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The US-China Trade Row and the International Order

The implications of the US-China Trade row on the international order is often overlooked by commentators. Most of the time, focus is put on the disruption of international trade flows rather than the US Government’s attempt at frustrating China’s political programme. The recent escalation of tariffs imposed on Chinese good exemplifies this intention: sanctions aim directly at crippling the Made in China 2025 plan.

For most Europeans, the idea of anything ‘Made in China’ usually brings about thoughts of cheap goods, poor quality electronics and counterfeit products. However, ‘Made in China 2025’ (MIC2025) is anything but cheap. Introduced in May 2015, this initiative sets the blueprints for ambitious programmes attempting to move China’s manufacturing up the value chain by making innovation its driving force in 10 of the most profitable segments of the global economy.

The 10 Sectors Identified in the Made in China 2025 Policy

Next-generation Information and Communication Technology  (ICT)

Biopharmaceuticals and high-performance medical devices

Robotics and high-end numerical control machinery

Maritime engineering equipment and high- tech maritime vessel manufacturing

Aerospace and aviation equipment

Advanced rail equipment

Energy-saving and new energy vehicles

Electrical equipment

Agricultural machinery and equipment

New materials

The Chinese economy will face considerable challenges in the coming years. If nothing is done to curb socio-economic trends, unbalanced growth, high corporate debts, severe environmental pollution, and an aging population will get the better of it. Even worst, China might end up lingering with South Africa and Brazil in the ‘middle-income trap’a situation in which a given country has lost its competitive edge over rivals in export of manufactured goods because of rising wages, leading to a spiral of low investments and slow growth.

China’s main objective with MIC2025 is therefore simple: to move toward a self-sufficient system where it invents and makes its own manufacturing products. By 2025, it aims to improve the overall quality of manufacturing, boost innovation and labour productivity, obtain an advance level of ICT, reduce energy and material consumption, and develop multinational firms and R&D clusters able to compete against Western ones.

But this is only the tip of the iceberg, building blocks of an overarching political agenda. The endgame for China is to become by 2049, coinciding with the 100-year anniversary of the foundation of the People’s Republic of China, the world’s leading manufacturing power. This means having the capacity to lead innovation and possessing unchallenged competitive advantages. In short, this would build a new world order in which China has taken over leadership.

China’s ambitions leave little space for multilateralism and liberal trade. In fact, MIC2025 gives us a glimpse of China’s vision of international trade. First, it aims at tightening its foreign investment rules for security reasons on sectors beneficial to the economy, preventing the disclosure of trade and technological secrets.

Furthermore, restrictions on foreign investments are being implemented, limiting their scope to basic industrial sectors and to partnerships with Chinese research centres. Not only is this kind of investment uninteresting (foreign corporations rather look to invest in new technologies, medical devices, and finances), but it also further underpins forced technological transfer for which China has been infamously known for decadesand for which many Western businesses have unfortunately been guilty of by association.

Finally, MIC2025 has been raising concerns with domestic content goals for key products sold in China. The roadmap documents specify that 40% of spare parts and ‘key material’ will have domestic sources in 2020 and then rise to 70% in 2030. Such targets are obviously a way for China to substitute Western technological imports, thus obtaining its much desired autonomy. This is likely to highly disrupt foreign high-technology trade. That being said, critics contend that such policy appears to violate World Trade Organization rules and may thereby be reviewed.

In the meantime, the European Union is nowhere to be seen. Caught in-between the two superpowers, it struggles to reach common policy agreements and has fallen behind on innovation, especially on how it develops and invests in it. If anything, there is insufficient coordination among stakeholders in view of a new, forward-thinking EU innovation strategy. It is unsettling to think that the EU will still lag behind in the coming years at its own expenses and for the benefit of the US and China.

In the end, there are no reasons to believe the trade row will end sooner rather than later. Implications of the dispute are now close to having military and strategic implications in the South China Sea and Taiwan. It would simply be too costly for the US and President Trump to cave in. But same goes for China and Xi Jinping, the stakes are way too high.