Defining the win in a trade war is difficult, even for a “winner” like Donald Trump. In an Apr 2018 tweet, the US President declared the trade war “already lost” with China by his foolish and incompetent predecessors. What he had been doing, first initiating a Section 301 investigation and then asking for tariffs to be imposed on roughly 150 billion USD worth of Chinese goods, appeared more like a penalty long overdue than the a strategically planned assault with clear objectives.
On the other side of the Pacific, victory was equally elusive to the Chinese government. “There is no winner in a trade war” was the official line repeated by the Ministry of Foreign Affairs(MoFA), the Ministry of Commerce(MOFCOM) and the official mouthpiece outlets such as People’s Daily. In the early days of the standoff, the message from the Chinese authorities was essentially of “peace through war”: we don’t think the war will benefit anyone, but if fighting is the only way to bring some sense back to the offender, we will retaliate with matching forcefulness.
That rhetoric escalated dramatically on Apr 6 upon Trump’s latest round of threat. In a MOFCOM statement responding to the US President’s announcement of his intention to slap penalizing tariffs on 100 billion USD worth of Chinese imports on top of earlier measures, the words used was “to fight till the end” and “at all costs”, even though, curiously, China has so far refrained from announcing its counter measures against Trump’s 100 billion “bluff”. If the country opts to follow suit in a one-eye-for-one-eye manner, it would mean a near blanket 25% tariff on all US imports (In 2017, total imports from the US amounted to 130 billion USD).In this sense, being rhetorically strong but substantively vague is all but rational.
Where official intentions remain ambivalent underneath the confrontational posture, social media is itching to offer some clarity. The trade war creates a rare spectacle of a massive Internet debate on China’s industrial and trade policies, through which one gets a glimpse of the public opinion foundation for China’s own brand of economic nationalism that is growing into an integral component of the increasingly prominent “national rejuvenation” narrative. If Donald Trump’s trade war has any effects, one of them would be uniting the Chinese internet under the flag of industrial self-armament.
Rejuvenation under threat
While the cyberspace was pretty calm about the relatively targeted tariffs on Chinese steel and aluminum announced on Mar 8, the following proposal to slap tariffs on another 50 billions worth of Chinese goods, a sure sign of a possible full-blown trade war, ignited the Chinese social media with excitement. As soon as China’s MOFCOM released its list of potential US products targeted for retaliation, online opinion leaders took note of the stark differences in the industries covered by each country’s measures. The Chinese goods and services included in Trump’s proposed levies ranged from industrial robotics to new generation information technologies, whereas China’s matching list consisted almost entirely of agricultural products: pork, fruit and nuts.
There was an almost gleeful response to the comparison. “It’s a trade war between an agricultural economy with an industrial power,” as one commentator put it. This might be a mischaracterization of both the makeup of the US economy and the nature of the trade war. The 10 categories of Chinese products selected by the Trump Administration were there not because they made up majority of Chinese exports now. They represented sectors that could challenge US industrial advantages in the future.
The message was not lost in Chinese online discussions, which seemed to be seized by a mixed sense of pride and threat. The juxtaposition of the two countries’ tariff lists quickly developed into a theory about what the trade war was really about: it was seen as an attempt to undermine China’s rise as a developed industrial power, with industries capable of competing at the highest level. “The trade war is but one interlude in China’s rise as a great power,” one commentator wrote in a long Weibo post.
Fluxing China’s engineering muscles has increasingly become part of broader patriotic propaganda in China. In 2013, a CCTV documentary series, “The Pillars of a Great Power“, amplified the “engineering equals national strength” narrative in the public’s mind. In Mao’s era, when China faced severe economic blockade from the rest of the world, developing its industrial might was often associated with achieving self-sufficiency. Today, honing China’s manufacturing capabilities has attained new significance: asserting China’s global competitiveness. The documentary, co-produced with the Ministry of Industry and Information Technology(MIIT), the government body overseeing the implementation of “Made in China 2025” strategy, was a tour de force of Chinese equipment manufacturing companies already occupying advantageous positions in their respective value chains: heavy duty bulldozers, high efficiency power generators, industrial robots. In one episode, a Chinese corporate executive recollected how, years ago, he and his colleagues got belittled by German engineers at a trade fair. By 2013 his company, a producer of cranes, was competing head to head with that German company globally. Similar accounts of an underdog fighting its way up abound in the series.
More recently, another CCTV made documentary “Amazing China“(the title is more literally translated as “Awesome, My Country!”) hit cinemas right before trade war talks began to heat up. The movie featured Chinese feats in building roads, bridges, high-speed trains, ports and networks. It was a visual manifestation of “industrial nationalism” at full play.
The propaganda shaped the national psyche when confronted with Trump’s provocation. The fact that the 10 sectors targeted by the US government were taken directly out of China’s catalogue of industries supported under the “Made in China 2025” strategy only intensified those sentiments. Zhanhao, one of the most-read grassroots nationalist accounts on social media, penned an incendiary Weibo post declaring that the trade war was the US’s desperate effort to “keep China in the bondage of low-end industries to be eternally exploited by the US hegemony, technologically and financially.”
Less melodramatic voices, which would not go so far as to brand Trump’s move as a calculated “Cold War” strategy to suffocate China, nevertheless saw it as a real trap in the way of a great national ascent. Multiple commentators pointed to Japan as a cautionary tale of the kind of unforced mistakes a country could make under the pressure of a trade war. “China is approaching the same sensitive spot where Japan was 30 years ago, in terms of population trends and economic conditions”, one observer noted. Improper response could cost China dearly, even ushering in its own version of the “lost decade”. He listed the four “wrong responses” China should absolutely avoid: restart real estate bubbling to hedge the potential loss of trade surplus; halt de-leveraging efforts due to external pressure; encourage households to take on more debt to boost consumption; reduce government support on new strategic industries to appease the US.
National strength vs. free trade
The conversation marks a notable departure from how trade issues have been discussed on the Chinese Internet. For years, online opinion leaders tend to hold the view that China should open its door wider, which would benefit consumers with cheaper and better imported goods and services, and, more importantly, exert much needed external pressure on the inert state-owned sector.
A 2015 article on FT Chinese summarized those sentiments. Two generations of Chinese leaders, from Deng Xiaoping to Zhu Rongji, had relied on a determined charge toward opening to integrate the country with the global market and inject much-needed energy and a sense of urgency into the reform process. Deng unleashed the nation’s productivity by removing shackles of the planned economy. Zhu spurred the system further by negotiating China’s way into the World Trade Organization (WTO). “Reformers have since then used China’s agreed deadline to meet its WTO commitments to accelerate domestic reforms of the state-owned sector and the expansion of the private sector.”
Those sentiments erupted at a few key moments in recent years, including when the negotiation of the Trans-Pacific Partnership (TPP) neared fruition in 2015, and when China’s 15-year grace period under WTO expired in 2016. Those moments invariably triggered public scrutiny of China’s fulfillment of its pledge to open up its markets, which would make desirable imported item, from cars to Hollywood films, more accessible to domestic consumers. One recurring theme in those discussions was a complaint that China never actually met its promises to the WTO, effectively taking advantage of its trading partners by winning access to their markets while restricting entrance to its own. “When China entered WTO in 2001, probably no Chinese took the 15-year deadline seriously… Nobody believed China would pay any price for violating the contract, ” a 2016 Weibo post by Huang Zhangjin, a veteran journalist and editor noted.
The pro-opening stance reemerged in the current debate in the form of support for Trump’s actions against China. A few dovish commentators said things like “Donald Trump is a godsend gift to China” and that “Chinese consumers would benefit the most from the trade war,” given the expected lowering of tariffs for imported goods and freer flow of capital and services. Some pleaded “surrender” and “compromise”, arguing that China’s unreasonable industrial policies should have been scrapped a long time ago.
But with “national rejuvenation” talks in the ascent this time around, such “capitulation-ist” voices got challenged, their core premises explicitly picked apart. “That China did not fulfill its WTO promises was a myth fabricated by the TPP camp (a trade bloc of nations excluding China),” one Weibo post stated after a Vice Minister of MOFCOM claimed that China had allowed access to 120 WTO designated business sectors, way more than the 100 it had agreed to open in 2001. In a lengthy WeChat post, Prof. Cui Fan of the University of Foreign Commerce and Trade traced the “myth” to the Information Technology and Innovation Foundation, a US think tank that produced a “misleading” list of China’s WTO entrance commitments. To the astonishment and dismay of the author, the “fabricated” list was translated and widely circulated in the Chinese cyberspace as evidence of China’s dishonest behavior. He quoted former WTO Director General Lamy as confirming, in multiple occasions, that China had fully met its commitments upon its entry into the trade club, and it was the United States whose number of violations way surpassed that of China. The issue of whether those commitments, made almost 17 years ago when the Chinese economy was way weaker than it is now, are inadequate by today’s standard, should be treated separately and “through re-negotiation.”
A telling sign of the turning tide in Chinese public opinion is social media reactions to Elon Musk’s open complaint to Donald Trump about China’s “unfair” treatment of foreign car companies. In early March, the founder of Tesla sent out a few tweets, addressed to Trump, protesting China’s high import car tariff (25%) and coercive joint venture rules. To be clear, these restrictions, as highlighted by the above WeChat post, do not violate WTO rules, which allow developing countries to put up protection measures for their nascent industries. And Musk, despite his otherwise popularity on Chinese social media as a cultural hero, got a fair amount of ridicule for his comments. People questioned why he bellyached about the situation when other foreign car companies formed profitable joint ventures in China. Instead of supporting Musk’s plea to lower the bar for entering the Chinese market, which would potentially lower the price of imported vehicles for Chinese consumers, many opinion leaders spontaneously ran to the defense of Chinese policies nurturing its own EV industry.
ZTE complication and the “developmental state”
On Apr 10, President Xi Jinping delivered a closely watched keynote speech at the Boao Forum, re-affirming China’s commitment to global cooperation and to market openness. “Opening brings progress, while a closed door means backwardness,” the Chinese leader told his audience before announcing a series of market opening measures, including lowering import car tariffs. The second day, a MOFCOM spokesperson had to fend off interpretations of the speech as a concession to Trump’s threat, claiming that it represented a long-standing Chinese position on trade issues.
Even though it’s hard to believe that the speech was not some form of response to the trade war, there was detailed analysis showing that the high-handedness was indeed in line with earlier decisions made by the leadership, way before Trump got elected. Later developments, however, would soon put that commitment to test. 6 days after Xi’s appearance at Boao, a decision by the US Department of Commerce would send shockwaves across China and force the Chinese society into an intense round of soul-searching about its industrial ambitions.
On Apr 16, US secretary of commerce Wilbur Ross Jr. activated a “denial order” against ZTE, a Chinese telecom conglomerate, which would essentially bar any US company from exporting components and services to the Chinese company for 7 years. ZTE was accused of lying repeatedly to the US government while the denial order was in suspension after it paid a billion dollar fine and reached a deal with US authorities in Mar 2017 for violating US embargo to Iran and North Korea (it exported products containing US technology to the two countries).
The severity of the punishment already became clear on Apr 15, when a slew of US microchip suppliers, including Qualcomm, Intel and IBM, informed ZTE that they would terminate contracts, sending the latter’s production lines to a grinding halt. “The US denial of export could knock us into a coma,” ZTE’s President Yin Yimin told reporters at an Apr 20 press conference. An industry insider told Caixin magazine that ZTE’s microchip inventory wouldn’t last for another month.
The company’s predicament exposed just how vulnerable China’s telecom industry was to upstream supply shocks like this. Notwithstanding their reputation as pioneers of the country’s manufacturing upgrade and global competitiveness, players like ZTE and Huawei, which are able to compete head-to-head with traditional industry giants such as Cisco and Ericsson, nevertheless have to source core components of its products almost entirely from outside China. A widely shared chart showed the pathetic rate of domestic availability for a host of semiconductor chips.
Even though legally speaking the ZTE episode was a separate matter from the on-going trade war (investigation of its behavior started in Obama years), it inevitably got intertwined with trade war debates in Chinese social media. Ironically, the news made some nationalists almost ecstatic. Zhou Xiaoping, a notoriously provocative figure, openly celebrated the US ban as an “enormously positive development” that would force China to cast aside illusions about global interdependence and concentrate on creating its own microchips, “the spring has come for home-made chips!” Others even cited Mao-era philosophy to justify a return to complete industrial self-reliance. For economic nationalists, the incident only affirmed their belief that it was an all-out attack on China’s grand industrial ascendance. “This is a US plot to stave off China’s momentum of attaining dominance in 5G telecom technologies. The Americans are scared and desperate,” Global Times’s editor in chief Hu Xijin asserted as he mobilized support for ZTE on Weibo.
China’s state media, People’s Daily in particular, quickly distanced themselves from this brand of economic isolationism. It openly criticized Zhou’s view for being “extreme”, as it presented domestic R&D and international cooperation as “mutually exclusive”. On the other hand, the propaganda outlet also raised the flag of economic security by declaring that China would develop its own chip industry “at all cost”, after the painful realization that China is still very much at the mercy of a supply chain controlled by technologically more advanced countries.
“Extreme views” aside, ZTE’s troubles seemed to have pushed official stance and public opinion to converge on one key point: that China needs to build its own competitive processor industry. One Weibo user claimed that building the processor industry had become the new “political correctness” on the Chinese Internet. Public support for state nurturing of the industry was at all-time high. The difference was only on the question of how. In a long blog post, Liang Ning, a researcher who was deeply involved in China’s botched effort to develop its own CPU and operation system around 2001, advocated for massive government investment to be run in the fashion of venture capitals. The lesson she generated from the unsuccessful bid to open a new path not blocked by the Windows/Intel hegemony 17 years ago was insufficient funding into the field and the need for a domestically cultivated hardware/software ecosystem, which could only be achieved through an enhanced “natural selection” process on a massive scale.
Others did not agree. Government-run “venture capitals” are doomed to fail, as bureaucrats would certainly abuse their “permission to fail”, one commentator predicted. Only a genuinely incentivized healthy capital market can rise to the occasion of picking the right winners. Wu Jinglian, one of the most well-respected liberal economists, openly warned about the “danger of a state-led campaign to develop the semiconductor industry at all cost.” The old man was worried that corruptive administrative power would use the excuse to plug itself deeper into the economy. The alarmed voice found some resonance on social media, which was full of accounts of wasteful government R&D spending and the 2003 Hanxin scandal, where a former Motorola executive cheated the entire Chinese science and technology establishment by claiming to have developed China’s first 180nm chip, which turned out to be purchased Motorola products.
Nevertheless, advocates insisted that the Chinese state had a very big role to play, if not directly handing out cash to the industry. They pointed to China’s East Asian neighbors, Japan, South Korea and Taiwan as examples of “enlightened” industrial policies that led to the taking off of their respective semiconductor industries, with Samsung and TSMC now dominating the field. One commentator even came up with a full roadmap for how China’s weak microchip industry could catch up with its South Korean and Taiwanese competitors through strategic financial support from the government. The key, according to such views, was for government to help its high-potential corporates withstand the industry’s cruel business cycles: subsidize them to lower cost when they need to fight uphill price wars to snatch market shares from dominant players, reap benefits during high-demand booming years and patiently wait for an era-changing moment to complete a leapfrog. These once-in-a-generation moments came when email substituted fax and smartphones replaced PC. The next one, many believe, would be when custom AI chips become more widely used than generic processors.
No matter what route China takes with its chip industry, many commentators seem to share one presumption: it has to happen within the context of a global value chain, a functional capital market and strategic government intervention. In a 2016 article by Fudan University scholar Tang Shiping, he summarized the key factors contributing to a successful “developmental state”, a concept first advanced by Chalmers Johnson in the 1980s in his groundbreaking book about the “Japan Miracle”. Tang emphasized that an effective developmental state should play by the rules of a market economy, set industrial policies that take into account international division of labor, and most importantly, serve as a “helping hand” for a vigorous private sector, not a control-all planning machine.
This is the kind of thinking that Maoist isolationists don’t get, and neo-classic liberal economists, suspicious of all forms of state intervention, too readily dismiss. But increasingly, this is the message that the likes of People’s Daily send, and around which a social media consensus is growing: China needs strong state-guided industries that embrace the market and globalization.
On May 3, a high-level US delegation landed in Beijing. Chinese media described the visit as the “touching down of hawks”, as the team consisted of the most ardent China-bashers of the Trump administration: Robert Lighthizer, the US trade representative, White House trade and manufacturing adviser Peter Navarro, and Secretary of Commerce Wilbur Ross Jr. In a leaked “draft framework” brought to the table by the American side, the hawks demanded China to reduce its trade surplus with the United States by “at least 200 billion dollars by the end of 2020,” and “immediately cease providing market-distorting subsidies and other types of government support” to industries under the Made in China 2025 industrial plan.
The proposal was met with laughter and dismissal by Chinese netizens. “Those Americans came here just to poke fun at us,” as one financial observer quipped, “do not harbor any illusion about the intention of those American rightists.” Another Weibo user noted the short stay of the delegation, only for an afternoon, “this is not a negotiation. It’s declaration of a war using the trade dispute as harbinger.”
Trump’s negotiators might have misunderstood China’s state-directed economy. In a recent event, Lou Jiwei, a former Finance Minister said of the arbitrary surplus reduction target as “planned economy style” when China itself had all but given up on rigid GDP targets. They might have also underestimated the public support for the government’s industrial upgrade strategy, in part mobilized by US provocation. “If Made in China 2025 is negotiable, this Chinese administration might as well dress-up in Qing Dynasty costumes,” joked a Weibo commentator.
In response to the US proposal, the Chinese side, led by vice premier Liu He, suggested a list of counter-measures, which included cancelation of Trump’s proposed penalizing tariffs, adjustment of the ZTE denial order and a commitment to not initiate any future Section 301 investigation against China. The two sides held “constructive” discussions, and agreed to disagree. No deal was reached, no victory declared by either side. The hawks left Beijing, leaving behind a nation more alerted and vigilant than ever about staying its course toward regained glory.