All eyes on Washington

Will the trade war ceasefire last?

Lionel Fatton

Economics and finance, Government and governance, International relations | Asia, East Asia, The World

31 October 2019

Relying on economic prosperity for its legitimacy, the Chinese Communist Party is desperate to find a resolution of the US-China trade war. Unfortunately for China, the ball remains in America’s court, Lionel Fatton writes.

After a new escalation in the trade war between the United States and China, the two countries have reached an agreement. In exchange for Beijing’s pledges to better protect intellectual property and buy $40 to $50 billion of American agricultural products, the Trump administration suspended a tariff increase on Chinese goods scheduled for October 15.

Whether this ceasefire agreement will become the first step toward a settlement of the economic struggle between the two countries depends on Washington’s ambitions, and on whether they can be accommodated by the Chinese government. A key aspect of understanding this is a grasp of Chinese domestic politics.

Xi Jinping’s chief priority is to guarantee the continued leadership of the Chinese Communist Party (CCP). When Xi reached the apex of power in late 2012, he inherited a government weakened by widespread corruption, a party divided between hardliners and liberals, and a population more conscious of its rights and roles as a citizenry. In Xi’s view, the main threats to communist leadership were disunity among the party and social instability.

Reflecting this, Xi focused first on uniting the CCP around himself. He used a nationalist domestic agenda and a more assertive foreign policy to neutralise hawks in the Politburo and its Standing Committee, and hinted at possible political reforms to satisfy liberals, especially during the third and fourth plenums of the Communist Party Congress in 2013 and 2014.

He also launched an anti-corruption campaign to purge the state bureaucracy and the party from corrupted elements and stifle opponents, and then finally enshrined his doctrine of Socialism with Chinese Characteristics for a New Era in the party’s Constitution in March 2018. Since then, any attacks by party members against Xi or his policies amount to an attack against the CCP itself, making them effectively forbidden.

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Social instability remains the most serious threat to Xi’s regime. Since China’s economic opening-up in the late 1970s, a significant portion of the CCP’s legitimacy comes from its ability to sustain growth and improve the living standards of Chinese citizens.

To reinforce this legitimacy and ensure social peace, Xi formulated the concept of the ‘China Dream’, which refers to embracing China’s glorious past and ambition to create a modern, rich, and prosperous society.

Simultaneously, control over the population is being tightened through strict Internet regulation, a crackdown on civil rights activists, a network of some 200 million surveillance cameras, and the Social Credit System, which ranks citizens according to their daily behaviours and provides rewards and punishments to reinforce what is desirable to the leadership.

The tightening control over the population may not suffice in maintaining public order, however. The Chinese people have tended to accept restrictions on individual liberties in exchange for improved living standards. The consequences of the trade war on China’s economy jeopardise this fragile trade-off.

The country’s gross domestic product rose six per cent during the third quarter of 2019, its slowest growth since 1992. This could threaten public order.

The March 2019 sessions of the National People’s Congress and Chinese People’s Political Consultative Conference thus focused on ‘stability maintenance’, notably through job creation and public aid to lower social classes.

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The same sessions also revealed CCP concern that should the people’s economic situation and prospects deteriorate, the number of so-called ‘mass incidents’ will rise, weakening the party.

The trade war is a crucial part of this, as it raises the risk of China’s economic situation deteriorating by falling into the middle-income trap. The middle-income trap refers to the inability of developing countries to shift from low to high value-added economies.

As a country develops, rising wages that accompany economic growth reduce the performance of cheap and low-skilled labour-based business, and because the economy is not mature enough in terms of technology and innovation, high value-added industries fail to take over and lift the country out of its middle-income status. In these cases, economic slowdown ensues.

Washington’s trade offensive weakens the Chinese export industry and its ability to sustain growth, while attacks against Huawei and the strategic plan Made in China 2025, both with key roles in boosting high-tech sectors, impede innovation systems. If they cannot supplant low value-added sectors in time, China could fall into the trap.

If the Chinese economy continues to slow down, or indeed enters the middle-income trap, party cliques, bureaucratic elites, and wealthy families jolted by Xi’s rise to power and anti-corruption campaign could find in growing popular discontent a breeding ground to counterattack. Social and political instability could increase, adding uncertainty as to whether Xi would remain as president and CCP leader after the 20th Communist Party Congress of 2022.

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Because of these domestic dynamics, the Chinese government is eager to make concessions to lower trade tensions, given they do not jeopardise its development model based on the active involvement of the state and party in the economic fabric.

Otherwise, the repercussions could be worse for the CCP’s legitimacy than the impacts of the trade war.

Consequently, the future of bilateral economic relations depends on what Washington does next.

If the Trump administration seeks to reduce the trade deficit, allow greater access to the Chinese market by American companies, and better protect their intellectual properties, a compromise can be reached.

But, if the objective is to roll back the state and CCP’s influence in the Chinese economy, suffocate China’s high-tech sectors, and push for a full-fledged liberalisation of the Chinese market, the showdown between the two superpowers may be far from over.

Ultimately, whether the trade war will be short-lived or long-lasting rests on the White House’s understanding of these domestic Chinese dynamics, and on what it does next.

The Trump administration faces a choice on whether to de-escalate the trade war that ultimately comes down to whether it is primarily engaged in a fight for re-election or in a geostrategic competition with Beijing. Its next move could have lasting effects on the CCP’s legitimacy, but it seems all the Chinese government can do is watch with bated breath.

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