Econ_May_05

44 China

The Economist

May 5th 2018

HENPresident Donald Trump threatened punitive tariffs in

the spring on $150bn of Chinese goods, some Chinese ob-

servers thought thiswas a tradewar that could be finished before

it really began. To weaken America’s resolve, robust retaliation

was threatened against American goods, from soyabeans to

bourbon. To overcome it entirely, barriers to certainChinesemar-

kets, such as for cars and credit cards, could be dismantled. China

could even offer to cut America’s $375bn bilateral trade deficit,

overwhichMr Trump obsesses, without toomuch loss of face.

Oh halcyon days! As

The Economist

went to press, Mr Trump’s

senior economic officials, including Steven Mnuchin, the trea-

sury secretary, Wilbur Ross, the commerce secretary, and Robert

Lighthizer, the United States Trade Representative, were about to

sit down in Beijingwith their Chinese counterparts. The aimwas

to avert a trade war that now seems increasingly likely. The no-

tion thatMr Trumpwill declare victory after a fewpolite Chinese

concessions appears less plausible. His beef with China, shared

bymanyAmerican policymakers and business folk, goes deeper.

At issue, in American eyes, is a system of economic gover-

nance at odds with the West’s. It shuts off whole sectors to for-

eigners—or allows them in only after they hand over their propri-

etary know-how. It pumps money into favoured domestic firms

to turn them into global champions. And, when it comes to ac-

quiringWestern technology, it encourages Chinese companies to

beg, borrow—or steal. “Made in China 2025”, a state plan to up-

grade industry in sectors from robotics to electric vehicles, seems

to others like an underhand play forworld domination.

The risks involved for China were driven home on April 16th

when the Commerce Department punished

ZTE

, a Chinese tele-

coms giant, for shipping equipment to Iran and North Korea in

breach of sanctions, and lying about the remedies it had prom-

ised when it pleaded guilty to this in 2017 (see Schumpeter). The

penalty is a seven-year ban frombuyingAmerican components.

For

ZTE

this is a bodyblow. It relies uponAmerican parts: four-

fifths of its products contain them, including its smartphones,

whichuseQualcommchips. As forChina’s biggest telecoms firm,

Huawei, it has long come under attackinAmerica over how it has

acquired know-how, andwhether it helps China spy. Nowcomes

the news that the Department of Justice is investigating it, also

over possible sanctions-busting in Iran.

Back in China, a report by the regulator of state-owned assets

castigated

ZTE

after the American ban for its “short-sightedness

and dishonesty” and for harming the country’s image. Yet the re-

actionwas verydifferent inother quarters. Netizens leapt to

ZTE

’s

defence. The editor of the

Global Times

, a jingoistic state tabloid,

tweeted that Chinesewere “all

ZTE

people”.

More pertinently, Xi Jinping has redoubled calls for greater

self-reliance in the quest forChina’s “great rejuvenation”. On a re-

cent visit to the Yangzi river town of Yichang, site of the giant

Three Gorges dam, China’s autocrat declared that “in the past we

tightened our belts, gritted our teeth, and built the two bombs

and a satellite.” (Every Chinese patriot knows that the two

bombs refer to China’s first atomic and hydrogen ones.) Pursuing

advanced technologies, Chinese must “cast aside illusions and

relyon ourselves,”Mr Xi said. In official pictures, it looked almost

as if hewere about to dive into the river and swimacross, asMao

Zedong had done during a period of autarky 52 years earlier.

Given the way Mr Xi has been ratcheting up his tech-

nationalist rhetoric, it is hardly likely that hewill back away from

“Made in China 2025”, asMr Trump’s negotiatorswant him to. At

a seminar in Beijing over the weekend, reported by the

NewYork

Times

and attended by senior Chinese economic policymakers,

officials insisted that “Made inChina 2025”was not up for negoti-

ation. (They also stressed that a one-party state can take more

pain froma prolonged tradewar than can a democracy.)

When Chinese policymakers argue that the policy is misun-

derstood, as they did at the seminar, they have a point. During

their industrialisation, Japan, South Korea and Germany all had

industrial policies to protect domestic sectors—and arguably still

do. “Made in China 2025” is as much aspiration as fixed pro-

gramme. But, crucially, every advanced technology these days

has a military dimension. Because China and America see each

other asmilitaryaswell as economic threats, an “undeclared cold

war” over technology is under way, says Kevin Rudd, an Austra-

lian former primeminister.

Cold, getting hotter

The worry is that the techwarwill only get hotter. Tech-national-

ists on both sides argue that China andAmerica, their economies

intertwined for so long, must nowcleave and go their ownways.

In China the propaganda doesn’t favour common sense. “Amaz-

ingChina”, currently smashing box-office records for a documen-

tary, extols Chinese technological prowess. And the press likes to

talk of high-speed rail, e-commerce, mobile payments and bike

sharing as China’s “new four great inventions” (to rival the past

accomplishments of papermaking, printing, gunpowder and the

compass). They are not China’s at all. American tech-nationalists

also harbour delusions. The Trump administration has flirted

with the idea of huge government support for the development

of a 5

network. That would never fly politically.

Mr Trump insists that America and China will “always be

friends, no matter what happens with our dispute on trade”.

There is an echo in that of old-think—of a time when American

andChinese officials believed that nomatter howmuch they dis-

agreed, they would always find a way of getting on because the

consequences offallingoutwouldbe sodevastating for both. The

two sides’ techno-sparring is evidence ofhowhard it is becoming

to separate their economic and strategic rivalries. Safe spaces in

the relationship are gettingworryingly hard to find.

Casting illusions aside

ASino-American techwar looms. It is aboutmore than technology

Banyan

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