[EAI Commentary] Dynamics of the US-China Trade War: Expanding Scope and the Backlash of Interdependence

Editor's Note

Beginning with the trade dispute in 2018, competition between the United States and China has gradually expanded beyond trade to encompass technology and energy sectors. To provide an outlook on the future of US-China relations, EAI published a special issue briefing series in July 2019 titled "The Future of US-China Competition: Dynamics of Four-Stage Competition." As a follow-up, EAI has planned a special commentary series, "Transformation of the Global Political and Economic Order Amidst US-China Competition," to conduct an in-depth analysis of the current US-China competition. The publication schedule is as follows:

1) Lee, Seung Joo, Dynamics of the US-China Trade War: Expanding Scope and the Backlash of Interdependence (Published August 23)

2) Kim, Sang Bae, Cybersecurity and US-China Technological Hegemony Competition: The Complex Geopolitics of Its Evolution (Scheduled for Publication August 27)

3) Shin, Bumshik, Energy Issues and US-China Strategic Competition (Scheduled for Publication August 29)

As the first report in this series, we are publishing a commentary on the US-China trade war authored by Lee, Seung Joo, Director of EAI's Center for Trade, Technology, and Transformation (and Professor at Chung-Ang University). The US-China trade war has become prolonged beyond initial expectations following the breakdown of negotiations in May 2019. The author analyzes that the Trump administration initially leveraged asymmetric interdependence, including trade imbalances, against China, and is progressively moving towards a new form of economic warfare through the networking of the global economy. However, the author states that "there is a paradox in weaponizing interdependence," and that trade wars utilizing asymmetry can negatively impact one's own economy due to the networked global economy.

Trade War's Expanding Scope and Prolongation

The US-China trade war is entering a new phase as it becomes prolonged. The prolongation of the US-China trade war can be attributed to the increased intensity of US pressure and China's evolving perception of it. The US-China trade war began in March 2018 when President Trump signed an executive order imposing tariffs on $50 billion worth of Chinese imports, filing a case against China at the WTO, and restricting Chinese investment in the US. Subsequently, after a complex process involving tariff impositions, trade negotiations, tariff deferrals, and failed negotiation outcomes, the conflict took on the character of a technological competition when the Trump administration implemented trade restrictions on Huawei and related companies. On August 5, 2019, the Chinese government allowed the yuan's exchange rate to exceed 7 against the dollar (破七, poqi), and the Trump administration again designated China as a currency manipulator, further expanding the scope of the trade war.

The expansion of the trade war's scope and the diversification of employed means have led to its prolongation. However, China's initial response suggests a desire for an early resolution of the conflict. While the Xi Jinping government did not hesitate to take confrontational actions such as imposing retaliatory tariffs, it showed caution by framing the US trade offensive not as a direct attack on China but as a challenge to multilateralism, thereby avoiding direct confrontation with the US on a bilateral level. This is because attempting an early resolution of the situation to eliminate uncertainty might be the second-best option, rather than prolonging the confrontation with the US. As seen in the case of imposing tariffs on US soybeans, while the US trade offensive was unprecedentedly strong, the Xi Jinping government's internal assessment also factored in that President Trump would face significant domestic political burdens in sustaining the trade war.

However, the eventual breakdown of negotiations in May 2019, despite reaching an agreement on key issues, provided a clue to reaffirm China's fundamental perception of the US-China trade war. The Xi Jinping government's pursuit of compromise with the US was possible only within 'negotiable limits'; it did not imply acceptance of unilaterally disadvantageous solutions. China's critical perception of US pressure can be divided into two main dimensions. First, the disagreement stemmed from the inability of both the US and China to resolve differences on issues such as Chinese local government subsidies, amendments to cybersecurity laws prohibiting data transfer outside China, and forced technology transfer from foreign companies. From China's perspective, the US's demands went beyond trade policy and constituted excessive intervention in its domestic policies and economic system, making compromise difficult.

More fundamentally, the Chinese government criticizes the Trump administration for violating the spirit of the agreement at least three times during negotiations. From China's perspective, the Trump administration repeatedly undermined the negotiations by making false claims about China's intellectual property theft and forced technology transfer, imposing additional tariffs based on these claims, or increasing criticism of China's economic system and trade policies just 10 days after the joint statement was issued in May 2018, and then announcing the resumption of tariff impositions. Furthermore, the Trump administration made highly unequal demands, such as requiring that "if negotiations fail, the US can reimpose deferred tariffs, while China cannot withdraw tariff deferrals" (The State Council Information Office 2019). Ultimately, the core of the criticism boils down to "the more China concedes, the more the US demands," which ultimately leads to a problem of trust between the US and China.

The US-China trade war is becoming more prolonged than anticipated, as the Xi Jinping government has not readily agreed to a trade deal with the US and has even risked escalation, such as allowing the yuan to depreciate despite US warnings. This choice signifies a shift towards pursuing practical gains by delaying conflict resolution, rather than accepting excessive inequality. While this choice has the effect of not accepting unequal outcomes in the short term, the challenges it presents are considerable, given the extreme difficulty of managing the conflict process.

The Limits of Bilateralism

The structural nature of the US-China trade war also warrants examination in terms of conflict or negotiation. The Trump administration's bilateralism is assessed as a strategic choice to maximize US interests. President Trump's belief that bilateralism is an effective means to maximize interests is evident in the withdrawal from the TPP, the renegotiation of NAFTA, and criticism of the WTO. Views reflecting President Trump's perception suggest that China's rise has strategically and exclusively utilized the existing multilateral order, led by the WTO, and therefore the Trump administration prefers bilateralism as an alternative. However, an inherent contradiction exists within the Trump administration's bilateralism between maximizing interests and controlling negotiation outcomes. From a forum shopping perspective, bilateralism is chosen when control over negotiation outcomes is preferred over maximizing interests. Bilateralism, compared to multilateralism, involves smaller gains but is effective in mitigating uncertainty in the negotiation process because it allows for the exercise of asymmetric bargaining power.

The Trump administration appears to be well aware of these limitations of bilateralism. This is evident in the administration's pursuit of bilateral negotiations simultaneously or in rapid succession to maximize interests. However, by prioritizing its own interests even with traditional allies and key partners, the Trump administration has revealed limitations in consolidating a united front for negotiations with China. Immediately after taking office, President Trump demanded renegotiation of the ROK-US FTA and an increase in cost-sharing for defense with South Korea, pressed for the launch of US-Japan FTA negotiations while strengthening cooperation for the Indo-Pacific strategy with Japan, and entered into a trade dispute with India, a key partner in the Indo-Pacific strategy. In other words, the administration is focusing on increasing the magnitude of its interests by simultaneously pursuing bilateral negotiations with key partners. This can be seen as a strategy to overcome the limitations of bilateralism through simultaneous bilateral negotiations. However, in the midst of a critical confrontation with China, the US is exhibiting a dual approach by prioritizing its own interests even with its major allies and partners, who can be considered the rear flank of a united front against China. That is, the Trump administration needs to pursue bilateralism simultaneously to maximize its interests, but this creates a dilemma that negatively impacts the simplification of the front in the US-China trade war. This is a structural limitation of the bilateralism pursued by the Trump administration.

The Backlash of Interdependence

The US-China trade war has opened the prelude to great chaos by realizing the weaponization of interdependence, which was considered a taboo in economic relations between countries. If a tariff-centered trade war is a game that utilizes the quantitative asymmetry of interdependence, then attempting to disrupt the supply chains of a rival country or company can be considered a precision strike game utilizing the asymmetry within global value chains. The US-China trade war has served as an opportunity to recognize the reality facing the world by maximizing the influence of these two elements.

The Dangers of Asymmetric Interdependence

The US-China trade war starkly demonstrates the 'normalization of the unconventional.' When the US-China trade war began, it was dismissed by some as an aberrant behavior by President Trump, and there was widespread hope that it would soon normalize. This assessment is a testament to the unconventional means employed by the Trump administration for the trade war. While using Section 232 of the Trade Expansion Act, criticizing the WTO, and adopting a bilateral approach are not new in themselves, the unconventional aspect lies in the bold utilization of long-dormant provisions for the critical confrontation of the US-China trade war.

The unconventionality of the Trump administration's actions draws attention because it starkly revealed the one-dimensional nature of inter-state relations by leveraging interdependence in reverse. Since the 1990s, the global economy has continuously deepened interdependence between nations. In response, liberal scholars advocated the theory of commercial peace, arguing that the increase in complex interdependence would lead to non-military resolution of conflicts between states, ultimately promoting peace. For them, interdependence was a harbinger of peace. However, realist scholars emphasized the dangers of asymmetric interdependence, which most countries face in reality. The US-China trade war was sufficient to make us realize the possibility—perhaps one that has been deliberately ignored—that economic interdependence, a symbol of cooperation between nations, can become a tool to threaten a rival country, and that this possibility can materialize at any time.

The Trump administration's strategy in the early stages of the US-China trade war focused on exploiting asymmetric interdependence. The choice of trade war as a means to resolve various economic issues with China, such as China's industrial policies, theft of US corporate technology, and discrimination against foreign companies, was paradoxically an act of weaponizing the asymmetry of the US-China trade imbalance. As of 2017, the Trump administration had a trade deficit of approximately $370 billion with China, which it could use as leverage to pressure China. In contrast, while the Xi Jinping government responded with a 'tit-for-tat' strategy of imposing retaliatory tariffs against US tariffs, it faced limitations due to a lack of ammunition, given the trade imbalance between the US and China. The Xi Jinping government's exploration of new response measures, such as currency depreciation, is also an attempt to overcome the structural disadvantage arising from the asymmetry in the trade sector through different means.

Networked Global Economy and Trade

Globalization, which has been ongoing since the post-war era, accelerated in the 1990s in conjunction with neoliberalism and the IT revolution. Companies pursued optimal methods to reduce costs and maintain innovation momentum, leading to the formation of global value chains (GVCs). This was because GVCs were recognized as an efficient production method for realizing economic efficiency and managing risks. This change was qualitatively different from previous globalization, which was centered on final traded goods.

The networking of the global economy progressed as numerous actors became intricately intertwined through transnational economic activities during the formation of GVCs. This was a result of not only companies but also governments competing to provide optimal locations for multinational corporations in order to be included in GVCs. While past globalization was based on simple GVCs, current globalization is centered on complex GVCs. The emergence of complex GVCs has led to a phenomenon where countries worldwide are more closely connected than ever before, going beyond simply increasing the level of interdependence between nations. This is why the significant differences in influence among actors participating in GVCs have been newly highlighted. In other words, as the frequency and intensity of connections among actors within the network increase, certain companies and countries have gained the ability to exert relatively greater influence.

The Trump administration's various sanctions against Huawei represent a new form of economic warfare that leverages the networking of the global economy. On May 19, 2019, the Trump administration added Huawei and its 68 affiliated companies to the list of entities subject to trade restrictions. By restricting trade with US companies such as Google, Intel, Qualcomm, Xilinx, and Broadcom, which supply key components and operating systems to Huawei, the plan is to curb Huawei's 5G development plans as well as its growing influence in the telecommunications equipment market. This game is possible because US companies hold significant positions within the supply chain constructed by Huawei. Thus, the networking of the global economy also means that countries occupying critical positions within the supply chain possess 'choke points' that can be used to strangle rival companies and governments.

Tariff wars utilizing quantitative asymmetry require significant domestic political burdens, such as increased import prices and retaliatory tariffs from the opposing country. Trade wars centered on tariff imposition inflict damage on the opposing country but inevitably have negative impacts on one's own economy. Furthermore, as vividly demonstrated by the Xi Jinping government's decision to impose retaliatory tariffs on US soybeans, it is unavoidable to inflict damage on industries and regions that are domestically sensitive in the US. Meanwhile, games leveraging network asymmetry have recently emerged as a new alternative, as they can maximize damage to rival countries and companies while managing damage to one's own companies to some extent. This method is fundamentally different from tariff wars in that it provides a means to exert greater influence on the rival while minimizing damage to one's own country.

The Outcome of the US-China

What consequences will the ongoing US-China trade war have on the global economic order? First, the possibility of the spread of short-term profit-seeking and the weaponization of interdependence cannot be ruled out. While the US may weaponize interdependence to achieve its own interests quickly in its dealings with China, China has also previously used asymmetric interdependence as a means of threat against East Asian countries to achieve its foreign policy and security objectives. As seen in Japan's Abe government's decision to impose de facto export restrictions on key South Korean industries shortly after the G20 Summit in Osaka in June 2019, the weaponization of interdependence can spread beyond the US and China to other countries. This could be described as the 'universalization of taboos'.

However, there is a paradox in the weaponization of interdependence. The Trump administration's pressure on China through tariffs is possible due to the trade deficit with China. It is essentially using the trade imbalance to correct the trade imbalance. However, if the trade imbalance is alleviated as intended by the Trump administration, the effectiveness of the pressure strategy utilizing asymmetry will inevitably be diminished. When leveraging the asymmetry of economic relations between countries to pressure the other party, a mechanism is built-in whereby the more successful the pressure, the less effective it becomes.

This paradox also applies to threatening a rival country by utilizing global value chains. Attempts to disrupt global value chains will ultimately promote their restructuring. Current global value chains have been formed and maintained on the premise that they will not be disrupted for foreign policy and security reasons. However, as the foundation of that belief is shaken, efforts to readjust global value chains for risk management purposes will become inevitable not only for companies but also at the national level. When combined with the progress of the Fourth Industrial Revolution, the restructuring of global value chains may proceed at an even faster pace. Ultimately, while countries that weaponize interdependence may pose threats and inflict damage on their rivals in the short term, they may face paradoxical outcomes in the medium to long term where the benefits derived from such actions do not accrue to themselves. This is because the optimal position a country holds within global value chains at present does not guarantee its future position. Furthermore, if global value chains are restructured, the country that previously held a dominant position may weaken its own gatekeeping power, which allowed it to threaten rival countries by leveraging its core position within the value chain. In this sense, the weaponization of interdependence can lead to paradoxical results.■

■ Author: Lee, Seung Joo_ Professor of Political Science and International Relations at Chung-Ang University, Director of EAI's 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 regionalism, East Asian political economy, and 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).

■ Managed and Edited by: Kim, Se-young, EAI Research Fellow

Inquiries: 02 2277 1683 (ext. 208) I sykim@eai.or.kr

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