China has a more than a 4,000-year-long tradition and bases its governance on a Confucian tradition enriched with a modernized socialist vision; it has time. The United States, less than 10 percent of this age, is a liberal democracy, in which short term success is important because of election cycles and shareholder-value-based reporting in enterprises. China has experienced over and over again fundamental defeat on its own territory from the First Opium War onwards and a revolutionary civil war, thus it is extremely sensitive to foreign interference or even dominance. The last war experienced by the US on their own territory dates back more than 150 years. China is economically larger than the US in terms of purchasing power parities and No 2 in terms of exchange rates. Although China is aging because of the long-term effects of its one-child policy, it is economically still rejuvenating and grows at three times the speed of the US which balances its demographic structure through immigration.

China has a private savings rate of some 50 percent, huge export surpluses and exports capital to the rest of the world, thus also financing part of the US debt. The US has stubbornly stable double deficits (federal budget and current accounts) and a savings rate of about one tenth of China. However, this also the result of its role as safe haven for capital, and China limited the outflow of capital because it was aware of a trafficking of hot money and money laundering. And this permanent inflow of capital into the US is the other side of the coin of its trade deficit. President Xi Jinping says fuxing (resurrection), while US President Donald Trump says America First.

Both countries now are at loggerheads as Trump wants to reduce the US trade deficit against the rest of the world and reduce the outflow of knowhow – the price all Western countries willingly paid to the present to exploit China’s booming markets and access its human capital. There are three interdependent strands of explanations to explore the roots of the conflict:

1. Geo-history: The Thucydides-trap named after the Greek historian and strategist Thucydides describes the challenge of an established power – here Sparta – by an uprising power – Athens in the fifth century BC. It ended with the destruction of Sparta. Similar examples are Carthage versus Rome, Britain versus Germany, and now the US versus China. As a rule, these conflicts were won by the challenger. Only World War I is an exception because of the intervention by the US – but at the price of the long-term destruction of the geopolitical position of the old continent.

2. Geo-politics: The Russian philosopher Alexander Dugin argues that enduring conflicts are often based on the basic antagonism between maritime and land powers. This fits the cases above and provides an alternative explanation for conflict.

3. Geo-economics: Although free trade may be the best for the world, it is a paradise-type limit case. The German economist Friedrich List argued nearly 200 years ago that tariffs should be used for a limited time to protect infant industries and that government has a huge role to play in the forming of human capital and the efficient combination of human and physical capital. It is exactly this advice that first Prussia, and after 1871, Germany applied that led to British fears of being overtaken and then cornered. Today, China applies List’s efficient recipes. Thus, under conditions of rivalry, the present, potentially very peaceful and mutually acceptable situation of free trade is compared to potential future situations – and if they are expected to be inferior, striking out today may make sense.

Dominance Expectation Theory (DET) explains well and encompasses these three geostrategic perspectives with a strong focus on the last point. Thus, the final question in terms of geostrategic plate tectonics is: Are fears US prospects will be pushed under a Chinese subduction plate real – and if yes: How much of this development is self-inflicted and will the present strategy of tariffs and blocking technology transfer save them?
Given the size of the population and the dynamics of its economy and human capital, China will one day become No 1 in the world, unless it destroys itself – the only question is: When? The trade and intellectual property rights’ war that are meant, from the US side, to postpone or even prevent this, may even accelerate this path.

• Offer a positive vision: For China, reciprocity in terms of access of foreign investors to domestic enterprises poses multifold challenges. It directly impacts the state income which is to a considerable extent dependent on company profits. Historically, all countries on their catch-up path needed higher levels of protection than established powers – and China still has quite some way to go with about 900 million people that still want to access prosperity. The West should consider this – and use the opportunities cooperatively.

• Choose your enemies carefully: The vulnerability to a tariff war depends on the supply and demand conditions. Chinese tariffs are, on average, three times as high as the US ones and about twice the level of the European Union. Thus, China should use retaliatory tariffs with prudence – and with surgical precision. In the case of soy beans, for instance, a reduced demand may make prices fall and, as a consequence, force suppliers – US farmers – to carry the tariff burden. If US firms such as Whirlpool depend on Chinese components, then the tariff will just raise input costs and consumers will pay an increased price for the benefit of the US Treasury. US rules allow firms to ask to be exempted from tariffs on their imports. Tariff revenge based on trade volumes may thus be entirely irrelevant for real outcomes. Putting tariffs on cars does not hurt the US but Germany: BMW and Daimler Benz are the US’s largest car exporters to China. This might destroy sympathies and may push Germany – and Europe – that were neutral up to now, to the US side. Generally speaking, tariff effects differ vastly – and are often unknown before they can be observed.

• Concentrate on the important: Over and above, it is not a war between free traders and mercantilists: it is a war on power and, economically, about global supply chains. China wants to increase its low share of value added because most profits on products Made in China for Western firms just leave peanuts of value added in China. Among the major reasons are missing headquarters for internationally rooted firms and missing trademarks. With its initiative on “Made in China 2025”, the China has shown that it has understood the new rules of the world economy: govern global value chains. This is the ultimate challenge for why the tariff war is being fought.

China is the home – as Germany – of military strategy. The lesson learnt is to apply this wisdom to this tariff war. It is also the land of the bamboo: flexibility, and in critical phases to bend back, may be extremely rewarding.

Ulrich Blum is the chair for political economy at Martin-Luther-University, Halle-Wittenberg. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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