[EAI Commentary] <The Future of US-China Competition - Trade> US-China Trade War: A Multidimensional Complex Game

Editor's Note

EAI has been planning and operating a mid-to-long-term research project titled "China's Future Growth and the Construction of a New Asia-Pacific Civilization" since 2018, aiming to design a desirable order for the Asia-Pacific region and suggest Korea's role, ensuring that China's future growth contributes to human coexistence and sustainable development. As the first phase of this project has concluded, EAI published the research findings as an English working paper series in April and May. As a follow-up series, EAI has planned a special issue briefing series, "The Future of US-China Competition: Four Stages of Competitive Dynamics," comprising four reports that examine the future of US-China relations.

As the first report in this series, we are publishing an issue brief on the US-China trade war, authored by Lee Seung-joo, Director of EAI's Trade, Technology, and Transformation Center (and Professor at Chung-Ang University). The author analyzes the US-China trade war as a 'multidimensional complex game,' not confined to a single issue but interconnected with various others, and unfolding not only bilaterally between the US and China but also multilaterally, involving allies. The author posits that the trade war's complex nature stems from the underlying element of 'hegemonic competition,' and thus predicts that the trade war is likely to expand into a systemic competition for the reshaping of the global economic order, becoming globalized and protracted.

Introduction

Although the offensive actions of the Trump administration are highlighted, the underlying dynamics of the game played by the US and China are highly complex. This is an unavoidable consequence of the multifaceted nature of the problem's origins. In the trade war thus far, both the US and China have shown a dual characteristic of 'fighting without breaking' (鬪以不破), escalating conflict by expanding the front and rigidly adhering to their positions on key issues, while avoiding a decisive breakdown. Starting with the issue of trade imbalance, the conflict has expanded to encompass technology and industrial policies, technology theft, and development models. While the US and China have boldly chosen escalation, such as repeatedly causing trade negotiations to fail, they have also resumed negotiations at critical junctures.

Meanwhile, although the US-China trade war is primarily a dispute between the two countries, its economic ripple effects and impact on the global economic order are global. The current trade war is a game between the US and China, but it also signifies a globalized game in which major countries participate directly or indirectly. The Trump administration's request to allies not to install Huawei equipment (Sanger 2019/1/26) and China's response urging major multinational corporations to maintain relations with Huawei (华为技术有限公司: Huawei) symbolically demonstrate that the US-China trade war is already globalizing (Corera 2019). Furthermore, if the 25% tariff on Chinese imports announced by the Trump administration is imposed, and China also raises tariffs on US imports by 5-25%, the GDPs of the US and China are projected to decrease by 0.2% and 0.5% respectively by 2021. If the trade war affects capital markets, the GDP reductions for the US and China could widen to 0.7% and 0.9%, leading to a global economic reduction of approximately $600 billion (Holland and Sam 2019). Thus, the US-China trade war transcends merely mitigating or resolving bilateral trade imbalances; it is also a conflict over securing future competitiveness and reforming the global trade order, making it a structural and long-term issue rather than a one-off event. In this regard, the US-China trade war has the potential to trigger the globalization and normalization of conflict.

This article focuses on the US-China trade war exhibiting the characteristics of a 'multidimensional complex game.' A multidimensional complex game refers to a game where the US and China not only link multiple issues closely rather than focusing on a single one but also engage in a dual dynamic of conflict and limited compromise, while centering on bilateral negotiations but also considering linkage with multilateral negotiations in the future. In other words, the US and China are simultaneously raising various issues such as (1) correcting trade imbalances, restructuring supply chains, and technological competition; (2) projecting hegemonic competition, which is imbued with geopolitical interests, onto the trade war; and (3) closely linking bilateral, regional, and multilateral frameworks as arenas for competition and conflict to establish a global economic order favorable to themselves.

The US-China trade war involves a complex mix of factors, including trade imbalances, intellectual property theft of advanced technologies, unfair trade practices such as government subsidies and regulatory barriers, future competitiveness, fundamental challenges to China's development model, and hegemonic competition. To understand the essence of US-China relations, it is crucial to note that conflict and competition are occurring simultaneously across a wide range of issues in a relatively short period. The US-Soviet competition after World War II was characterized by systemic competition but primarily focused on military and security affairs. In the US-Japan trade disputes that intensified from the 1970s, the US took aggressive measures bilaterally but ultimately resolved issues with Japan within the framework of global governance through the G7 (Beeson and Bell 2009). In contrast, the US-China trade war is distinct from past precedents in that not only are economic and security competition occurring simultaneously, but within the economic sphere, conflicts over various issues such as trade imbalances, technological innovation, industrial policy, and development models are unfolding in a compressed and simultaneous manner over a short period.

The compressed and simultaneous unfolding of conflict is a factor that makes effective conflict management difficult. First, the uncertainty in US-China relations is likely to increase. As conflicts unfold in a compressed and simultaneous manner, there is always a possibility of unforeseen problems arising, thus increasing the uncertainty in bilateral relations. Moreover, discrepancies in perception can occur between the level of conflict in individual sectors and the overall level of conflict. The simultaneous unfolding of conflict across multiple issues implies that even if a basis for agreement is established on most issues, disagreements may remain on some. It is highly likely that disagreements on specific issues could lead to unexpected outcomes that negatively impact and escalate the overall level of conflict.

Characteristics of the Trump Administration's Trade Policy and US Perceptions of the China Threat

The defining characteristic of the Trump administration's trade policy thus far can be described as 'pragmatic determination,' focusing on outcomes rather than processes. This characteristic has already been observed in its withdrawal from the TPP, renegotiation of NAFTA, and amendment of the KORUS FTA. Pragmatic determination is also consistent with unconventional or unorthodox approaches. This includes allowing remedial measures under Section 201 of the Trade Act or invoking Section 301, and even resorting to mercantilist approaches towards traditional allies. Pragmatic determination is also evident in the US-China trade war, where the US actively leverages the asymmetric interdependence between the two countries and boldly imposes punitive tariffs on China.

A second characteristic of the Trump administration's trade policy is its preference for means that bypass Congress domestically. This characteristic is not unrelated to President Trump's uncomfortable relationship with Congress and the established powers within American politics. President Trump's preference for Section 301 of the Trade Act and safeguards is also because these are means to bypass the US Congress. Furthermore, from President Trump's perspective, bypassing Congress also helps achieve swift results.

A third characteristic is the close linkage between economics and security. This is supported by the National Security Strategy, which defines America's prosperity as a matter of national security (The President of the United States 2017). The National Security Strategy emphasizes that "trade policy, like national security policy, must serve to protect the interests of the American people" and calls for "defending national sovereignty and strengthening the American economy by all means necessary" (The President of the United States 2017).

A fourth characteristic is the recognition of the importance of technology. The US must lead innovation in the digital economy and protect against intellectual property theft by competitor nations. In particular, it criticizes China for engaging in "unreasonable and discriminatory efforts" to acquire US technology and intellectual property, emphasizing the need to keep open the possibility of invoking Section 301 to prevent such unfair practices.

Focusing solely on President Trump's unique approach makes it difficult to comprehensively explain why the US is aggressively pursuing a trade war. A certain consensus on trade policy toward China has been formed between the Republican and Democratic parties, as evidenced by the introduction of the "Fair Trade with China Enforcement Act" by Republican Senator Marco Rubio (Florida) and Democratic Senator Tammy Baldwin (Wisconsin). Specifically, the Rubio/Baldwin bill aligns with the Trump administration's hardline policies toward China, including prohibiting the sale of technology and intellectual property related to national security to China, banning federal agencies and contractors from purchasing Huawei and ZTE telecommunications equipment and services, and setting limits on Chinese investors' ownership of US companies in sectors related to "Made in China 2025" (Rubio and Baldwin 2018).

Thus, the Democratic Party does not fundamentally reject the Trump administration's hardline stance toward China, at least in principle. The Democratic Party generally acknowledges the necessity of protecting intellectual property against technology leakage and correcting trade imbalances, and it also considers the practical need to cater to its traditional base of labor unions and harbors concerns about China's development model. However, the Democratic Party differs in its emphasis on cooperation with key allies rather than unilateralism in pressuring China.

This domestic political landscape has provided the Trump administration with the leverage to pursue its trade policy toward China without facing intense scrutiny from Congress. The reason Congress's checks on the Trump administration's frequent use of means to bypass it have remained largely declarative, without fundamental obstruction, lies in this background. In essence, the Trump administration has secured the domestic political foundation to pursue bilateral conflict and negotiations with China while simultaneously actively pursuing reforms of the WTO and the establishment of a new multilateral trade order.

The Trump administration's ability to pursue escalation in the trade war is also related to the American public's perception of the threat posed by China. According to a 2018 Pew Research Center poll, the American public perceives China's economic rise as a greater threat than its military power (<Figure 1>). While 29% of Americans perceive China's military power as a threat, 58% perceive China's economic power as a threat to the United States. This figure represents a 6 percentage point increase from 2017, reflecting significant public concern over China's economic ascendancy (Pew Research Center 2018/8/28).

<Figure 1> American Perceptions of China Threat (2018)

Source: Pew Research Center 2018.

US-China Competition's Complex Game

Trade Imbalance-Supply Chain-Technology Linkage

The Trump administration favors bilateral negotiations as a means to address trade imbalances, a preference linked to the structure of the US trade deficit. The US trade deficit is concentrated in eight countries, including China, accounting for over 90% of the total. In 2018, China recorded a surplus of $419 billion, representing 65% of the total US trade deficit, followed by Mexico ($81 billion), Germany ($68.2 billion), and Japan ($67.6 billion) (Amadeo 2019). From the perspective of the Trump administration, engaging in bilateral negotiations with a few countries that account for the majority of the US trade deficit is an effective way to resolve the imbalance, making China the primary target of its trade offensive a natural choice. The bilateral trade imbalance has been steadily increasing since the early 1990s. China's trade surplus with the US began to grow more rapidly after the 1997 Asian financial crisis, and the imbalance further expanded after China's accession to the WTO in 2001. With the exception of a temporary decrease in China's exports to the US immediately after the 2007 global financial crisis, the US-China trade imbalance generally widened throughout the 2000s. Even in 2018, when the trade war intensified, the imbalance paradoxically increased to $419 billion, rather than decreasing (<Figure 2>).

<Figure 2> Changes in US-China Trade Relations

Source: Reprinted from US Census.

What, then, are the specific causes of the trade imbalance from the US government's perspective? The unfair trade practices by the Chinese government, consistently raised by the Trump administration, are diverse, including protection of domestic industries from imports and competition, expansion of market share for Chinese products globally, securing and controlling key resources, expanding dominance in traditional manufacturing, theft of key technologies and intellectual property, and closed financial markets. The Trump administration views China's unfair trade practices as part of a comprehensive, long-term industrialization strategy aimed at continuously enhancing technological competitiveness, reducing external dependence in key technology sectors, and fostering advanced industries that will drive future competitiveness. Ultimately, the essence of these unfair trade practices is considered to be China's 'economic aggression' (White House Office of Trade and Manufacturing Policy 2018).

From the US perspective, structural issues within the Chinese economy, such as a low consumption ratio and high savings rate, are also major contributors to the trade imbalance. As of 2016, consumption accounted for 39% of China's GDP, a significantly lower proportion compared to the US and other major economies. The issue is that China's low consumption ratio is not due to fundamental differences in personal consumption propensity but is a result of government policies and regulations, thus constituting a structural cause of the trade imbalance.

Conversely, China argues that it has continuously made efforts to rectify trade imbalances and that the US also bears responsibility for these imbalances, making it one-sided to attribute blame solely to China. While it is true that the absolute value of China's trade surplus with the US has increased, its relative share has continuously decreased, falling from a peak of 9.9% of GDP in 2007 to 1.7% in 2017. China maintains that this indicates the US-China trade imbalance is being managed at an appropriate level, contrary to the US claims (<Figure 3>).

<Figure 3> Trend of China's Trade Surplus with the US (as % of GDP)

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Source: Ha (2018).

Furthermore, the Chinese government argues that the impact of global value chains should not be overlooked as a structural cause of trade imbalances. China records a surplus with the US and the EU but a deficit with other countries. In 2018, China's trade surplus with the US was $419.5 billion, and as of May 2019, its trade surplus with the US reached $137 billion ($180 billion in exports, $42.9 billion in imports). However, China has trade deficits with South Korea, Taiwan, Japan, and Germany, reducing its overall trade surplus to approximately $48.3 billion.

China views the US-China trade imbalance as a structural issue stemming from the increasing trade of intermediate goods within global value chains. Since intermediate goods account for about one-third of China's total trade, the trade imbalance with specific countries like the US arises as multinational corporations efficiently utilize global value chains. Indeed, China's trade surplus with the US is not unrelated to the relocation of production facilities from Japan and other East Asian countries to China by major multinational corporations after China's WTO accession. In 1990, Japan and East Asian countries accounted for 75% of the US trade deficit, but this figure decreased to about 12% by 2017, while China's share of the US trade deficit increased from 10% in 1990 to 73% in 2013 (World Trade Organization 2019). From China's perspective, the US-China trade imbalance is the result of major global economies forming global value chains by selecting optimal locations to maintain and enhance their competitiveness, thus it is an exaggeration to view China as the root of the problem.

The US-China trade war is escalating into a technology competition. For China, achieving the status of a superpower requires not only quantitative economic growth but also qualitative upgrading. "Made in China 2025" is an attempt to reduce external dependence and increase self-sufficiency in key advanced industries. Specifically, Made in China 2025 aims to transform the Chinese economy, which has grown primarily through labor-intensive industries, into one centered on high-value-added industries by fostering ten key future industries, including next-generation information technology, robotics, aerospace, marine engineering, high-speed rail, high-efficiency/new energy vehicles, agricultural machinery, new materials, and biotechnology. In particular, the Chinese government has formalized plans through Made in China 2025 to significantly enhance the self-sufficiency of Chinese companies in areas such as increasing the self-sufficiency rate of advanced computer-based machinery to 80%, increasing annual industrial robot production to 100,000 units, and integrating big data and cloud computing with the Internet of Things (IoT) (U.S. Chamber of Commerce 2017).

China's rise was based on traditional manufacturing until the early 2000s, but in the 2010s, China's catch-up has shifted towards advanced industries. The year 2011 marked a precursor to this change, with China successfully catching up to the US in medium-high technology industries. In 2016, China recorded sales exceeding $1 trillion in medium-high technology industries, while US sales have decreased in absolute terms since 2011, showing a stark contrast in the manufacturing bases of the two countries (National Science Foundation 2018). China's catch-up is also clearly evident in its share of the global ICT industry. In terms of value added, China accounts for approximately 34% of the global ICT industry, a significant gap compared to the US's 24% (<Figure 4>). Moreover, in key ICT sectors such as computers, telecommunications, and semiconductors, China has not only succeeded in catching up to the US but has also established a considerable lead in areas like telecommunications (National Science Foundation 2018).

<Figure 4> Share of ICT Industry by Country

Source: National Science Foundation (2018).

China's future competitiveness is also evident in the field of research and development. In 2017, R&D expenditures in the US and China were $496 billion and $408 billion, respectively, accounting for 26% and 21% of global R&D spending. However, in terms of R&D expenditure growth rate, China's R&D spending has increased tenfold (18% annually) since 2000 and doubled between 2008 and 2012. In contrast, the US R&D expenditure has increased by only about 39% (4% annually). The gap between China and the US is expected to widen further, with China's R&D spending projected to exceed $600 billion by 2024, while US R&D spending is expected to remain below $500 billion (<Figure 5>). In terms of venture capital supporting advanced technology development, China's funding increased from $3 billion in 2013 to $34 billion in 2016, accounting for 27% of the global total. In terms of patent applications, China's annual growth rate has been 13.4%, surpassing Japan in 2017 to become the second-largest in the world, and is expected to become the world's largest patent applicant in 2018.

<Figure 5> Trend and Forecast of R&D Expenditure in Major Countries (2000-2024, Million USD)

Source: OECD Science, Technology and Industry Outlook 2014.

The US views these efforts by the Chinese government as being achieved through the thorough protection of domestic industries. It argues that the Chinese government continues its existing industrial policies, such as providing subsidies in advanced industries, fostering advanced industries based on the special relationship between the government and corporations, and sometimes imposing discriminatory measures on foreign companies, engaging in comprehensive unfair practices. The examples of industrial policies cited by the US are diverse. New energy vehicles (NEVs) are a prime example of an industry fostered by government initiatives. The total amount of support provided by the Chinese government, including R&D subsidies, purchase incentives, tax reductions, government procurement, and funding for charging infrastructure construction, is estimated at approximately $58.5 billion, which is about 42% of the funds invested by private companies (Kennedy 2018, VI).

The AI industry is another sector where US and Chinese interests clash. The Chinese government has systematically fostered the AI sector through a series of policies, including the 13th Five-Year Plan, "Internet Plus" (互联网+), and the "New Generation Artificial Intelligence Development Plan" (新一代人工智能发展规划). Through these initiatives, the Chinese government has outlined plans to create a domestic AI market worth 1 trillion yuan ($150 billion) by 2020 and emerge as a leading AI nation by 2030. Private companies such as Alibaba, Baidu, and Tencent are also participating in national efforts to develop AI in areas like autonomous vehicles, smart cities, and medical imaging (McKinsey Global Institute 2017). As a result, the Chinese government internally assesses that it is already leading the world in speech and image recognition technologies, that adaptive autonomous learning, intuitive perception, and collective intelligence are at a level of cross-development, and that information processing, industrial robots, service robots, and autonomous driving are approaching practical applicability (State Council 2017).

The digital trade sector is also an area where China is rapidly developing. According to China's National Bureau of Statistics (国家统计局), the size of China's online retail market reached $1.33 trillion in 2018, a 23.9% increase from 2017. Despite the rapid growth of online commerce within China, the country maintains a protectionist approach to digital trade. As pointed out in the US Trade Representative's 2016 National Trade Estimates of Foreign Trade Barriers, the Chinese government has effectively created an environment for domestic companies to grow by blocking foreign suppliers through internet filtering. According to this report, in 2016, Chinese authorities blocked 8 of the world's top 25 most visited websites, negatively impacting digital trade (USTR 2016). Furthermore, US concerns are growing over the increasing uncertainty in the internet market, as exemplified by the Chinese authorities' suspension of Apple iTunes' movie and iBooks stores and DisneyLife services without specific explanation (CRS 2017). IT technology theft is also a hindrance to digital trade. China is identified as the largest perpetrator of intellectual property theft. The US side estimates the scale of intellectual property theft by China against US companies to be as high as $240 billion (Lee Seung-joo 2018).

From the US perspective, China's technological catch-up has been achieved through unfair methods, including thorough protection of domestic industries, theft of technology from US companies, and forced technology transfer from US companies (White House Office of Trade and Manufacturing Industry 2018). While it is generally projected that the US will continue to lead innovation due to the qualitative superiority of its patents, the key to future US-China competition will be how long the US can maintain its technological innovation and market leadership capabilities. This is why the US-China trade war is escalating beyond trade imbalances into a technology war. Part of the Trump administration's recognition of this is evident in its selective inclusion of items supported by the Chinese government through "Made in China 2025" when announcing tariffs on 1,300 items in April 2018 by the United States Trade Representative (USTR).

In response, the Chinese government vehemently argues that China's technological innovation is based on the indigenous capabilities of its own companies and has no relation to intellectual property theft or forced technology transfer (国务院新闻办公室 2019). Thus, the US and China are on parallel tracks, with no narrowing of their differences. Ultimately, the various preemptive measures taken by the Trump administration to maintain and secure an advantage in competition in advanced technology fields such as AI, 5G networks, robotics, and big data, in the face of China's rise in technological innovation and key industries, may be an anticipated choice.

In the long term, the US and China are expected to engage in competition to preemptively secure future competitiveness by forming independent platforms and expanding them. Securing an advantage in advanced industries requires not only enhancing the competitiveness of individual sectors but also forming platforms that link various industries. Therefore, the US and China will engage in fierce competition to proactively establish a new global trade order as an institutional framework for expanding their respective standards.

In terms of negotiation tactics, both the US and China exhibit the characteristics of a complex game involving both resolving current issues and securing future competitiveness. As clearly demonstrated by the invocation of Section 301 against Chinese imports, the US is taking direct measures to reduce trade imbalances in the short term. However, given the fundamental limitations of approaches aimed at resolving US-China trade imbalances through containment of China, the US continues to seek the most effective policy mix for conducting the trade war. In the same vein, the Trump administration is strengthening restrictions on Chinese investment in the US through the Committee on Foreign Investment in the United States (CFIUS). As indicated by the US Treasury Department's recommendation for CFIUS to directly manage foreign investment, the US government is expected to continue taking measures to enhance CFIUS's authority through new legislation.

These measures are primarily based on the assessment that Chinese companies are unfairly acquiring key US technologies through various means, including joint ventures with US companies, unfair licensing, and acquisitions of US technology firms. Furthermore, the institutional strengthening of CFIUS aims to thwart China's efforts to move up the value chain in advanced industries to higher value-added segments. This is because the enhanced authority of CFIUS is expected to provide effective means to protect key technologies, as well as to counter predatory investment practices that threaten national security and America's future economic prosperity (Lawder and Chiacu 2018).

Economy-Security Linkage

The US-China trade war appears to be primarily focused on resolving the current trade imbalance, but technological competition lies at its root. As clearly demonstrated by the Huawei incident, both the US and China are engaged in fierce competition without yielding an inch. Technological competition is both a current issue, as it is a cause of trade imbalance, and a future issue, as it forms the basis of future industrial competitiveness. Furthermore, the expansion of the battlefield by the US and China beyond trade imbalance to technological competition is because securing superiority in advanced technology and industrial competitiveness is not only the key to future competition but also has significant implications for security (Navarro 2018). The US's raising of issues concerning Huawei is not a recent development. In a 2012 report concerning Huawei and ZTE, the US Congress raised various issues, including opaque corporate governance, the relationship with the Chinese Communist Party, and the backdoor problem, concluding that they posed a threat to US national security (Rogers and Ruppersberger 2012).

Within the US, there is a strong view that a strategy integrating economy and security is necessary to win the technological competition. This is because China's technological advancement is seen not only as leading to trade imbalances and issues with industrial competitiveness but also as a threat to US national security. Despite the increasing need to employ economic means for the geopolitical goal of containing China's rise, past administrations have indeed faced domestic institutional and political constraints in formulating and implementing an integrated economic and security strategy (Blackwell and Harris 2016). The Trump administration's strategy toward China stems from a critical assessment of previous administrations. President Trump's decision to strengthen national security reviews to curb Chinese companies' acquisition of key US technologies is in this context.

The Multidimensionality of US-China Competition: Bilateral-Multilateral Linkages and Systemic Competition

Dual Dynamics and Bilateral-Multilateral Linkages

The US-China trade war is becoming multidimensional in that it is simultaneously a one-on-one bilateral game and, ultimately, a prelude to establishing a global economic order favorable to each country. That is, while the US and China are engaged in fierce competition at the bilateral level, including threats and retaliation, they have also entered into intense strategic competition to secure advantageous positions in the process of reshaping the global economic order.

These characteristics have persisted until recently. Firstly, at the bilateral level, although the US and China narrowed their differences on many issues on May 9, 2019, negotiations broke down due to China's firm stance on issues such as local government subsidies, cybersecurity laws, and foreign investment laws. On May 10, 2019, the Office of the United States Trade Representative announced that tariffs on $200 billion worth of Chinese imports would be raised from 10% to 25%, prompting the Chinese government to declare retaliatory tariffs of 5% to 25% on over 5,100 US import items worth $60 billion, showing an escalation of the trade war. However, as indicated by the agreement reached at the G20 summit on June 29, 2019, where President Trump and President Xi Jinping agreed to temporarily suspend additional tariff impositions and resume trade negotiations, the US and China, while not hesitating to escalate conflict to assert their national interests, have not opted for a decisive rupture (Liptak 2019/6/29). The US and China repeatedly show a pattern of escalating the trade war while simultaneously resuming negotiations.

The prolonged trade war signifies that US-China relations will maintain a dual dynamic of conflict and cooperation. In the future, the US and China will likely continue a game of coexistence of contradictions such as negotiation and conflict, compromise and clash for a considerable period, rather than seeking fundamental solutions or a catastrophic outcome. While the US and China may reach compromises on specific issues during negotiations, such compromises are likely to be the beginning of new problems rather than their resolution.

The dual dynamics of conflict and cooperation will also unfold at the multilateral level. The US and China will continue intense competition to preemptively secure advantageous positions in establishing a new global economic order, while also seeking a minimum common ground in mitigating the possibility of the collapse of the global economic order itself. The reason why the US and China can pursue dual dynamics of competition and cooperation, rather than solely competition, at the multilateral level is that China, in the process of upgrading its economic system, has aspects that can accommodate US demands. As China's technological and industrial competitiveness improves, it will have different interests than in the era of catch-up growth. Areas where interests align with the US, such as protecting its own companies' technology rather than stealing foreign companies' technology, promoting the overseas expansion of its own companies, and protecting foreign investments, will gradually expand. There are areas where the Chinese government may pursue gradual changes, such as transitioning to a domestic demand-oriented economy, liberalizing the service sector, and adopting friendly policies toward foreign companies, even without US pressure. Premier Li Keqiang's suggestion at the Summer Davos Forum to advance the opening of foreign equity investment limits in financial sectors such as securities and insurance to 2020, one year earlier than originally planned (Financial Times 2019/7/2), and the National Development and Reform Commission's decision to reduce the negative list to 40 items and ease regulations on foreign companies (XinhuaNet 2019/6/30) are examples demonstrating the possibility of gradual change in China.

Of course, it will be difficult to avoid serious conflicts in international norm-setting regarding issues such as changes in government-enterprise relations, cross-border data flows, personal information protection, and the restriction and monitoring of civil and corporate activities for social stability, as fundamental differences in interests exist with the US.

Meanwhile, the reason the US finds it difficult to adhere solely to bilateralism is the limitation in sustaining pressure on China at the bilateral level over the long term. The Trump administration can exert pressure on China to resolve trade imbalance issues because the trade imbalance between the US and China is large. However, if the Trump administration successfully resolves the trade imbalance issue through aggressive pressure, the scale of the trade imbalance between the US and China will decrease. This means that while the Trump administration uses trade imbalance as a bargaining chip, the effect of pressure diminishes as the trade imbalance shrinks according to US desires.

If US-China competition has been 'interdependent competition' so far (Wright 2017), future US-China competition is likely to involve increasing the level of competition while reducing the level of interdependence and forming distinct spheres of influence. This is a strategy of 'balanced reduction.' The current high level of economic interdependence is difficult to sustain because if the US government chooses escalation, the impact on US companies will be significant. This is why the US must seek alternatives at the medium- and long-term levels, such as supply chain reorganization and global economic order restructuring, while pressuring China through bilateral negotiations in the short term. As seen in policies promoting the 'reshoring' of US companies under the banner of 'America First,' the US will employ a strategy to reduce economic interdependence between the US and China by restructuring the supply chains of its companies and building an independent economic system. Even if the US and China reach an agreement, the impact of the trade war will not be short-lived, as companies from both countries have already begun forming new supply chains.

However, the US-China trade war could cause significant domestic repercussions, as not all companies are equipped to cope with the rapidly changing environment. Unlike large corporations that can attempt supply chain restructuring or diversification, many small and medium-sized enterprises (SMEs) are expected to face considerable difficulties in rapidly reorganizing their supply chains (Petty 2019). Furthermore, supply chain restructuring does not guarantee the intended policy effects. The sanctions against Huawei have a negative impact on US companies, with annual exports to Huawei reaching $11 billion, making it difficult to overlook this impact. Intel and others are known to have attempted indirect exports to Huawei to circumvent US Department of Commerce sanctions, which symbolically represents this issue. Moreover, since the sanctions list is not specific enough to completely block exports to Huawei, there are ways to export through third countries without violating regulations. It is uncertain whether the US government's sanctions against Huawei will be as effective as expected.

From a strategic perspective, to consistently contain China, the US is expected to pursue supply chain restructuring gradually while simultaneously employing a strategy that closely links bilateralism and multilateralism. Given the relative decline of US hard power, the effectiveness of unilateralism will ultimately decrease; therefore, it is advantageous for the US to contain China through reforms of the multilateral order based on cooperation with the EU, Japan, South Korea, and others. There is a fundamental dilemma in US policy toward China, as suppressing China's rise itself is not easy. Therefore, the US aims to secure a favorable position in qualitative competition with China by ensuring external balance in trade between the US and China while leading in innovation capabilities. To this end, the US is expected to secure sustainability in pressuring China at the bilateral level and to strive externally to reform the multilateral economic order that more effectively reflects its interests after the US-China trade war.

While the US has focused on bilateral negotiations regarding intellectual property rights and digital protectionism for advanced technologies, its withdrawal from the Trans-Pacific Partnership (TPP) and criticism of the World Trade Organization (WTO) have given the impression that it is relatively uninterested in reshaping the global economic order. However, in response to India's imposition of tariffs on US products in July 2019, the Trump administration requested WTO dispute settlement, citing violations of GATT regulations. In addition, the Trump administration's decision in December 2017 to participate in a meeting to review key issues to be discussed in future digital trade negotiations shows that it selectively utilizes the WTO when necessary. Considering this series of actions, the Trump administration's criticism of the WTO can be seen not as an attempt to withdraw from it but as an effort to accumulate leverage for WTO reform.

Although President Trump has repeatedly expressed a highly critical stance toward the WTO, this paradoxically indicates a strong will for WTO reform. Given that the Democratic Party has traditionally maintained a pro-multilateralism stance, the Trump administration faces few domestic political obstacles in reforming the WTO in cooperation with major developed countries and establishing a new global economic order. The core objectives of the US in establishing a multilateral economic order include not only addressing current issues such as regulating state-owned enterprises, ensuring transparency in subsidy payments, and segmenting developing country status but also normativizing issues related to digital trade, which are related to securing future competitiveness.

In this regard, it is noteworthy that the Trump administration swiftly concluded the amendment of the Korea-US FTA and the renegotiation of the USMCA. This can be seen as a strategy for the US to use the outcomes of bilateral negotiations as a benchmark for future bilateral negotiations and, furthermore, to establish them as standards for a new trade order. The US government will pursue bilateral FTA negotiations, including rules for advanced industries, with major developed countries such as Japan and the EU, and based on this, it will employ a strategy to draw China into the framework of a new global economic order through cooperation with major developed countries in the medium and long term. This is a dual strategy that closely links bilateral and multilateral negotiations. Such a strategy is expected to play an important role in the US's future efforts to pressure China and reshape the global economic order.

Although the Trump administration decided to withdraw, the TPP remains a significant benchmark in the process of reshaping the global economic order in the digital trade domain. The intention of the US is revealed in the statement by the Office of the United States Trade Representative that 'the rules agreed upon in the TPP will be utilized to build a framework for digital trade.' The USMCA, concluded in October 2018, further strengthened intellectual property provisions compared to the TPP and stipulated that if a member country signs an FTA with a non-market economy, the other two member countries can terminate the USMCA, reaffirming the US's strategic intentions. This is an intention to preempt standards in the process of reshaping the global economic order simultaneously with bilateral negotiations with China.

China is also responding assertively at the bilateral level by imposing retaliatory tariffs on US actions, while simultaneously making efforts to shift the issue to the multilateral level. This position of China is well reflected in the 'Decision on Levying Additional Tariffs on Certain Imported Products from the US (Second Batch)' announced by the Tariff and Customs Committee of the State Council of China on August 3, 2018. The Chinese government claims that the US 'is violating WTO principles and rules,' 'has violated agreements reached through multiple rounds of negotiations and unilaterally escalated trade friction,' and 'is taking actions that destroy global value chains and the free trade system' (State Council Tariff and Customs Committee Office 2018). China's strategy is to highlight that it is the US that is undermining the existing multilateral trade order, thereby transforming the trade war from a bilateral game into a multilateral one. In this regard, China's emphasis on the fact that the continuation of the trade war 'adversely affects the development of the world economy, including the US,' and its simultaneous assertion that it 'substantially infringes upon the interests of the Chinese nation and people' are part of the same strategy. By arguing that resolving the trade war is necessary not only for China's national interests but also for the development of the world economy and the stability of the global economic order, China seeks to gain consensus from other countries. The supplementary statement that China's national interests are adversely affected is intended to garner support from countries facing US trade aggression.

Systemic Competition's Complexity

The backdrop of the US-China trade war is the complexity of systemic competition. Since the US-China trade war fundamentally entails strategic competition, the US will pursue systemic competition by strengthening cooperation with major developed countries. This development implies that the trade war could extend beyond the bilateral relationship between the US and China, potentially leading to the formation of a common front with major US allies. In addition to its existing strategy of pressuring China through bilateralism, the US government will likely parallel this with a strategy of increasing pressure on China's 'unfair trade practices' by strengthening alliances with its major allies.

In this case, the US and China will move beyond bilateral competition into systemic competition. The recently concluded United States-Mexico-Canada Agreement (USMCA FTA) stipulates in Article 32.10 that if a party to the agreement initiates an FTA negotiation with a country that has a non-market economy status, it must notify the other two countries in advance, and the other countries can terminate the USMCA FTA if the FTA negotiation is concluded. This provision in an FTA is unprecedented and, by giving the US effective veto power if Canada pursues an FTA with China, demonstrates the US's intention to contain China not only at the bilateral level but also at the regional and multilateral levels. The early form of systemic competition can be observed in the US's efforts to form an 'anti-Huawei' alliance with the 'Five Eyes' and other allies.

If the US forms a 'hegemonic coalition' with its traditional allies, it is expected that the changes in the US-China competitive landscape will be significant, as it can maintain a quantitative advantage in economic power and the resulting leadership alliance for at least 20 years. The types of hegemonic coalitions can be categorized into Coalition Group 1, comprising the US, Europe, Canada, Australia, and New Zealand, and Coalition Group 2, which adds South Korea and Japan (see Figure 6). If the US successfully forms Coalition Group 2, China will be able to surpass the economic power of the US bloc no earlier than 2040. If China's economic growth rate falls below 6%, this date will be pushed back to after 2050 (Bergsten 2018).

However, before fully engaging in systemic competition, the US government faces significant challenges. The US and the EU hold differing views on some key issues regarding the international norm-setting for advanced industries. The US will inevitably have to narrow these differences with Europe before engaging in full-scale systemic competition against China. Meanwhile, China will pursue a strategy of preventing the formation of a US-led hegemonic coalition by leveraging its economic power to persuade or pressure individual countries, while avoiding direct confrontation with the US. This will involve a simultaneous unfolding of systemic competition over the formation and prevention of hegemonic coalitions, alongside ongoing bilateral conflict and cooperation between the US and China.

The complexity of systemic competition also manifests at the level of specific issues. Digital trade issues are a prime example. The digital economy and trade are core components of the US-China trade war. The global digital trade volume is $28 trillion, having grown by approximately 44% over the past five years (USTR 2018). The Office of the United States Trade Representative announced trade barriers in the digital trade sector in its 2019 'National Trade Estimate Report on Foreign Trade Barriers.' These include restrictions on cross-border data flows and data localization, cloud computing limitations, and internet filtering and blocking, all aimed at China (USTR 2019).

Figure 6: US Coalition Groups and Projected Changes in China's GDP

Source: Bergsten (2018).

The EU generally holds a critical stance toward China regarding internet censorship and digital industrial policy. However, it maintains a distinct position between the US and China on issues such as personal data protection, taxation of tech companies, and cross-border data flows. As Europe sometimes adopts differentiated positions between the US and China, the US-China competition is shifting from a simple one-on-one dynamic to a complex game. The US must bridge its differences with Europe to enhance the effectiveness of its containment of China, while China is engaged in a complex game of individually pressuring and appeasing European countries to prevent the formation of a solid hegemonic coalition between the US and Europe, maintaining an alternative paradigm.

Data localization is one of the key issues where interests diverge among the US, China, and the EU. The mandatory localization of data is a barrier to the transnational activities of tech companies, with 82% of large US tech firms and 52% of SMEs citing it as a trade barrier. In contrast, the Chinese government mandates that operators of critical information infrastructure store personal information and important data of Chinese citizens within China. From the perspective of the US government, cross-border data flows are essential to reduce the costs of providing cloud computing and internet-based services, thereby increasing digital trade.

The EU generally views China's Cybersecurity Law as having a negative impact on digital trade and adopts a critical stance. However, this does not mean the EU unilaterally aligns with the US position. The EU believes that rules affecting fundamental democratic principles, such as the transfer of personal data, should not be subject to trade negotiations and therefore require significant restrictions. This is why the EU's General Data Protection Regulation (GDPR) allows data transfer only when the recipient country guarantees a level of protection consistent with GDPR, the data processor provides appropriate safeguards, and the individuals concerned have specifically consented to the data transfer.

Differences in positions between the US and Europe are also found regarding the taxation of transnational tech companies. The EU considers it unfair from a market competition perspective that transnational tech companies, despite generating revenue and profits in various European countries, effectively evade taxes. It is currently negotiating a proposal to set a tax rate of 3% of revenue for tech companies whose global revenue exceeds 750 million euros or whose revenue within the EU exceeds 50 million euros. France and the UK are particularly active in introducing a GAFA (Google, Amazon, Facebook, Apple) tax, named after the four major US tech companies. The French government decided to introduce the GAFA tax in 2019 regardless of the outcome of EU-level negotiations, and the UK government also plans to impose a digital services tax on companies whose global revenue exceeds 500 million pounds (approximately 740 billion won) starting in April 2020. The increasing complexity of systemic competition arises from the fact that major European countries are pursuing independent positions in the context of US-China competition.

Conclusion

This paper has examined the origins, development, and future prospects of the US-China trade war from the perspective of a multidimensional complex game. The Trump administration is rapidly and consistently pursuing a bilateral approach toward China and other major trading partners to rectify trade imbalances. The Trump administration's bilateral approach has profound implications for the global economy, as it has redirected the global economic order, which began to be established around the mega FTAs led by the Obama administration, in a new direction.

Given the differences in scale and level, US-China relations are likely to involve pursuing competition in establishing a new global economic order at the multilateral level, while simultaneously seeking conflict over specific issues and limited compromises at the bilateral level. As the gap in economic scale between the US and China narrows, China is bound to become a target of US containment, and thus, competition at the bilateral US-China level is likely to intensify for a considerable period.

In the short term, the US and China will manage the issues by escalating conflict at the bilateral level while seeking temporary resolutions through limited compromises. However, as this approach cannot guarantee a final resolution, the US and China will engage in a competitive game to reshape the global economic order, alongside limited cooperation. In this regard, the US-China trade war has the characteristics of a bilateral-multilateral game where cooperation and conflict occur simultaneously at both levels. The US and China are also engaged in games where they link various issues, not just one. Macroeconomically, they will continue to pursue strategies that closely link economy and security, and within the economic sphere, they will link trade, production, and technology.

In the future, the US-China trade war is likely to take the form of systemic competition due to its hegemonic rivalry elements. Given the significant gap in economic levels between the US and China, the US will pursue a strategy of redesigning the new world order through cooperation with major countries such as Europe and Japan that share its interests. To this end, the US is expected to go through a process of coordinating differences with major countries. Consequently, the US will pursue a multilateral strategy of establishing a new world order through cooperation with its traditional allies, in addition to its bilateral attempts to compete with China.

What challenges does the globalization of the trade war pose for South Korea? The paradoxical outcome that the globalization of the trade war has involved major world powers implies that a certain space for action has been given to middle powers in Europe and Asia. The US and China will need to seek cooperation from other countries to design the future global economic order in a way that favors them. The US and China's application of bilateral-multilateral linkage strategies to third countries is related to this. South Korea needs to strengthen solidarity and cooperation with like-minded countries in Europe and Asia that share concerns about the US-China trade war. At a time when the world economy is entering an 'Age of Hyper-uncertainty,' it is crucial to form alliances with countries that agree on the simple fact that the restoration of multilateralism is the way to stabilize the global economic order. ■

■ Author: Lee Seung-joo_ Professor of Political Science and International Relations at Chung-Ang University and Director of the EAI Center for Trade, Technology, and Transformation. He holds a Ph.D. in Political Science from the University of California, Berkeley. His main research areas include East Asian political economy, East Asian regionalism, global FTA networks, and the institutional balancing strategies of East Asian countries. His major works and edited volumes include ≪Northeast Asia: Ripe for Integration?≫ (co-edited) and ≪Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions≫ (co-edited).

■ Editor: Choi Soo-ee, Senior Researcher at EAI

Inquiries: 02 2277 1683 (ext. 206) I schoi@eai.or.kr

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