept into a political storm if they are perceived to have delivered a weak agreement (Trump) or made too many concessions (Xi).

“Global trade is now hostage to the fragile egos of two autocratic men” commented Jamil Anderlini in the Financial Times. While this is an oversimplification there is undoubtedly some truth here. The price for both leaders is extremely high, possibly even costing them their hold on power, should they sign an unpopular or humiliating accord. Both regimes are partly captives of their own demagogic nationalism encapsulated in the slogans “Make America Great Again” and its Chinese equivalent.

While both Beijing and Washington want to project strength, in reality both fear the effects of this conflict, which have moved beyond the relatively painless phase of the initial few months of tariffs. Trump will face increasing pressure in key farming states which helped him win the 2016 election and are already suffering from China’s retaliatory tariffs on U.S. soybeans. Last year Trump’s government initiated a $12 billion support fund for farmers, most of which goes to big agribusiness, labelled by some as “socialism for farmers”. As the latest tariffs kicked in, Trump tweeted he would buy $15 billion of U.S. farm products with the proceeds from his tariffs and send it to “poor and starving countries” as humanitarian aid.

U-Turns

Like most commentators we believed a deal was the most likely outcome (and this is still not excluded), but we explained that “Clearly, the two sides are not as close as they want people to think. But they are also under pressure to de-escalate, without losing face. This last point is what’s mainly causing the negotiations to drag out.”

The build up to the May 10 escalation seems to be a u-turn or series of u-turns by the two main protagonists. Trump blames the Chinese side for “reneging” on previous commitments. “They broke the deal,” he told a campaign rally in Florida. The U.S. version has been widely accepted by most media worldwide, but as details of the 150-page draft trade agreement are still secret this is impossible to verify.

While this type of blame game is a familiar practice of diplomacy, and while we are entitled to be skeptical towards any statement from the Trump White House, reports are emerging from China that suggest an element of push back from within the regime, including pressure from nationalist hardliners, against making too many concessions to Trump. This includes the alleged comment of Xi Jinping, “I will be responsible for the consequences”.

“Matters of Principle”

Liu He, China’s chief negotiator, threw more light on this in comments made as he was leaving Washington following the abortive and rather perfunctory 11th round of talks, which lasted just three hours in total, and unsurprisingly failed to prevent Trump’s escalation. While trying to downplay the crisis, saying “small setbacks are inevitable”, Liu denied China had “reneged” on previous areas of agreement. From a transcript of his speech posted on Hong Kong-based website Pheonix Television, Liu identified three key issues over which attempts to reach a deal have faltered.

The first is Beijing’s insistence that all Trump’s tariffs are removed, with the U.S. side pushing for at least some tariffs to remain or for a phased removal to insure China’s compliance.

The second relates to China’s procurement of U.S. goods – major purchases of agricultural and other goods – which were already put on the table when Xi and Trump met in December on the sidelines of the G20 summit in Buenos Aires. According to Liu the two sides now have different views on what was actually agreed, with the U.S. evidently demanding a cash sum the Chinese side are not prepared to meet.

The third issue concerns the Trump team’s insistence that China’s government commits to incorporate key aspects of the agreement into Chinese law to address U.S. complaints over theft of intellectual property and trade secrets, forced technology transfers, competition policy and subsidies to state companies, U.S. access to the financial sector, and currency “manipulation”.

The clear connotation of such an accord would be to cast China and Xi’s regime in a submissive role, echoing the ‘unequal treaties’ forced upon China by imperialism in the past. It is unsurprising therefore that Liu stated these were “matters of principle” over which the Chinese side was not prepared to compromise. However, the same applies to U.S. objections in respect to technology and intellectual property – these are essential parts of Trump’s program and part of the reason he gets the support of U.S. capitalists.

The Ghost of Yuan Shikei

The Chinese regime has been prepared to make concessions in order to reach a deal with Trump’s government, while also understanding this won’t fundamentally shift the trajectory of U.S.-China relations, which is towards sharper great power rivalry. The Chinese regime’s strategy is to achieve a de-escalation to buy time in which to continue its modernization of industry and build a stronger technological base, cognizant that the country’s social and economic problems are piling up. But as we explained this willingness to making concessions has limits:

“But Xi’s regime won’t sacrifice ‘core areas’ which are anything vital to its state capitalist economic model such as state subsidies, protection of key state monopolies and creation of ‘national champions’.”

The Chinese regime – a dictatorship which combines state-directed capitalist economic development with unprecedented levels of repression and political control – lives in fear of massive social unrest which could endanger its survival. There are multiple challenges in the form of an increasingly sluggish economy, a debt time bomb and widening inequality, all of which could be further compounded by the trade offensive of Trump and US imperialism. The regime and especially Xi’s aura of invincibility as an all-powerful ruler at the head of the most expensive police state in history are necessary ingredients to its rule. This explains Xi’s refusal, even at the cost of possible serious escalation, to compromise on what his mouthpiece Liu He called “matters of principle”.

With good reason, Xi fears he will be attacked as a “weak” ruler by factional enemies within the CCP (so-called Communist Party), which could also become a lightning rod for mass discontent. The 100th anniversary of the May Fourth Movement, which coincided with the escalation of the trade conflict, provides many lessons for China’s rulers and the masses.

When Xi abolished presidential term limits last year, allowing him to rule indefinitely, he was widely compared to the power-crazed but brief Chinese president Yuan Shikei. Yuan proclaimed himself emperor in 1915, but is also remembered as a weak ruler who caved into demands from Japanese imperialism. This was an important part of the background to the May Fourth mass protests in 1919, which marked the start of a decade of revolutionary upheavals. “Xi is very concerned about his authority, as he doesn’t want to be seen like Yuan Shikai,” noted Wu Qiang, a former politics lecturer at Tsinghua University.

Media Censorship

The government’s sensitivity to criticism is illustrated by new tough media censorship to block most reports about the trade war. “We have received instructions that we can only publish comments made by the spokesmen of the commerce and foreign ministries,” the news editor of a major Chinese media outlet told Hong Kong’s South China Morning Post on condition of anonymity.

Xi is therefore forced to tread a very fine line. He does not want to completely abandon the possibility of a trade accord with U.S. imperialism. Hence the restraint so far shown which includes muzzling the Chinese media’s natural predisposition towards strident nationalism. This explains why Liu He went to Washington on a thankless mission, which represented a departure from Beijing’s previous position that it would not negotiate under threat.

Will There Be a Deal?

A window was left open by the Trump administration with its announcement that the increased tariffs would not apply to goods that left Chinese ports up until the May 10 deadline. Those ships already at sea will not face the new tariffs, allowing a further month for a deal to be concluded between the two sides. Both governments confirmed that new talks are planned in Beijing, but with no dates yet announced. This has led commentators in China to compare the situation to the Korean War (1950-53) in which for two years China, under Mao Zedong, waged war against the U.S. while negotiating at the same time.

Meanwhile Trump has signalled a further escalation with the announcement by Robert Lighthizer, his top trade negotiator, that the government was formally initiating the process to extend tariffs to the remaining $325 billion of Chinese imports. These tariffs will be introduced in one month, Lighthizer said.

These contending pressures have injected enormous uncertainty into the situation, in which a complete breakdown of the fragile détente process (i.e. all-out trade war) is one possibility, as is a largely cosmetic trade agreement, but also a prolonged stalemate in which talks continue punctuated by new threats and crises. This is not a reassuring scenario even for U.S. capitalism. “We are concerned that this gets worse and instead of a tariff regime that lasts for a few months, we see a tariff regime that last for years,” a spokesman for the U.S. National Retail Federation told the Financial Times.

The bigger picture, where U.S.-China relations have shifted onto a completely different and fundamentally antagonistic trajectory remains unchanged even if a trade deal is reached. However a complete breakdown in the trade talks can inflame other areas of contention even more rapidly. Even with a trade deal, there is a concerted pushback by the U.S. against Chinese tech companies, most notably Huawei, and against China’s Belt-and-Road Initiative – Xi’s grand infrastructure strategy to construct a 70-nation China-centric economic sphere. Just the day before Trump’s tariff escalation, China Mobile, the world’s biggest telecom company, was banned from operating in the U.S. market as a “threat to national security”.

U.S.-China rivalry is also intensifying over maritime disputes in the Western Pacific and South China Sea, over Taiwan, which could become a major flashpoint in future, and even in Africa and Latin America where the interests of the two superpowers are increasingly at odds.

Today’s political and diplomatic uncertainty, not to say chaos, with global trading rules and capitalist international institutions weakened and increasingly sidelined, is indicative of a global system in decay. Capitalist nationalism, of which both Trump and Xi are exponents, is no more of a solution than the globalized capitalism favored by the main wing of the capitalist class internationally for more than three decades. Likewise, both U.S.-style “free market” capitalism and China’s authoritarian capitalism represent two variants of a redundant economic system. The working class is the only force, drawing behind it all the oppressed, which can put an end to this chaotic state of affairs, by fighting for international socialism and democratic planning.

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