[SCMP Column] The Art of Trade War

January 28, 2017

As we watched Xi Jinping at the World Economic Forum championing the virtues of globalization, and Donald Trump at his inauguration singing in praise of protection, we can be forgiven for seeing a world turned upside down.

But is China really transforming itself to become a global champion for trade and investment openness? Is the US truly set on a course towards protection and gunboat mercantilism? No matter how pleasing to the ear were Xi Jinping’s Davos comments, and no matter how shockingly pugilistic Trump appears, we must surely be a very long way away from such a world turned on its head.

As I have in the past praised China’s rapid but recent conversion to more free and open trade and to the rules of the world’s multilateral trading system built around the World Trade Organisation, lots of colleagues and readers (mainly Americans) have complained at my rose-tinted naivity. And in the teeth of my criticisms of increasing evidence of US protection, they have protested that despite recent reversals, the US remains one of the most open and liberal economies in the world.

My response is simple, and underpins a rising conviction that the balance of diplomatic, economic, political and trade power in our region is indeed in the process of being turned on its head. Trump seems bent on accelerating this process – more forcefully to China’s advantage than he appreciates.

First, the example of the US is fundamentally important to the functioning of the global economic order. It is the creator and guardian of a system that has served all of us – in particular the US – extremely well over almost seven decades. Backtracking from this commitment is of seismic importance. Second, the US is much less a paragon of openness than its advocates and lobbyists would have us believe. And third, my current comments and sentiments towards China are clearly and legitimately focused not on the current location of the US or China on a spectrum from liberal to protectionist, but on their direction – where each economy is coming from, and where it is heading.

The first point is critical if often overlooked. It was highlighted by Martin Wolf in the Financial Times last week:  “Once the hegemon attacks a system it has created, only two outcomes seem at all likely – its collapse, or recreation of the system around a new hegemon.” The new US administration is playing an extremely dangerous game in which the primary victim could be its own people, its own economy, and its own pivotal position in the global economy. And Xi Jinping has amply demonstrated that there is a new potential hegemon in the wings well able to work on building a new system.

Second, just how virtuous is the US among the world’s open or liberal economies?  In terms of the World Bank’s Ease of Doing Business index, the US performs well – ranking 8th in the world, behind (for example) Singapore in 2nd place, and Hong Kong 4th. But in the International Chamber of Commerce (ICC) Open Market Index, the US ranks an embarrassing 42nd, just below Peru and Korea. The Heritage Foundation ranks the US 11th worldwide in terms of its Economic Freedom index, well behind Hong Kong in 1st place, but better than Japan in 22nd place.

So in terms of current location, the US offers much to admire. And despite Xi Jinping’s statesmanlike commitment to global trade rules, China’s current global ranking by these various measures remains appalling. The Ease of Doing Business index ranks China 78th. While the ICC ranks China in 59th place behind Russia and Morocco. Even worse, the Heritage Foundation ranks China 144th – with worst scores for trade and monetary freedoms.

But in terms of direction, the signals make uncomfortable reading for the US. In Prof Simon Evenett’s Global Trade Alert, widely regarded as the leading tracker of emergent protectionism since the 2008 global crash, the US has launched a breathtaking 3705 discriminatory trade measures against trading partners, making it by far the worst initiator of new discrimination in the entire G20. Even India and Russia rank far behind, while China is a comparative innocent, responsible for just over 1268 discriminatory measures.

In contrast, China has launched a total of 617 liberalising measures since 2008, while the US has initiated just 235.

So let us not be dewy-eyed. China remains a very tough market to penetrate. When Trump’s trade Rottweiler Wilbur Ross complains that China is the world’s “most protectionist large economy”, he complains with reason. Both the European Chamber of Commerce and the US Chamber of Commerce in Beijing complain bitterly and in great detail over the discrimination they wrestle with day to day as they try to do business inside China. Germany’s ambassador to Beijing, Michael Clauss, noted last week that “political assurances of equal treatment (for foreign companies in China) give way to protectionist tendencies.” But optimism and positiveness about Xi Jinping is built not on China’s present location, but on how far they have come since joining the WTO in 2001, and where they are pointed as we look forward.

If Trump and his team do indeed act on their commitments to espouse “protection”, encouraging “Buy American”, reneging on commitments made in regional and global trade agreements and preferring to build future trade relations on a fabric of muscularly-negotiated and self-serving bilateral trade deals, then it is a reasonable bet that an increasing number of economies worldwide will begin to think much more positively towards China, and the potential benefits of liberal-leaning trade agreements with China at the heart of the process.

China’s own determination to put its own people’s interests first, to build local companies that can compete worldwide, and to strengthen its own domestic economy may not in truth be very different from Trump’s. But the difference in the rhetoric and the body language is huge. As Xi said in Davos: “We defend our way, but are not rigid. We learn, but do not copy from others. We formulate our own development path through continuous experimentations. No country should put its own way on the pedestal as the only way.”

As historian Niall Ferguson reminded us in the SCMP last week, Trump may have a strong strategic template based on his “Art of the Deal”, but China has Sun Tzu’s “Art of War” – which has served its leaders well for 2500 years. According to Sun Tzu, “if you know your enemies and know yourself, you will not be put at risk even in a hundred battles… But if you only know yourself, you may win, or lose.” As skirmishes begin on possible trade wars, I wonder how well Trump knows his enemies?
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