Similar and different – an occasional reflection

As huge economies with large and diverse populations, occupying about the same land area at about the same range of latitudes, China and the US have many similarities.  Similarities extend to many elements of culture and institutions, good and bad.  The similarities are often surprising; the differences confuse us, but may be a source of new perspectives. 

 

Domestic and foreign affairs in 2018 – Xi, CCP, DJT, GOP – Part 3 of 5

Tariff and Tribute - sic transit gloria

Actions by Xi and Trump seem to exhibit astounding ignorance of how the world works – Xi on the relationship culture that is necessary to get things done in the absence of rule of law, Trump on basic econ that should have been learned before his time at Wharton.   Both are substantial disruptors of prior practices that were never codified, but followed by general agreement among prior generations of thoughtful leaders. 

Xi has put himself at the head of far too many leading small groups, and moved China in an aggressive direction internationally at a time when reasoned participation in international forums – the “peaceful rise” - would be to China’s great advantage.  South China Sea, Diaoyudao, oil drilling in Vietnamese waters, threats to Taiwan – all unnecessary, or at the very least conducted poorly.  Xi would accomplish more with a little less aggression. 

Trump promotes violence, berates other leaders, has broken long standing international agreements, and worked rather hard to demolish the shining democratic and free city on a hill that his predecessor Ronald Reagan imagined.  Trump would accomplish more with a little less aggression.

Why behave this way? Perhaps it would be better said that both Xi and Trump know how the world works, but are personally dissatisfied with the results at home and abroad.  Both want foreign tribute, not just foreign trade. Tribute is both national and personal.  Both are using fundamentally flawed means to get what they cannot have in any case.

Both are egomaniacs, and in a mano-a-mano confrontation like the tariffs, neither will afford the loss of face to back down. Xi must remain in power past 2022, because even he will be unable to purify China and CCP before then.  Trump seems to want to manage the entire government by himself.  Both are willing to let the national economies suffer while the personal fits of pique goes on.  Both will seek some altered state in which victory can be declared before a retreat or find a way to draw attention elsewhere.  Ely Ratner in Foreign Affairs - There Is No Grand Bargain with China

China has recently agreed to begin buying soybeans again, and will reduce tariffs on imported American cars.  These are relatively meaningless actions, since they do nothing to affect the fundamental intellectual property theft that is the only real trade  issue at this point.  The soybean purchases will return US exports to somewhere near where they were a few months ago.  No change.  And the car tariffs will only be reduced to the same level as that of other foreign importers.  All are still subject to the 17% luxury tax on foreign imported cars.  But, you know, Trump wins!   For Mr. Xi, these changes are just part of opening up and letting the market take a greater role in the economy, as he promised in 2012.  Xi wins!

We can take the historical record of Chinese dealings with neighbors as one indicator of meaning in current events.  The past is not the perfect model, but it most certainly deserves attention when thinking of China.   Chinese themselves pay far more attention to patterns of history than we do.

The historical approach of China to foreigners and foreign trade begins from the superior attitude of Chinese to the outsider.  Foreigners are the barbarians.  China is always willing to instruct the barbarians in proper behavior, and conduct “trade,” as long as the foreigners properly acknowledge the superiority of China and Chinese culture.  Trade is not really the proper term – tribute is more accurate.  Remember the Qianlong emperor to Lord Macartney in 1793 – "we have no use for your manufactures." This was not simply arrogance on the part of an emperor who truly, himself, needed nothing from England.  Macartney’s failure was also due to his unwillingness to acknowledge the emperor as ruler of tianxia – all under heaven.  The Qianlong emperor sent a note home with Macartney addressed to the King, noting

It behooves you, O King, to respect my sentiments and to display even greater devotion and loyalty in future, so that, by perpetual submission to our Throne, you may secure peace and prosperity for your country hereafter.

This note accompanied by gifts to King George. 

Now, after the hundred years of shame and western imperialism, China is poised to again claim the mantle of world supremacy. But today’s gifts, and warnings, are more subtle.  In a world flush with capital, flush with exploitable minerals and oil stocks, flush with food supplies, the country with relatively low labor costs and willing to play a long game is in a superior bargaining position.  Whether the labor costs are still low, and whether China makes good deals on purchases, is beside the point.  China will bargain only when it sees a superior advantage, and that advantage must accrue not only to the Chinese business.  In business negotiations with foreigners, what is considered a good outcome by the foreigners is celebrated as a personal triumph for the negotiators and the company.  What is considered a good outcome by the Chinese is celebrated as a win for China.

The foreign investments everywhere in the world in roads, hospitals, schools, ports, entire development zones are of a piece.  One must not forget the good  that such projects do, and one should not be entirely cynical about the motives behind these investments.  There are real benefits to local economies, as long as they are not completely Chinese dominated and the debt can be managed. 

At the moment, China is flush with cash as a result of all those sales in the US and Europe over the last forty years.  Infrastructure investment within China has about reached the limit of its feasibility, and debt is a huge problem.  China needs projects for its huge state owned construction companies, and jobs for the scores of thousands of Chinese workers.

Construction overseas accomplishes four tasks, of which only one is of long lasting importance to China – profits for the big SOE; jobs for workers, who might otherwise have little to do back home; developing real “social overhead capital” that makes trade with China easier; and, most important in my mind at least, buying votes and appreciation in international forums and in foreign capitals.  This last is worth far more to China than the temporary profits and jobs from a few years of construction spending.  The votes and appreciation are good will, which China can interpret as tribute, just like in the old days.  China will remake international institutions to conform with Chinese characteristics, using its newfound friends for support.  See China deals another blow to UN human rights framework

Under the right circumstances, reframing of international institutions is ongoing, and lasts far longer than two or three years of construction, which will oftentimes be mostly paid for by the locals in any case.  In some cases, when the locals are unable to repay debts, China can maybe get the IMF to put money in (another form of tribute - see Pakistan) or claim the collateral, as it has done with the Hambantota Port in Sri Lanka (with thousands of ships passing Hambantota yearly, the port received 34 ships in 2012).  China took the port plus 15,000 acres of land for 99 years. The Malacca port in Malaysia will probably default as well, along with other Chinese projects in the string of pearls.  Studies show that the Malacca port is not necessary for shipping.  As with many such projects, by far the principal users will be Chinese.  What might happen when you have essentially a single buyer of a fixed-in-place commodity?   Quoting again from Qianlong, about his gifts - Do you reverently receive them and take note of my tender goodwill towards you!  A special mandate! 

 

On the other side of the world, Trump wants to make America great again, just as Xi wants to do for China.  American exceptionalism is truly not so different from Chinese exceptionalism, although America seems to have the fear of falling and China only the optimism of rising.

Trump seems to see increased tariff revenue as a big unilateral win (Trade wars are easy to win, you know).   Michael Pettis seemed to be thinking of  Trump in 2015, when he wrote of Germany and China –

Any suggestion that Germany’s trade surplus is too large and has become a source of global distortions elsewhere seems to infuriate a lot of people, for many of whom the idea that a trade surplus can be too large is the moral equivalent of castigating people for working too hard and being too prudent. A trade surplus, they believe, is the reward a country gets when its people work hard and save their money.   See Internal and External Balance

Trump seems to think that tariffs punish Chinese companies, and therefore by some extension, the Chinese government.  There is truth in that; but he fails to see that it is American companies and consumers who actually pay the higher prices.  The Chinese producers are unable to absorb much of the cost of the tariffs, and prices increases will be passed on.  But Trump sees the tariffs as much as a form of tribute to America as he does punishment for China.  On a simple logical level, trade must always be beneficial to both sides, else no one would do it. But Trump fails to see that, as much as he fails to see trade as multilateral rather than bilateral. Trade, he apparently thinks, is a one on one contest.  Just as China wishes to only deal state to state, so does Trump.  Even in international trade, it is mano-a-mano.  And trade should be decidedly to American advantage – a form of tribute to American exceptionalism.

Not much difference there, between Xi and Trump. Earlier this year, Trump wanted a military parade that would have been essentially in his honor, since the military saw no need.  When Xi spoke to assembled foreign business leaders as part of the Hangzhou G20 meetings in 2016, he entered to the blare of trumpets, like a Roman emperor.   Both might benefit from remembering the old Latin phrase – sic transit gloria.  But that is not likely.

 

Coming:  Part 4 - harmony and trust