China shows restraint in trade talks with U.S. but experts fear Trump agenda

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The deepening transpacific trade war has stoked fear in Beijing that the Trump administration is seeking to “confine” China, raising the spectre of a widening divide between the world’s two largest economies.

On Friday, after a week in which new tariffs fell into place and trade talks in Washington produced few evident results, the Chinese government maintained a public face of careful optimism, with the Ministry of Commerce calling the latest round of negotiations “constructive and frank.“ In the state press and in its treatment of U.S. commercial interests, China has shown restraint.

But the conduct of the White House has raised concerns in China that the United States is not merely bent on exacting better trade terms but on broadly suppressing the country’s progress. China’s best course of action, former officials and some scholars now say, is to strike back hard.

“The U.S. is trying to confine China’s comprehensive development," said He Weiwen, a former Chinese diplomat in the United States who is now director of the China-U.S.-Europe Economic Strategy Research Center at the Center for China and Globalization. He sees the trade was as “just a tool” to that end. "Its ultimate concern is that China will strategically hinder the U.S. from maintaining its monopoly position.”

That argument is rooted in a study of Washington itself, where the Defence Department has called “great power competition” its top priority and has named China and Russia as adversaries in a contest “between those who value human dignity and freedom and those who oppress individuals and enforce uniformity.”

In July, Arthur Laffer, an economist whose thinking has been influential with President Donald Trump, told the White House that U.S. tariffs were creating “substantial risk of derailing much of the past 50 years of growth in China.”

He sent his analysis in a document titled “The Great Fall of China,” the Wall Street Journal reported.

Chinese scholars, meanwhile, have warned about the consequences of the current course. “A trade war unchecked between China and the United States will lead to financial war, will lead to a currency war and will lead to a cold war,” cautioned Victor Gao, chairman of the China Energy Security Institute.

Indeed, some in Beijing have concluded that China must now be “ready to battle the U.S. for years or perhaps decades in virtually every arena short of direct military conflict,” said Richard McGregor, a senior fellow with the Lowy Institute, an influential Australian think tank.

This week, China struck back against US$16-billion in U.S. tariffs “with the same amount but with a revised list of goods that contains automobiles, which we see as a more aggressive retaliatory measure,” Iris Pang, ING economist for greater China, wrote in a research note.

The prospect of a more adversarial Beijing, however, has yet to emerge in China’s relations with U.S. companies, which have largely escaped the financial punishments exacted against corporations from other countries involved in disputes with Beijing. The U.S. corporate sector remains China’s “most sober ally in Washington,” said Joerg Wuttke, former president of the European Union Chamber of Commerce in China. “If you burn the bridges to the multinationals and the U.S. business community, what else is there?”

Senior Chinese officials have “made it clear the U.S. and foreign investment is very welcome in China,” US-China Business Council president Craig Allen said after attending meetings in Beijing this week. He criticized the notion of the White House contemplating ways to contain China. “Containment is not the right idea. It is not the right word. It is not the right concept,” he said.

At the same time, China has sought improved relations with other major trading partners, including Japan, South Korea and European Union countries, by taking steps toward opening protected sectors of its economy. In July, German chemicals giant BASF signed an initial agreement toward the construction of a wholly owned chemical production facility in China after Beijing relaxed laws requiring foreign companies to invest with joint partners. German automakers have begun taking control of long-standing joint ventures in China in another new step by Beijing to allow foreign investment. On Thursday, China removed limits on foreign ownership of domestic banks and asset managers.

Yet underlying those moves are much broader shifts. China’s overtures toward U.S. allies come amid an attempt to shape a “new order,” one in which Washington no longer exercises unquestioned dominance, said Cui Hongjian, a former Chinese diplomat who is now a foreign-policy specialist at the China Institute of International Studies. “The big question for China and other major players is: How can we try to find a common understanding? Which kind of international order will be in favour of our interests?” he said.

And “China and the European countries, as well as Japan, need to try to work together to develop some immunity from damage or uncertainty from Washington. That’s a very pressing task,” he said.

Skeptics, meanwhile, caution that Chinese openness, particularly toward the United States, may not last. In the longer term, Beijing’s concern about U.S. efforts to thwart its rise will mean “China doubles down on all the policies that have so enraged Washington, notably state investment in technology to catch up and surpass the U.S., and further tightening access to its markets for foreign companies,” said Mr. McGregor, the author of The Party: The Secret World of China’s Communist Rulers.

"It’s not clear how much China can succeed in this. It is hard to see how the world’s two largest economies, both enmeshed in global trade networks, can decouple in any serious way,” Mr. McGregor said.

Still, a deepening strategic rivalry between China and the United States has raised the risk of more dire outcomes. ”If you get to this place where Chinese investment is not welcome in the United States, and China feels compelled to make life difficult for U.S. multinationals to the extent they can’t really operate, then you could really have a sort of deglobalization,” said Andrew Polk, founding partner of Trivium, a Beijing-based business advisory firm.

“That kind of thing would make the trade war look like child’s play.”

With reporting by Alexandra Li