Despite declarations of cooperation,
friendship and respect from both sides, major trade conflict is brewing between
the two superpowers
·
The upcoming
summit between Donald Trump and Xi Jinping is expected to project cooperation publicly,
despite rising tensions beneath the surface.
·
Trade experts say China is no longer passively accepting US
tariffs and export controls, unlike in earlier years.
·
The US expanded semiconductor restrictions over the past
decade, targeting Chinese firms such as Huawei and ZTE through export controls
and entity lists.
·
China has developed stronger countermeasures, including
export controls on rare earth materials and anti-sanction laws targeting
companies complying with US restrictions.
·
Analysts believe China’s dominance in rare earths has given
Beijing greater leverage in negotiations with Washington.
·
Experts say the US-China technology conflict has reached a
strategic stalemate, with both sides wary of escalating further.
·
The Trump administration has softened some chip
restrictions, including allowing certain advanced Nvidia chips after earlier
bans.
·
Trade tensions are increasingly shifting through “connector
countries” such as Vietnam, Mexico and Malaysia, which are becoming major
export hubs.
·
Some exports involve simple transshipment of Chinese goods
through third countries, while others reflect genuine manufacturing growth in
those economies.
·
The Trump administration is considering a proposed “Board
of Trade” to regulate sensitive trade flows between the US and China.
·
Analysts questioned whether managed trade arrangements can
succeed, citing the limited success of earlier US-China trade agreements during
Trump’s first term.
·
Experts expect discussions at the summit to include
tariffs, export controls, Taiwan, Middle East tensions, soy purchases and
aircraft sales.
·
Despite diplomatic engagement, analysts believe the major
trade and strategic disputes between the US and China are likely to remain
unresolved.
The
scheduled summit next week between US President Donald Trump and Chinese President
Xi Jinping will almost certainly include proclamations about cooperation, friendship
and respect between the leaders of the world’s two largest economies, but beneath
the surface, major trade conflict is building, said trade experts on Wednesday.
In
the past, a weaker China was forced to grit its teeth and grudgingly accept US tariffs,
export restrictions and other restrictions, but Beijing has quietly and methodically
amassed increasingly effective tools it believes will counter what it sees as Washington’s
heavy-handed behaviour.
“It
kind of looks calm, like OK, maybe the summit could cement this agreement, and everything
will be fine. But actually, underneath the surface here, we see a lot of pressure
brewing,” said Martin Chorzempa, senior fellow with the Peterson Institute of
International Economics (PIIE).
Semiconductors
are a prime example of the high-stakes face-off, analysts said. Over the past decade,
starting with Huawei and ZTE, the US built an entity list that would eventually
include over 1,000 Chinese companies, which were forbidden from buying advanced
chips or semiconductor manufacturing equipment.
Trump
stopped updating these, banned Nvidia’s H20 chip, then, a few months later, unbanned
the H20 and subsequently allowed the much more advanced H200 chip. The administration
sought to counter this by imposing restrictions on the subsidiaries of entity-list
companies, but China retaliated.
“The
US would put export controls on, and China would respond with nothing. But that
really began to change,” said Noland.
“Every
time we talk to Chinese interlocutors, they say we have found our counter weapon,”
added Chorzempa.
“And
so we think that now the US will not dare to increase its
controls. And that is what we’ve actually seen, that China seems to have got the
US into a stalemate.”
Fuelling
China’s growing confidence has been its grip over rare earths, leading to the ratcheting
up of its own export controls and Chinese anti-sanction regulations that penalise
any company that follows US sanctions.
“Trump
came into office last year with the sense that he was going to reduce Chinese influence
and force them to acknowledge his power over them,” said Jake Werner, Quincy Institute’s
East Asia programme director.
“He
discovered that he could not do that, because the Chinese were able to fight back
effectively with the embargo on rare earth elements.
“What
Trump basically decided was, ‘OK, I’m going to deal with them from a position of
certainty, of respect for their power, and more or less treating them as a peer
competitor.’”
While
the May 14-15 summit in the Chinese capital will seek to project harmony, the gloves
are increasingly off, analysts said.
“The
trade war may be downplayed in Beijing, but the conflict is coming to new fronts,”
said Mary Lovely, a PIIE fellow. “Stay tuned.”
As
trade and tariff wars have intensified between the two giants, the focus has shifted
to connector countries as more trade is increasingly routed through Vietnam, Mexico
and Malaysia.
Some
of these shipments are classic transshipments in which Chinese goods travel to a
third country, where a “made in Vietnam” or “made in Mexico” label is slapped on,
and then head to the US.
But
that often misses genuine change in these connector countries, analysts said, which
have worked in recent decades to educate their people, encourage foreign investment,
sign new trade agreements and improve their infrastructure, allowing them to become
stronger exporters in their own right.
A
pathway proposed by the Trump administration has been a vaguely defined Board of
Trade championed by US Trade Representative Jamieson Greer that will attempt to
manage the flow of sensitive goods between the two giants.
In
addition to market distortions created by managed trade, other problems with this
model include how to define “sensitive”, what incentive China has to import US products
and how it might compare to the failed phase one and phase two agreements hammered
out in 2020 during the first Trump administration.
“How
do you get this to work better than the first one?” said Chad Bown, a PIIE fellow.
“Part
of the problem with the first one is that China kept all the tariffs in place, so
the private sector in China didn’t get the signals that it should resume ties with
American companies.”
The
record is not very good when attempts are made to manage trade flows from the top,
analysts said.
While
Trump touted the resumption of US soy purchases after he met with Xi last
October in South Korea, these have not returned to pre-trade war levels, a similar
picture seen with cotton, beef, pork and other US exports, said Bown.
“We
look forward to the summit next week and think there will be a large number of topics
discussed,” including the war in the Middle East, Taiwan, export controls and Chinese-mandated
purchases of soy and aircraft.
“But
I expect the big issues will be kicked down the road again,” said Lovely.