The last days of 2018 were used for dire predictions for 2019, conjured up by those better informed or quicker to judge than your columnist. Gazing into balls of dark crystal, observers saw the damage caused by President Trump’s trade fight with China spreading further and faster than originally anticipated.

Factories in China and the United States have both posted weak order portfolios. American farmers are feeling the pain more acutely now – and they’re not being helped by a government shutdown that makes Chinese gloat about the drawbacks of partisan politics. Most eye-catching was a collapse in Chinese demand for iPhones, which evaporated almost US$75 billion of Apple’s market value in a single trading session.

donald trump in china xi jinping
Donald Trump in China. Photo: White House.

The Chinese government has announced a tried and tested remedy: infrastructure projects, used in the past to pep up the domestic economy and keep workers at bloated State Owned Enterprises employed. They can’t spend all working day in the now compulsory Xi Jinping Thought study sessions, after all.

More infrastructure projects in China and more help from American taxpayers for hard-hit farmers are not going to solve anything in the long run. Both are adding to huge piles of domestic debt, a vicious debt trap that could eventually keep both economies down, if not crash them completely.

Despite lousy indicators, some observers were cautiously optimistic about the chances that talks held in Beijing would result in a less than perfect agreement, enabling both leaders to declare victory without rubbing the other one’s nose in a smelly defeat. This is wishful thinking.

The argument goes that it would be counterproductive for the United States to press for outright capitulation, or for Trump to tweet a possible compromise as a crushing Chinese defeat. The same argument holds that the Chinese economy is hurting too much to make this a bloody slugging boxing match in which the victor is simply the last one to throw the towel into the ring.

Supporters of some sort of appeasement to resolve the conflict believe that both sides ought to grant each other a face-saving exit from the mess, by rationally recognising that they are bound together more than either government might wish to admit.

If this truly were a rational world we would not be in a trade war in the first place and many people have already wished that Trump would stop tweeting completely, from Little Marco and Low Energy Jeb during the GOP primaries to General Motors and actual generals in the more recent past.

The argument also suggests that China is unwilling to inflict serious damage on its own economy in defence of national prestige. The people proposing this have never spoken to an even moderately indoctrinated mainlander or studied recent Chinese history.

Maersk container factory
Photo: Wikimedia commons.

It is odd how the China bulls see proof for their optimism in terrible numbers by saying that these make it inevitable that a deal will be reached. They seem to propose that the China Model is sustainable in the long run if only those pesky Americans would stop harassing a peacefully rising nation and stop harming themselves in the process.

This ignores the fact that the China Model is based on a zero-sum equation that allows for mercantilism and protectionism, not on a trading system that would make everyone better off.

The latter is the system on which the World Trade Organisation is based, and China is a member, even though it ignores both the letter and spirit of the organisation. To be fair, so do the United States and many others.

The optimists’ argument also ignores the fact that China is now less welcomed and more feared in foreign capitals throughout the world, not just Washington, DC. From Canberra to Berlin policymakers have finally woken up to the threat that China poses if it does not change its pernicious policies of widespread theft of intellectual property, hidden and overt subsidies to State Owned Giants, debt-fuelled foreign entanglements and United Front Work Department interference in democratic elections abroad. There are still exceptions of course.

The main gripe with the pundits who predict a quick trade resolution and then back to business as usual is that they ignore the glaring truth that China’s rulers have been promising bold reforms since at least 2007, in the run-up to China’s famous ‘coming out party’ at the Beijing Olympics, and on the cusp of commemorating three decades of Reform and Opening Up.

At the time some of the same people who now think a resolution is imminent believed that the games would open China up further and spell the end of the Dictatorship of the Proletariat with Chinese Characteristics. Most prominent among these China bulls is Henry Kissinger.

Instead, the world has had more than a decade of vague promises and more repression of the Chinese people, not less. The Proletariat are still Dictating to their red hearts’ content.

China’s recent offers to treat foreign and private Chinese companies the same as State Owned Enterprises and to ban the forced transfer of technology to Chinese partners in onerous joint venture regulations should be seen in this light.

As long as they are not backed up by Party directives and actual legislation they are just as meaningless as earlier promises.

And facts on the ground are pointing to the opposite: under Xi Jinping, the Party’s influence over the economy has increased, not decreased. The aforementioned humongous infrastructure programme that will benefit mostly those bloated State Owned Monstrosities is another case in point. This is not a regime that is embracing reform.

Beijing Olympics
Beijing Olympics. Photo: Wikimedia Commons.

Despite having one of the most ideologically pure Marxist leaders since Hua Guofeng, some officials in Beijing agree that market forces should play a greater role in allocating capital. Some inside the halls of the People’s Bank of China even argue for cutting subsidies and pruning the other advantages State Owned Giants currently enjoy, just as Washington demands.

These technocrats support the optimistic western observers in their reasoning why a fast resolution on trade is preferable, but the two that I have spoken to, off the record as always of course, are sceptical about their chances of winning the argument.

One of them told me that the Party is too ideological now. Cooler heads know that China needs to maintain a steady flow of foreign investment, technology and expertise and that this will require opening more sectors of the economy and protecting intellectual property more honestly. But he noted that nobody dares to sell this to the leaders.

This official echoed the British historian Thomas Babington MacAulay, who observed that free trade is one of the greatest blessings which a government can bestow and almost everywhere unpopular.

Still, the other official was hopeful. He lamented wasteful industrial policies such as the ‘Made in China 2025’ programme and cheered on the Party leaders who were willing to scale them back.

Top-down innovation and Five Year Plan targets are great for early development and picking low-hanging fruit, but they would not help promote a more balanced economy. He called the 2025 plan Xi’s Great Leap Forward. We all know how Mao’s Great Leap Forward ended.

This trade conflict was unnecessary and the wrong way to address legitimate concerns about China’s malevolent trade practices. But now that we are in the trenches, we should consider the best and worst case scenarios.

The cautiously optimistic camp have given us the best case scenario, but they fail to say how they would deal with the very real concerns about China’s economic policies.

us china trade
File photo: Mohamed Hassan, via pxhere.

In the worst case scenario, the trade conflict will spin out of control and heels will be dug in. Instead, the United States should go back to her multilateral tradition and co-operate with allies to put maximum pressure on Beijing.

The west should explain to the Chinese people, which is admittedly difficult to do over the heads of the censored Party media, that this is not meant to keep China down. Indeed, the Party has been doing a great job at that. It should be made clear that Chinese consumers would actually benefit from freer trade and less political interference in markets.

The biggest danger is not that this trade war will get hopelessly out of control, even though that is a real and worrisome possibility, but that the west falls into tit-for-tat tactics and embraces ‘managed trade’ as an alternative to free trade, with enhanced protectionism as an answer to Chinese mercantilism.

Sun Tzu was not the first military strategist to observe that those who hold the high ground usually win a fight. The west has the moral high ground vis-a-vis China. It should not abandon that shining city on a hill.

Alexander is a lecturer at the Arnhem Business School in the Netherlands and a fellow of the Sima Qian Foundation, advising governments and businesses about how the rise of China affects the global economy. With over ten years of work experience in China, he has written extensively about Chinese business and how free market solutions would solve many of China's problems. He has published books and articles in Dutch and English. On Press Freedom Day 2016 a Dutch collection of his essays was published by Pharos publishers and the proceeds were donated to HKFP.