US-China: War by other means

Shaken Superpower: US-China trade war is just not what it seems. It’s strategic competition

In early 1992, only weeks after the Soviet Union had ceased to exist, a draft Defense Policy Guidance (DPG) began to circulate in the US Pentagon. The draft DPG 1992 was so controversial that it was never made public. It was leaked by officials to the New York Times and the Washington Post, who published excerpts from it. Those excerpts revealed a blueprint for American strategy in the post-Cold War era: it would maintain its worldwide military presence; it would ensure that no peer competitor on the scale of the Soviet Union would ever rise again from any region of the world; and it would its technological superiority over the rest of the world and put itself in an orbit that other countries could not even aspire to reach.

But America had unwittingly already sown the seeds of the next superpower rivalry some 20 years earlier, at the height of the Cold War with the Soviet Union. Richard Nixon and Henry Kissinger had opened the door to Communist China. Since 1972, and especially since 1978, when China embarked on economic reforms, successive US Presidents (and US businesses) have helped China rise – by making it the world’s manufacturing powerhouse and by integrating it into the US-led international trade and technology regimes.

Consider this: In 1990, China produced less than 3% of global manufacturing output by value; today, it produces more than a quarter of the world’s output – accounting for 90% of the world’s computers, 80% of air conditioners, 70% of mobile phones, etc; in 1985, China had a trade surplus of $6 billion a year over America.

By the time Donald Trump took office in 2016, China had an annual trade surplus of over $350 billion over the US; by 2018, it had risen to $420 billion. In 2000, China had a foreign exchange reserve of $170 billion; in April this year, it had about $3.1 trillion – more than a third of it in US treasury bills, notes and bonds. In other words, America owes China more than a trillion dollars.

In that time, China has also built up its military might – with nuclear-tipped intercontinental missiles, a fifth-generation fighter jet, a submarine force from which the US Navy is feeling the heat in the South China Sea and the Western Pacific, space and cyber war capabilities that it regularly demonstrates. China is now the second biggest defence spender, behind the US.

Oh, yes, America now has a peer competitor – perhaps still not in the same class as itself, either economically or militarily, but one that’s getting there rapidly and relentlessly, in a planned, programmed way. It is this that has spooked the Superpower. It’s at the heart of the current trade war between the two countries.

It started off seemingly as a mere ‘tariff war’ aimed at rebalancing the trade so that America can close the deficit gap, but it is really the opening shot in what looks like a long-drawn war for technological and military dominance between the existing Superpower and the rising challenger.

The Tariff War

Donald Trump came to the White House promising to fix China’s “long-time abuse of the broken international system and unfair practices”. Since January 2018, the US and China have been locked in a trade war involving raising tariffs on each other’s exports. Trump threatened to raise tariffs on $200 billion of Chinese goods from 10% to 25%. When a dozen rounds of talks between their trade teams did not yield a deal that could have headed it off, the tariffs went into effect in May. Beijing retaliated with its own tariffs on $60 billion of US goods.

The trade tensions have since increased with the US threatening to extend the 25% tariff to the remaining $300 billion of imports from China. Trump has also broadened the trade war by blacklisting Chinese telecom giant Huawei over espionage concerns.

The Tech War

The US (and many other countries) has for long accused China of stealing technology from it through a variety of methods: using Chinese students and professionals in the US; forcing foreign direct investors in China to enter into partnerships with Chinese companies and part with their technology to the local partner; or planting software bugs in computer systems or hacking into US computer systems.

US officials have said China used spies and hackers to steal top US military technology, including those related to the B-2 stealth bomber, the F-22 fighter aircraft (the Chinese J-20 is a curious copy of the F-22), stealth technology, the Patriot and Aegis missile defence systems, aircraft engines, submarines as well as dual-use and civilian technologies such as satellites, robotics, Artificial Intelligence, semiconductors, mobile phone technologies. Indeed, former director of the National Security Agency, Keith Alexander called Chinese cybertheft of intellectual property “the greatest transfer of wealth in history.”

In going after China on intellectual property and other technology-related concerns, the Trump administration targeted China’s biggest global symbol of its rising tech industry – Huawei, the country’s giant telecom equipment provider and maker of mobile phones. Its founder is a former Chinese army general, to boot. As soon as Huawei was sanctioned, Google and Facebook took their apps off Huawei’s phones across the globe. Worse, it has also cut Huawei off the UK-based ARM, whose chip designs power the Chinese company’s phone. Without ARM designs, Huawei will have to start designing its own chips from scratch, and that could take a long time. Huawei also stands to lose Google’s support for the Android operating system that its phones run on.

China retaliated by signalling that it could cut off the supply of rare-earth metals to the US, announcing a probe into FedEX for “wrong deliveries” and penalising Ford in China some $163 million.

The Rare Earths Threat

From our mobile phones and electric cars to ear buds and consumer gadgets, from oil refineries to wind turbines and jet engines, and almost every modern weapon system – drones, aircraft, missiles, etc – depend on these Rare Earth elements – the set of 17 elements in the Periodic Table known as the Lanthanides. And China controls 80% of the world’s supply of these. China not only nearly monopolises their production but also their refining capacity and their industrial forms, such as magnets. So much so that the single mine operational in the US also sends its output to China for refining.

China has not officially threatened the US that it will stop supplying Rare Earths for its iPhones and its jet engines. Rather, amidst the trade war tensions, President Xi Jinping simply made a highly publicised visit to a rare earths plant. It was enough to send shivers down the spine of the US officials and business executives.

It’s not as if the Rare Earths are rare. Indeed, the US itself has 1.4 million metric tons of rare earth reserves, but mining and refining them are a highly toxic activity. The developed world prefers to let the Chinese handle that. Will it continue to take that attitude?

How might this end?

First, the US and China might decide that neither side can win a trade war and reach a deal that unwinds the tariffs and leaves other things pretty much unchanged. China would be willing. Can Trump live with that, especially as elections approach?

Second, they might continue in a stalemate at the current levels. Trump’s threat to raise tariff on the other $300 billion of goods hangs over China, and China, in turn, maintains its threats on rare earths, US securities but does not act. This will leave everybody in uncertainty and stress.

Third, Trump carries out the threat of more tariffs and China retaliates. Prices will rise significantly for the US consumer. The US goes into recession, and it will have a chain reaction, including in China, which already has its domestic economic troubles. This will also hit other Asian economies and emerging nations.

Regardless of which scenario plays out, one thing is certain: China and the US will become increasingly estranged and suspicious of each other. China will speed up efforts to develop its own core technologies and to build up its strategic sectors. Indeed, it will act on its Made in China 2025 even more determinedly. And that will ratchet up the US-China strategic competition even higher. Call it the wages of “weaponised interdependence”, as one academic put it, or the dawn of the “new Cold War”.