Ghosts of history: Lessons for US-China trade war

Donald Trump is focusing US policy increasingly on a single concern: the rise of China. His campaign manifesto, Great Again: How To Fix Our Crippled America explained that: “There are people who wish I wouldn’t refer to China as our enemy. But that’s exactly what they are.” In Trump’s view, China’s economic success was a form of cheating, and a trade war is needed to make trade fair again.

Ghosts of history: Lessons for US-China trade war

The rivalry between China and the United States in the twenty-first century holds an uncanny resemblance to that between Germany and Great Britain in the nineteenth. Both rivalries take place amidst the emergence of economic globalization and explosive technological innovation. Both feature a rising autocracy with a state-protected economic system challenging an established democracy with a free-market economic system. Both clashes affect the entire international system, with other large countries (Russia then, India now) playing a vital part in the strategic calculation. And both rivalries feature countries enmeshed in profound interdependence wielding tariff threats, standard-setting, technology theft, financial power, and infrastructure investment for advantage.

The Anglo-German rivalry, like the present Sino-American one, was as much a clash of two systems as it was of two countries: the liberal, free-market constitutionalism of an established Britain and the autocratic, state-protected development of a rising Germany. Indeed, differences in economic system amplified the salience of the narrowing economic gap, leading the established power to feel cheated and the rising power to feel unsatisfied and threatened.

Latecomers to modernization

Germany and China both believed their struggle for unification left them as latecomers to modernization. Germany industrialized in the 1850s, nearly a century after Great Britain, while China emerged from the Century of Humiliation and then the senseless stagnation of Maoism only in 1979. Both countries believed that catching up with established powers required state-directed economic and technology programs. Fair competition was beside the point and national strength was the goal under both Bismarck and Deng, to the eventual detriment of relations with the free-market Great Britain and the United States.

The speed of the catch up was as alarming to British elites then as it is to American elites now. German GDP was 67% of Great Britain’s in 1871 and exceeded it by 1908 in the aftermath of a financial crisis. Adjusted for purchasing power, China’s GDP was only 25% of U.S. GDP in 1990 after a decade of reforms and exceeded American GDP in 2014, also in the aftermath of a financial crisis. Even when their economies eclipsed those of their rivals, Germany and China remained poorer in per capita terms—with German income 74% of British income in 1913 and Chinese income only 25% of American income in 2016.

The fact German and Chinese citizens remained poorer than their counterparts in Britain and the United States did little to alleviate anxiety in established powers. From the perspective of the established powers, Imperial Germany and contemporary China had undergone a radical and alarming economic modernization that catapulted them into the ranks of first-rate powers in mere decades. British elites believed that the German developmental model was a form of cheating. For their part, German elites were concerned that Great Britain would seek to halt their country’s rise and undermine their economy by restricting trade, technology, or capital flows—whether through economic or military means.

Similar fears are at the core of Sino-American strategic competition, with Washington accusing Beijing of cheating and Beijing accusing Washington of seeking to halt its rise through trade tariffs. Indeed, just as British politicians levied blunt and sometimes counterproductive tariffs on their German competitors, so too do US political leaders risk making a similar mistake.

The Belt and Road game

The similarities extend to infrastructure. Roughly a century ago, Germany’s leadership sought to construct a 1,000 mile railway to circumvent British naval supremacy. The railway would have proceeded from Berlin all the way to Baghdad and onward to the Persian Gulf. The German government pressured national financial institutions to support the project, and top German officials described it as a “German national undertaking, executed, administered and operated as such.”

For Germany, the “Berlin-Baghdad railway” would not only bypass the preeminent British navy, it would also spread German influence deeper into West Asia, open up the Ottoman Empire as an export market and source for raw materials, and offer Germany new ways to protect its overseas possessions in Africa. The ill-fated project, which saw significant progress but fell short of completion due to World War I, could have revolutionized Eurasia’s strategic geography had it been completed.

China’s Belt and Road projects similarly leverage Chinese economic instruments for strategic ends. Originally announced by Xi in 2013, the program has been promoted by the Chinese government as the “project of the century,” as China’s “Marshall Plan,” and as a new “silk road.” In a historical quirk, the very term “Silk Road” was originally devised in Imperial Germany and shaped Berlin’s own continental ambitions.

Technology too has become a domain of competition. The principle focus of China’s approach sees technology as a tool to leapfrog over US development. Today’s Sino-American contest over information communication technology (ICT) mirrors a century-old contest between Germany and Great Britain for dominance in that era’s ICT infrastructure, with uncanny parallels and key lessons for the present.

In the late nineteenth century, the Italian engineer Guglielmo Marconi, supported by the British Royal Navy, created a radio network that gave Britain a monopoly over radio transmissions. When combined with Britain’s 60% share of the world’s undersea cable network, Britain dominated international transmissions.

Under Kaiser Willhelm II, Germany pursued protectionism by banning the Marconi systems in some cases, and developing a quite separate technology and then trying to bring other countries into a rival system. It pursued emerging markets by selling its technology to South America and Africa to set the standard in those regions and secure revenue. And when those efforts failed, it found success in multilateralism. Germany organized the great powers together in a conference on radio standards that jointly prohibited Marconi’s “non-intercommunication” policy, breaking the British monopoly and establishing an effective Anglo-German duopoly.

Today’s China is also contesting standards in the hard infrastructure of internet connectivity. Its government is investing billions so Chinese chipmakers can beat American rivals in the race for 5G mobile internet standards. Similarly, Chinese firms like Huawei and ZTE receive government loans to build the hard infrastructure of internet connectivity throughout the developing world. As the British example demonstrates, these efforts not only make Chinese technology the standard – they also offer opportunities for surveillance.

There was a mixture of rationality and paranoia in German calculations. Britain did indeed use its network power. It successfully wielded its monopoly against Germany during the First World War by cutting German cables, monitoring German transmissions, and forcing German traffic onto British-controlled networks.

Russia and India

There is an additional element that makes the race more urgent and more tense. One parallel between Germany a century ago and China today is the idea that there is a narrow window of opportunity for China to make its bet on innovation and a giant technical leap.

Germany under Wilhelm II saw that its population was growing much less quickly than that of Imperial Russia, which had since 1890 embarked on a course of rapid economic development. It would only be a matter of time before Russia was both economically and militarily superior to Germany. In fact, Russia’s hopes of making that leap were stymied by the Bolshevik Revolution, after the country was exhausted by war with Germany.

Today, China evinces a similar if somewhat more complex set of anxieties about balancing short term advantage with longer term disadvantages, driven in part by demographic developments.

Beijing’s leaders are worried that the country’s export-led growth model is stalling under pressure from growing costs, a shrinking labor force, and low cost competitors well before a rebalanced and consumption-driven Chinese economy can emerge.

China, like Germany before it, is also looking at its close competitors – particularly India and its tightening relationship with the United States and Japan. Like Imperial Russia, India started its rapid modernization very late, but then very effectively. And just as Russia sought a closer relationship with the old global hegemon (Britain), so too has India sought one with the United States today. For its part, China has responded with a string of relationships and ports in the Indian Ocean and close ties with Pakistan that together are intended to constrain India’s maritime and continental freedom of maneuver.

Both the US, and India, face choices in responding to this familiar geopolitical pattern. In the economic realm, the United States has used blunt force tariffs. But the heart of great power economic competition is subtle and sophisticated, occasionally patient and long-term, and rarely emotional and reactive. Competition over standards, technology leadership, and financial leverage is far more complex and far less intuitive than the crude levying of tariffs. The quick fix of tariffs, while psychologically soothing, too often proves strategically counterproductive in a competition that requires more nuance.

Facing British decline, the Chamberlain political dynasty—first father Joseph, then son Neville—pushed to use tariffs as a way of challenging German power. The dream of the Chamberlain family strengthened rather than weakened Germany by breaking up a multilateralism that could have contained or encircled it.

Mentioning Neville Chamberlain raises the specter of Munich, appeasement and then war. But neither appeasement nor war is inevitable, and a simple analogy to World War I can be misleading even if some of the economic dimensions of Anglo-German rivalry are familiar.

Ultimately, today’s response to the rise of China should not be Chambelianite. It must be neither blindly confrontational nor naively cooperative; instead it should be competitive. The right approach, in contrast to tariffs would be to work with those allies and partners to strengthen rules, set standards, punish Chinese industrial policy and technology theft, and create alternatives to its geo-economic statecraft. China is playing a good hand well, but the United States and its allies and partners have an even better one—but only if they work together.

source: livemint


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