Global Trends by Martin Khor

Monday 17 December 2018

From trade war to global anarchy?

The arrest of Huawei’s top executive indicates the Trump administration’s plan to escalate a mere “trade war” to a conflict to cripple America’s rivals and may unleash anarchy in the global system. 



We shouldn’t be misled into thinking the “trade war” between the United States and China is being resolved, after the recent breakfast meeting between the countries’ Presidents.

Instead, the United States’ President Donald Trump is taking the conflict way beyond tariffs into many other areas in a comprehensive attempt to stop or slow down China’s economic development.

This has implications not only for China or countries like Malaysia that are integrated into the Chinese production chains.  The evolving conflict spells the end of Western countries’ belief in the win-win benefits of trade and investment liberalisation.

And the emergence of an alternative view that China and some other countries are rivals that must be checked and not partners after all.

Just as Trump and China’s President Xi Jinping were sitting down for their working lunch on the sidelines of the G20 summit, which thrashed out a “truce” to their tariff war, the Canadian authorities were arresting the daughter of the owner of Huawei, China’s giant digital company. 

Its smartphone sales are now bigger than Apple’s I-phone and second globally only to Samsung phones.

Meng Wanzhou, chief financial officer, was in transit at Vancouver airport when detained at the request of the US on grounds of her company violating US sanctions against Iran years ago.

Only after many days was she released on bail, and she has to wear an electronic tracker.                                                                                                                                                                      

The Chinese government called the action “very nasty” and Chinese citizens are outraged.  The equivalent would be if China were to arrest Melinda Gates, co-head of Bill and Melinda Gates Foundation, for alleged violation of China’s regulations on healthcare. There would be a tremendous outcry and threats of very dire consequences in the whole Western world.

Yet the Chinese are supposed to accept Meng’ arrest as a routine matter, unrelated to the trade war.  It cannot be sheer coincidence that the arrest took place, years after the alleged crime, at the exact hour that China’s President Xi was having lunch with Trump to work out a truce.

The incident reminds us of the US accusation against another Chinese tech giant ZTE Corp in 2017 of breaking the same sanctions.  A ban was imposed on ZTE from buying telecom chips from US company Qulcomm, which paralysed the company for weeks.  Only much later was a political deal struck, ZTE paid a fine, and the company able to resume production.

With China, Trump is concerned not so much with his country’s big trade deficit, but more so with the threat to America’s global supremacy.

Suspicions on China’s global ambitions became certainty in the fevered minds of Trump and his hawkish advisors when President Xi moved from the rhetoric of the Chinese dream to the concrete industrial plan of Made in China 2025.  This was to get Chinese firms to be world leaders in ten high-tech sectors, including artificial intelligence, robotics, semiconductors, electric cars, aerospace.

Alarmed by the prospect of Chinese domination of the commanding industries of the future, Trump has been countering the ways by which China is developing its world-class companies. 

This is through trade, investment, subsidies and support, acquisition of technologies and intellectual property, including through buying other countries’ companies.

The extra tariffs are meant to slow down or stop Chinese exports.   The new Export Control Reform Act increases powers to regulate US exports of emerging and foundational technologies of importance to national security, and can be used to ban components and technologies to China.

To prevent Chinese companies buying into US companies (and acquiring their technologies), the review powers of the US Committee on Foreign Investment has been strengthened.  In November, new national security rules were passed to allow review of small minority investments into sensitive US technologies, including biotechnology, nanotechnology and wireless communications equipment.

The aim is to slow down or stop Chinese firms from buying even small stakes in into US tech start-ups, which have been called innovation jewels.

The US has also been blocking attempts by Chinese firms to takeover or buy controlling stakes in US companies, also on national security grounds. For example, the same Committee recently refused to approve a $1.2 billion deal between Money Gram, a US money transfer company, and Ant Financial, a Chinese electronic payment company. 

European countries and Australia are also increasingly restricting Chinese companies from investing in or taking over domestic firms.

Moreover, the US has banned the use of Huawei’s 5G related equipment, with Australia and New Zealand following suit.  US officials have also been touring Europe to warn against choosing Huawei equipment.  This is having effects, with concerns increasing over the risk of Chinese spying and the security of the 5G network if it uses Huawei kits. 

When slapping extra tariffs on Chinese products, Trump accused China of intellectual property theft and forced technology transfer.   The US actions cited national security grounds or used the unilateral Section 301 of its domestic trade law. Most WTO law experts view these actions to be a violation of various WTO laws.  Many countries have taken cases against the US in the WTO.

Perhaps feeling that the WTO rules constrain several of its planned actions, the US has moved to cripple the WTO dispute settlement system by blocking new members into its appellate body. 

By the end of 2019 that body will not have enough members left and the WTO will become ineffective as it loses its strongest function.

There would be no more formal way within the multilateral trade system to legally challenge the US actions against China or other countries.  Or for any country to challenge the actions of any other.  The system would break down, perhaps gradually at first, but surely.

Then the order would slip from rules based to each country for itself.  America first, France first, Britain first, are already in vogue, and many or all others will follow suit.

The trade war that started with some aluminium and steel may thus snowball into a world of anarchy, where only might prevails. 

It is an awful scenario but not an unrealistic one to ponder over as 2018 draws to a close.  It is not too late to check this trend, but something has to give or change drastically in the US, if we are to have even a small chance to avoid disaster.