Wed. Oct 5th, 2022

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

February 12, 2022

Of course, we all wish US-China can be peaceful co-existence. War is destructive to the global economy, especially if it was fought between the world two largest economies. But as the following two reports indicate, US and China have not resolved the trade war initiated by the Trump Administration in 2018 and then it could stumble toward real war.

Report One and Comments

  1. David Schambaugh is a respected Chinese scholar; his concern of US-China war is real. His suggestions for avoiding a real war should be taken seriously by policy makers of both nations and approach each other cautiously. He provided many ideas for Chinese policy makers.
  2. Taiwan is a major political risk, but as long as both nations fully appreciate and respect the redlines, war does not have to happen. Because no sensible individual in Taiwan would welcome miliary actions in his/her homeland. In fact, the US and China should/could collectively manage the Taiwan issue peacefully. On the other hand, if unfortunately, war broke out in Taiwan, military actions will not be limited on that island. US and her allies in the Pacific region will not be spared. Of course, China will suffer the consequences too. It is very difficult to comprehend how and where such a war could end.
  3. Any military incident between the US and China could trigger war crisis. But the US and China had resolved such incident previously, without going to war, including the bombing of Chinese Embassy in Belgrade and the collision of US-EP III and J8II fighter jet. It is interesting to note Shambaugh’s statement “Europe is not going to go to war with China, Australia is not going to go to war with China – but the United States and China do have potential. Does he mean that the US is not as clear headed as Europe, Australia?
  4. Conflict escalation restraint mechanisms are crucial for peaceful co-existence. US-China had productive Strategic-Economic Dialogues right after the 2008 global financial crisis. Once the Obama Administration started the “Pivot” (way from China), these mechanisms disappeared. The US-China relation noised dived after Trump Administration openly implemented the trade war against China. Now it is obvious that “conflict escalation restraint mechanisms” between the US and China should be enhanced. One should re-call, at the end of the Trump Administration, US Joint Chief of Staff, General Miley video-talked with his Chinese counterpart assuring the Chinese no war was immediate. It worked, but it could not be a normal procedure. Most likely, Chinese were confused and the US as a nation lost some credibility.
  5. Mr. Shambaug probably would agree with us that the Chinese culture and social structure are much more top-down hierarchal. It means that US should have a clear China strategy or policy and communicated to the Chinese. President Biden and President Xi should have a meeting to set the tone for US-China relation moving forward. Then the Chinese bureaucratic machine can comfortably engage with the US staff for policy implementations. Otherwise, such as now, USTR and US Commerce Secretary can only engage with Chinese working level staff. It will never resolve/dissolve the Phase-One trade agreement and re-start formal trade negotiation. That is what Mr. Shambaug described as “the lack of framework” to manage the relationship.”
  6. Specifically, China has changed from 2008 Olympic Game to today’s 2022 Winter Olympic Game. The rest of the world ought to recognize that fact and learn how to deal with the new China. Further, the rest of the world, especially the US has to understand and recognize that the US has changed in the past 12 years, especially during the Trump Administration.
  7. The world is probably getting over the COVID-19 pandemic, global economic recovery will be a bigger challenge. US and China should focus on the future.

Report Two and Comments

This report mainly advises US investors and warned that a new US-China Trade war cannot be ruled out.

A major issue of concern is: It’s not clear what the Biden administration will do on the tariff front with China. The Wall Street Journal recently reporting disagreement within the administration on the best approach to China. Policywatchers are also split.

The Biden administration lacks good options to pressure China, especially since tariffs didn’t inflict the pain some had anticipated, and instead exacerbated U.S. inflation.

“A mere announcement of a new Section 301 investigation will have wide-ranging implications across traditional and emerging sectors of the U.S. economy and is likely to move markets.” It is entirely possible that China will take retaliate actions, then both economies will suffer.

This report focused on potential actions by the US administration and its impacts. It is essential that the US and China engage in meaningful consolations any new trade war could be eliminated. Of course, it will then also eliminate any real war.

How the US and China can stop stumbling towards war

Sat, February 12, 2022, 1:30 AM

The United States and China must find a way to prevent conflict escalating and improve top-tier communications to avoid the risk of an “accidental war” between them, according to David Shambaugh, a leading, long-time American observer of China.

Shambaugh delivered the assessment in the latest episode of the South China Morning Post‘s video series Talking Post with SCMP chief news editor Yonden Lhatoo. In the conversation, he shared his take on the possibility of a China-US war, the future of the Chinese Communist Party and more.

“It’s not an insubstantial risk that a war [will occur] between the United States and China,” Shambaugh said, adding that the “major trigger” would be Taiwan or a military accident in the South China Sea.

He said another possible trigger was “a kind of EP-3 type crisis“, referring to the April 2001 collision between a US EP-3E intelligence aircraft and a People’s Liberation Army J-8II interceptor near China’s Hainan Island.

One PLA pilot went missing, later presumed dead, in the incident, and the EP-3 was forced to make an emergency landing on Hainan.

“I don’t think it is an exaggeration, I think … there is a risk,” Shambaugh said.

Europe is not going to go to war with China, Australia is not going to go to war with China – but the United States and China do have potential.

“Wars can begin for accidental reasons, if you don’t have conflict escalation restraint mechanisms.

“Unfortunately, the United States and China do not have those mechanisms. There are a few so-called hotlines, but they’re not so hot. And actually, I’m not joking. They’re not all that functional.”

Shambaugh, who has been analysing China for the last four decades, said he and a number of US analysts were “extremely concerned” about the absence of such mechanisms.

“There aren’t procedures in place between the US and China in the military sphere that used to be in place, for example, between the United States and the Soviet Union, during the first Cold War, so that if there were an accident that immediately it could be contained without escalation,” he said.

Beijing, in response to Washington’s warming ties with Taipei since 2018, has stepped up military pressure on Taiwan, the self-ruled island that it regards as a province to brought under its control, by force if necessary.

PLA aircraft flew more than 950 sorties across the Taiwan Strait in 2021 – compared with 380 in the whole of 2020, according to the island’s defence ministry.

To the south, China and the US have both stepped up their military presence in the South China Sea. Last month, the PLA said its air and naval forces warned off the Arleigh Burke-class guided-missile destroyer USS Benfold after it entered the Paracel Islands. However, the US Navy denied that this was the case.

The US’ heightened presence has also been marred by a string of costly incidents in the South China Sea. In January, a US F-35 jet sank in the waters after an unsuccessful landing. This came after the nuclear-powered submarine the USS Connecticut crashed into an underwater object in October, forcing it to sail on the surface for a week to reach Guam.

Describing the China-US relationship as “a broken marriage, where divorce is not an option”, Shambaugh said he did not see “a lot of signs of maturity”, making it “extremely stressed and very strained”.

“This is a highly stressed marriage, [the] United States and China can’t divorce and say, ‘Oh, sorry, we don’t really get along anymore. I’m going my way. And you’re going your way’,” he said.

“No, we live in an interdependent relationship and an interdependent world. And these are the two major powers in the world along with Russia. So we have to learn … perhaps to kind of coexist as productively as possible and to stabilise the relationship.”

He said ties would only be “OK” if both sides could put consultative, conflict escalation control and dialogue mechanisms in place.

“What’s really lacking in the relationship today is dialogue and candour at the highest levels, and we need to kind of reestablish that … We’re going to get inside the rooms, there’s going to be a lot of disagreement, but better to have disagreement face to face inside a room then to be guessing what the other side is thinking or assuming the other side is thinking something that they may not be thinking.”

Shambaugh said part of the reason the two countries were in “a race to the bottom” was China’s increasing assertiveness, with China less “concerned [than the Americans] about the deterioration and the lack of framework” to manage the relationship.

He said he heard a “different kind of tone coming out of Beijing, sort of demanding, hubris and kind of almost aggressiveness, diplomatic verbal aggressiveness”.

“We know the term Wolf Warrior diplomacy right? … Well, that’s on display, I hate to say it. Not just towards the United States, but a number of other countries. And, that’s a concern,” he added.

Shambaugh said that while analysts like him could understand that this was the result of the hostility, anger and frustration that Chinese felt about “the century of shame and humiliation” and a genuine pride as China was no longer weak and was “looking America directly in the eye”, it was a surprise to the rest of the world.

“They were accustomed to tao guang yang hui kind of approaches, to bide your time and hide your brightness, the kind of lay-low approach [late paramount leader] Deng Xiaoping had initiated. So the West and other countries were not accustomed to this kind of assertiveness.”

He said it would take a while for China to get through this phase of “exuberance and hubris” and settle down.

“Once it settles down and [achieves] … confident nationalism, that will be better for China. And it’ll be better for China’s interactions with others. Right now, this is a kind of defensive, insecure, overactive kind of nationalism that we’re seeing out of Beijing.”

When asked about the Communist Party’s next 10 years, Shambaugh said the organisation learned from the collapse of the Soviet Union by adapting and self-correcting to become stronger and more stable.

“The [party] itself looked in the mirror and had a self examination. It, lo and behold, discovered that, yes, [it] had a number of the same elements that had led to the Soviet decline and ultimately collapse.”

Shambaugh said that since President Xi Jinping came to power in 2012, he had taken a series of steps to strengthen the party.

“Beginning with his anti-corruption moves, [coupled with] a number of other steps, the [party] is much stronger today … It is much more stable, stronger, and less corrupt. Whether it’s responsive or not to public demands, it can be debated, but … it has strong support from the Chinese people.”

But the party needed to make sure that in the next decade China remained open and continued to grow its economy to avoid Soviet Union-style atrophy.

“Political parties are kind of like plants, they need water and sun to grow … You have to water them, they need sunlight or they will atrophy,” he said.

“If the [party] doesn’t continue to water the plant and open up to sunshine, proverbially, of course, it’s going to revert to atrophy. So it’s a constant process.”

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.

U.S. and China Face Risk of Reigniting a Trade War. What Investors Need to Know.

By Reshma Kapadia  [email protected]

Updated Feb. 11, 2022 12:02 pm ET

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It’s not clear what the Biden administration will do on the tariff front with China.
Str/AFP/Getty Images

Remember the U.S.-China trade war that gripped markets a couple of years ago that resulted in a phase one trade deal that calmed markets?

China didn’t buy any of the additional $200 billion of exports promised in that deal struck by President Donald Trump. Now, the question is what the Biden administration will do about it—and that could mean China-related concerns return to the front burner for investors. Many analysts and policy watchers were skeptical China could meet the commitments in that deal—and that it would address the structural issues at the heart of the friction. That skepticism was well-founded: China ultimately bought only 57% of what it had said it would—with its import levels not even getting back to pre-trade war levels, according to analysis by Chad Bown of the Peterson Institute for International Economics.

U.S. exports would likely have been higher—18% in 2020 and 23% in 2021— without a trade war and phase one agreement, according to Bown’s analysis. And the U.S. would have avoided an estimated $24 billion in export losses in 2018, and $30 billion in 2019, not to mention the tens of billions of dollars in subsidies paid out to mitigate the fallout of the tariffs on U.S. farmers, according to Bown. 

It’s still not clear what the Biden administration will do on the tariff front, with The Wall Street Journal recently reporting disagreement within the administration on the best approach to China. Policywatchers are also split.

One possibility: the U.S. launches another round of Section 301 investigations that could reignite the trade war—and rattle markets, says Henrietta Treyz, director of economic policy research at Veda Partners, which advises investment firms on D.C.-related moves.

In a note to clients, Treyz says Bown’s analysis could be a catalyst, and her conversations with trade counsel around Capitol Hill and the administration suggest such a move could be used to ultimately result in “material reforms” to the current tariffs.

“A mere announcement of a new Section 301 investigation will have wide-ranging implications across traditional and emerging sectors of the U.S. economy and is likely to move markets,” Treyz writes.

At risk could be everything from agriculture to driverless cars, but the expansive tariffs imposed by the Trump administration that were the most consumer-oriented could be repealed and replaced with tariffs on emerging technologies at the heart of the strategic rivalry between the two countries, and sectors like steel and aluminum. If the U.S. goes this route, Treyz expects it to be done with key allies, making it a much more coordinated and multinational trade war with China. That would likely rattle a market that is already on edge.

Others, like Capital Economics’ senior China economist Julian Evans-Pritchard, see a stalemate on trade. The Biden administration lacks good options to pressure China, especially since tariffs didn’t inflict the pain some had anticipated, and instead exacerbated U.S. inflation, he writes in a note to clients. China also has less incentive to offer concessions now than a couple of years ago since its exports are booming.

Pritchard expects the focus will instead turn toward national security and restrictions on technology and investment. On that front, negotiations are set to start between the House and Senate on China legislation after the House passed a version of the legislation last week intended to boost U.S. capabilities, including increased investment in semiconductors, and efforts to make supply chains more resilient.

Beacon Policy Advisors don’t expect a final bill before Memorial Day but it sees the possibility that the window for delisting Chinese companies not in compliance with U.S. auditing standards narrowing to two years from three years. Less likely to make it into the final package is a move to create a process that would scrutinize outbound investments, including those into China, in part because the bill is vague in exactly what would fall under its purview, according to the policy advisory firm’s analysts.

The takeaway for investors: Don’t push U.S-China relations off the watch list yet.

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