Cooperation, Competition and Conflict

The first formal treaty between the United States and China was signed in 1844 in rather unseemly circumstances.

After Britain won significant concessions from the Qing Empire in the First Opium War, America also wanted similar favourable terms. This led to the Treaty of Wangxia, signed between a rising power, the US, and a collapsing one. It confirmed US access to the five treaty ports (Guangzhou, Xiamen, Fuzhou, Ningbo, and Shanghai) where Westerners enjoyed special rights, including, to the chagrin of Chinese, extraterritoriality, meaning that Westerners accused of crimes could not be tried by Chinese authorities. It kicked off a period known in China as the “Century of Humiliation”, including another Opium War, Japanese invasion, civil war, and in 1949, the communist revolution.

Cordial
In contrast, last week’s meeting between Presidents Donald Trump and Xi Jinping in Beijing occurred against a much more cordial backdrop, resulting in statements of friendship and cooperation. Considerable underlying tensions remain, however. Today, China is the resurgent power, challenging the role of the US as sole global superpower. China maintains close ties with Russia, putting it at odds with Western support for Ukraine, while it is also Iran’s biggest customer. Taiwan remains a major sticking point, with China strongly insisting on an eventual reunification while the US supports the status quo. Taiwan’s current role as the world’s leading producer of high-end semiconductors puts it at the centre of the artificial intelligence (AI) boom, making the situation particularly delicate.

The US has been trying to protect its lead in artificial intelligence and other technologies by preventing China’s access to the top-of-the-range chips. On the other hand, China leads in many of the technologies related to the green transition and is by far the biggest producer of solar panels, batteries, wind turbines and electric vehicles. It is basically the Saudi Arabia of clean energy, and since AI is so electricity-intensive, this might ultimately give it an advantage. China also produces 80% to 90% of total global supply of several “rare earth” minerals, critical inputs to a wide range of key military and industrial technologies. This gives it significant bargaining power in its dealings with any country, including the US.

The world’s factory
In fact, China is by far the biggest producer of many goods the world needs and wants, both basic and high-tech. As a result, its trade surplus (exports minus imports) is the biggest of any country, ever, coming in at over $1 trillion last year. There is an uncomfortable echo here. The Opium Wars forced China to accept imports of the drug from Britain and other colonial powers because then as now China had a trade surplus. The Western world wanted Chinese products, but the feeling wasn’t mutual, so gold and silver flowed east in remarkable quantities. Forcing China at the point of a gun to import opium, with devasting social consequences, was a means to balance the lobsided trade relationship.

Trump imposed tariffs on China in his first term to improve the modern trade imbalance, and his successor, Joe Biden, kept most of those in place. Hawkishness on China has become a rare bipartisan topic in Washington. In his second term, Trump went even further, and at one point the tariff on Chinese goods was 145%. After talks, carve-outs and ultimately, the Supreme Court’s intervention, the effective tariff on Chinese imports is closer to 25%, still considerably higher than in the past.

As a result, Chinese exports to the US have declined sharply. At its peak in 2017, almost a quarter of US goods imports by value came from China. By April of this year, it was only 8%, though there is likely to be a fair amount of rerouting through third countries like Vietnam.

While the rest of the world has largely not followed Trump in raising trade barriers on China, that doesn’t mean they don’t want to. Industries across Asia, Europe, and elsewhere are facing intense pressure from Chinese imports. The motor industry is taking particular strain as China transformed from a car importer to the biggest exporter by volume in the past few years.

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