China Is in Denial on Trade

U.S. President Donald Trump isn’t the only one in denial about a trade war—and potential cold war—with China. If you ask people there, the relationship between the two countries has just hit a little rough patch and will soon be over it. As much as Trump’s tariffs on $250 billion worth of Chinese goods and his counterpart Xi Jinping’s retaliatory salvos might seem to qualify as something more than tension, government officials, scholars, business leaders, and think tank representatives with whom I spoke were all eager to downplay the two countries’ disagreements, economic or otherwise.

“The relationship is becoming even more complicated,” one official at a foreign-policy institute with ties to the Chinese government said. “But people working in the government here and people that know the China-U.S. relationship? We are more optimistic about this relationship than people who don’t know much about” it. I heard that message so frequently on a recent trip sponsored by the China-United States Exchange Foundation that I assume it was handed right down from Beijing.

Even Zha Daojiong—an international political economy professor at Peking University and one of the few people to tell me there’s a “real risk” that China and the United States might mishandle the trade dispute and massively disrupt global markets—still rejected the idea that the world’s two largest economies were headed for confrontation. China might be rising, he said, but it has no intent of “subjugating” the United States. “We are separated by these two huge oceans—[why would] we have to get into each other’s hair?”

Well, there are a lot of reasons, not least that their economies are deeply entangled, a fact Beijing has used to excuse some of its less savory business practices. It is true that, as the Trump administration has complained, China has stolen vast amounts of U.S. technological secrets and restricted access to its burgeoning domestic economy. But among Chinese political theorists and commentators, such problems aren’t just exaggerated, they’re also not worth tearing up the globalized supply chain over. Nor, they remind, would it even be possible to fully break China and the United States apart.

It’d be easy to think that such talking points are nothing more than Beijing sticking its head in the ground. For all that the trade war hurts American companies, it’s not doing China many favors, either. (By most accounts, trade disruptions could shave half a percentage point off China’s GDP growth rate in the next year.) And there certainly is some element of denial, especially the closer one gets to the state, which is why some government officials seem to put their faith in a possible sit-down between Xi and Trump at the G-20 summit in Buenos Aires at the end of this month. Liu Zhiqin, a commentator on state television and fellow at the Chongyang Institute for Financial Studies, told me that “all the problems can be discussed and can be solved if we can have a good dialogue.”

There are two problems, however. First, if China addresses some of the Trump administration’s concerns—intellectual property rights, for example—it could undermine its ambitious growth agendas, such as the Made in China 2025 plan. And second, it is unclear whether Washington has much interest in resolving its disputes with Beijing. For that reason, those who doubt that a G-20 sit-down would be a panacea—if it happens at all—are probably right.

For now, most business players in both countries seem to be buying the idea that trade tensions will pass. According to a survey conducted by the American Chamber of Commerce in China late this summer, fewer than one-fifth of American companies in China said they were considering relocating their manufacturing out of China in response to the tariffs. Among those that had relocated or were considering it, only a small fraction planned to move operations back to the United States.

“No one wants to be the idiot that relocates all the factories today and then finds out tomorrow that the trade war is over,” William Zarit, the chamber’s chairman told me. “But the longer it goes on, the smarter that decision appears. I expect we’ll see increases in the numbers of people thinking about relocation [in our next survey], but, again, I don’t expect many will be relocating back to the U.S.” In fact, the only story I heard about a company shifting operations in response to the trade war was when I spoke with a German textile machinery manufacturer, who told me over drinks that his family-run company had closed one factory—in the United States.

There’s a growing recognition among Zarit’s members that, trade war or trade friction, whatever one decides to call it, is going to last a while. But right now, he said, a number of those companies are taking a wait-and-see approach—just like the rest of the United States.

“They might be waiting to see what comes out of the G-20 summit outcomes between Xi and Trump,” he said. “That could be the trigger for companies to say, ‘OK, we really need to accelerate our plans and seriously look into reorganizing our supply chains.’”

Meanwhile, Beijing, too, has avoided all appearances that it expects open confrontation anytime soon. For example, were China to accept that the status quo has changed, it might draw closer to Russia, moving from exchanging “nice words” to expanding commercial projects and working more closely on defense issues, Scott Kennedy, an expert on Chinese political economy at the Center for Strategic and International Studies, told me. One would also start seeing more high-tech ventures with countries such as Singapore and Israel, as Beijing tried “to get around the U.S. effort to isolate them technologically, by expanding collaborations beyond the U.S. and leaving the U.S. as the one that’s isolated.”

But in Beijing, those types of policy shifts aren’t even mentioned. Of course, one must be realistic about the challenges the Trump administration poses, Chinese Foreign Ministry spokesperson Lu Kang told me, but “in general, the trend of this bilateral relationship is still going upward.” Optimism reigns supreme. And why not? After all, the two countries have overcome much worse. I was rarely able to bring up the future of the bilateral relationship without someone mentioning its past.

“It’s not a rare situation for China and the U.S. to encounter even big problems in their relationship, since the establishment of bilateral relations. But both sides managed that,” the official at a government-linked foreign-policy institute told me. “Both sides will manage it” again. Beijing is not wholly wrong to think it can survive Trump. After all, Xi can just wait him out.

Trump has no more than six years left, while Xi could very well be president for life. And although the Trump administration’s rapid change in tone on China at the start of the year was surprising, it’s not as if China was caught totally flat-footed. Under Xi, Beijing has been preparing for a more confrontational relationship with the United States for years, making overtures to U.S. allies in the South China Sea, for example, and cozying up to the international community by stepping into the leadership vacuum left by the Trump administration’s “America First” approach. If things do get worse, China will have several options. It could shift its reserves out of dollars and into some other currency, for example, or it could increase the heat on American companies in public and in bureaucratic backrooms.

In the meantime, Beijing is going to keep talking as if nothing’s changed. Almost everyone I spoke with seemed to be using the same rhetorical playbook they might have consulted during the George W. Bush or Barack Obama years. They continued to insist that China has no aspirations to be the world’s superpower and stressed the importance of cooperating on issues of global importance like climate change and counterterrorism. If China can keep people talking like they did in the Bush and Obama years, the hope must be, it will keep the rest of the international community on board; the United States will follow in time.