Why China will not Back Down from a Trade War

On Tuesday (4/3/2018) the US published a list of Chinese imports, set to be hit with a $50 billion tariff increase. This is the latest in an escalating trade skirmish between the US and China, that could escalate into a war. On Monday (4/2/2018) China implemented a $3 billion tariff hike on several US imports including fruits, pork and steel. This was in response to Trump’s tariffs on Chinese aluminum and steel one month ago. Back then, he was tweeting, “trade wars are good and easy to win,” but now it appears he is getting a dose of his own medicine.

Xi is unlikely to back down since, several facets of the Chinese economy bolster it against the vicissitudes of a possible trade war. First, China has built up its internal economy. China’s “township village enterprises” (TVEs) helped rural incomes rise by 300% between 1989 and 2005, fueling domestic demand. Moreover, China’s internal markets received an unprecedented boost in 2008, when the government launched its $586 billion stimulus plan in response to the financial crisis. China has also maintained record high levels of investment in infrastructure and built a world renown high speed rail system that has greatly reduced transport costs to the interior. Correspondingly, exports as a percentage of GNP have been falling steadily since 2006, and with them reliance on trade with the US.

Second, South-South economic ties have been strengthened by China’s one-belt one road project and Asian Infrastructure Development Bank. Just this January, China invested $2.28 billion in the one-belt countries, and $1 trillion is the target investment for the entire project. Increased south-south trade would substitute for lost trade with the States. Third, China holds $1.2 trillion in US debt, which will not only provide a stream stream of income in the event of a trade war, but will militate against Trump escalating it to the point of a trade war in the first place. And finally, China’s housing guarantee, land guarantee, and constitutional right to a job, imply that as bad as any trade war gets, people will have a roof over their head, and either a job, or a plot of land, from which they can draw sustenance. The same cannot be said for the United States.

There are also at least two facets of the Chinese political system that militate against Xi backing down to Trump’s proto-imperialist aggression. First, although Xi is a member of the ‘elitist’ faction of the CCP, which has among its base urban, coastal entrepreneurs who are likely to prefer taking a short-term loss than see an escalation to an all-out trade war; capital is subordinated to the CCP in the Chinese political system. Two of the three primary means of production (land and capital) are controlled by the state. Real estate developers must obtain use rights for land from local party officials, rather than local party officials needing to obtain campaign funds from real estate developers. The power that the CCP has over Chinese capitalists, while incomplete, is significant. In 2008, real estate developers were compelled to invest in 36 million subsidized housing units to counteract rising urban housing prices, which were largely the product of their speculative behavior.

Second, the CCP operates based on the principle of democratic centralism, which stipulates that the minority concede to the majority, once ample debate has been undertaken. This would imply that even if, entrepreneurs opposed a resolute stand against Trump, they would be compelled to accept the dictates of the majority, who presumably would act in their own interests and support strong resistance to Trump’s policies.

It is notable that the legacies of Chinese socialism, are today enabling Chinese state capitalism, to stand resolutely against Trump’s protectionist salvoes. For instance, the 2008 stimulus package that so greatly bolstered China’s internal markets, was made possible by state ownership of the banking sector, which allowed the government to not only inject an unprecedented amount of capital into the Chinese economy, but inject it in the interior regions of China, for the express purpose of building up the domestic market.

Similarly, state banks were instrumental in facilitating the technology transfer necessary for China’s high speed rail system. State lending to “national champions” allowed these champions to leverage their monopsony buying power to force US companies into transferring their technical know-how.

China’s investments in infrastructure were greatly facilitated by the relative abundance of semi-skilled labor (welders, machinists, engineers etc.), themselves a product of the broad based approach taken to education in the Maoist era.

Rural China’s TVEs would not have been possible without state ownership of land, which allowed the state to prevent de-collectivized farmland from being ‘grabbed’ by global agribusiness and turned into vast monocrops which would not have stimulated internal markets in the slightest. TVEs were also, at least in the beginning, state-owned enterprises.

Subordination of the entrepreneurial minority would not be possible without state ownership of two of the three means of production – land and capital, as mentioned above, and of course, China’s various social safety nets: housing guarantee, right to work, land guarantee etc. are a product of the “people’s war.”

China’s socialist legacy is the backbone of its current “sovereign project” – the only such project in existence today. This sovereign project rejects both the dominance of the triad (US, EU, Japan) and the dominance of the neoliberal model propagated by this triad. The power of this triad stems from their control of the five oligopolies of twenty first century capitalism: finance, technology, information, natural resources, and WMDs. The triad’s corporations are disproportionately represented on the top 10 lists of banks, tech companies, media companies, oil companies, and nuclear powers.

International organizations like the WTO have also been regularly biased in favor of the triad. For instance, Trump’s steel tariffs against China were in conflict with existing WTO rules. Trump justified breaking these rules by alleging that China had stolen intellectual property and obtained WTO authorization to implement intellectual property tariffs. The speed with which the WTO protected the intellectual property of 25 US billionaires, and its absolute resistance to protecting the livelihoods of 2.5 billion peasants in the global south who were decimated by the Doha round agreements, reflects the institutional bias of the WTO toward the interests of the triad.

China is making inroads on the five oligopolies of the triad. It is, moreover, presenting an alternative, nationally oriented, state-capitalist model of development, that is fundamentally in conflict with the logic of the dominant neoliberal paradigm. The emerging trade war, is yet another episode in the ongoing battle. China however, seems poised to mount a resolute stand against Trump’s proto-imperialist protectionism. On account of the strength of China’s internal market, the growth of south-south trade, China’s ownership of US debt, and China’s social safety nets, China’s economy looks ready to withstand the shock of a trade war. Its political system moreover, due to the subordination of capital, and the principle of democratic centralism, seems poised to nip elite co-optation in the bud. These bulwarks are in large part, the result of China’s socialist legacy.

Theo Vynnychenko Kenji is a grad student and aspiring sociologist. Read other articles by Theo, or visit Theo's website.