The US–China Trade War: Technology, Energy, and the Turning Tide of Globalization

Good afternoon, dear viewers. Another episode of the Source interview series is beginning. Today we've invited economist Chimeddorj to join us — good afternoon to you, and thank you, and good afternoon to our viewers as well. So, the process that the press has been calling a "trade war" between the US and the Chinese government continues. Well, Donald Trump promised before the election that he would work specifically to reduce the trade deficit through this trade war.

Well, almost from his very first days in office, on January 20th, he withdrew from the Trans-Pacific Partnership agreement. Right — so why did Donald Trump start this process that's being called a trade war? First, China and the US are quite different countries in terms of their social and political organization. Although both are countries with very coherent, long-term policies, the US views the rule of law as the basic underlying principle of its governance. China defines things somewhat differently.

For example, behind what's called "socialism with Chinese characteristics" lies, above all, full sovereign authority to make its own domestic decisions — what we now call the "political order" — as the basis for making decisions within its own political system. Because of this, the social and economic policies of these two countries have developed quite differently from one another. This is not something that happened recently — it has its roots going back to the late 1970s. This is especially the case for China, where this has been a long-term policy in the making. So what lies behind this? For example, the US champions a free-market economy, while China runs more of a state-directed, state-controlled economy.

This kind of economic activity involves a much higher degree of state participation. What long-term effect has this had? In China, the state can directly intervene in economic activity, whereas in the US the government cannot intervene directly in the economy the way it can through tax and monetary policy — so competition among private enterprises has become considerably more difficult. For instance, if we look purely at the economics of what's happening between the US and China today, the trade deficit has caused enormous harm and losses for the United States. But why did trade keep expanding even as this trade deficit kept growing? Because of China's cheap labor, its industrial capacity, and third, because China itself is a massive economy. As a result, companies from Western Europe and the US — from highly developed countries with advanced technology — came to China to manufacture cheap products, both to sell into the Chinese market and to supply cheap goods back to Europe and the US.

Behind all this, consumers have also continued to benefit. But there's another issue as well. Behind this, what do we see? Cooperation between countries is generally viewed within three broad frameworks. One is social and cultural cooperation.

Second is economic cooperation, and third is political-strategic cooperation. Looking at these two countries, there isn't a very deep, extensive relationship in social and cultural cooperation — it seems that neither side places much importance on this area. As for me, I think the political-strategic relationship is quite complicated. What this is really about is this: the growth of China's defense-sector budget factors into US security strategy — we call this the "security dilemma" — where as one side's defensive capability grows, the other side starts to perceive it as a threat. That's the kind of relationship that has developed.

And recently, as China's economic strength has improved, the amount it invests in its defense sector has grown considerably. Even though the US remains the world's leading country in defense, it doesn't take this development very favorably either. I think this becomes clearer if we look at the technology side behind this process now being called a trade war between the two countries. First — as I mentioned before — within China's state-directed economic policy lies the question of how to bring high technology that was developed in the West, in North America and other foreign countries, into China. In particular, how can Chinese companies come to own it? This matters not just for the economic benefit it brings, but because it's crucial for reaching the next stage of development.

Now, as a driving mechanism, technology transfer was encouraged, and in some respects Western companies were forced to bring in technology by restricting their ability to operate in the Chinese market unless they did so. Behind these two things, I've come to the conclusion that this has infringed on the interests of countries with advanced, free-market economies in two ways. First is the issue of intellectual property. Companies that produce technology should receive intellectual-property payments from any goods or services manufactured using their technology. In some respects, this was not being enforced in the Chinese market.

In particular, companies that hold Western technologies under contract for a limited period — and on the other hand, by setting up technology-transfer centers — once companies bring their technology into China, it gets stolen, and a great many counterfeit products then appear and are sold on the market. Trump has said as much himself. Beyond the general notion of a trade deficit, he says that major American companies worldwide are essentially required to partner with a Chinese company. Then, after a specific period, the joint venture is dissolved and China simply carries on alone. This is a major form of intellectual-property theft.

Yes, that's true. If I recall, in March 2018 a US intelligence agency issued a report that was made public, summarizing what had happened over roughly the past twenty years regarding the activities of the Chinese government and Chinese state-owned enterprises in the technology sector. What did that report say? First, by creating specific obstacles to operating in the Chinese market, Western technology is captured by Chinese companies. Now, in China, there's a standing policy for the very first step when a company enters: foreign-invested companies must have 50% of their shares owned by a Chinese company.

What happens with those companies is that the technology ends up captured by that Chinese company. Second, there's growing interest in placing Chinese citizens in management-level positions within the company's technical side, especially the technology side, of the technology company in question. In this way, they trained their own people. Up until around the early 2000s, the main issue being discussed was only counterfeit goods. But over roughly the past decade, especially since 2010, the issue of technologies that can be used for two purposes — what's now called "dual-use" — has become a much bigger concern. In other words, some technologies used in industrial sectors are also technologies that can be used in the military and defense sector. Examples include aircraft engines, remote guidance, missile technology, jet engine technology, and beyond that there's a fair amount tied up in information technology as well.

So this is something that, beyond purely economic relations, is putting these two countries into conflict from the political-strategic angle I mentioned earlier. And rightly so — why? Because Chinese state-owned investment companies haven't confined their activity to within China's borders alone; the process of acquiring shares in US technology companies, and in European technology companies, and folding them into themselves, has proceeded quite intensively. Especially over the past four or five years, countries have grown wary of this process, and some governments have been stepping in through negotiation to halt company mergers and acquisitions. On top of that, there's now a process underway in the US whereby, without passing additional legislation, a special government body can issue rulings restricting Chinese companies from investing in American technology companies — building a legal environment that makes this possible. Generally speaking, most countries are moving in this direction.

And going even deeper, beyond investing purely in technology companies, huge investments have also been made in research institutes, funded by Chinese state-owned companies. This is creating quite a lot of complications in the technology sector. Now, talk of a trade war breaking out actually goes back to before the election — it was already part of what Donald Trump was saying back in 2016. But 2017 was relatively calm — Xi Jinping met Trump in Mar-a-Lago, and Trump visited China. So why, the moment 2018 arrived, did it start right from January? In terms of timing, of course many factors contributed to setting off this process.

I personally think it's a somewhat superficial view for most people to see this as something Donald Trump personally came along and started. Because this process was already quite clear-cut. As I mentioned earlier, these countries view their own governance rather differently — this had become clear long before, and it points to two quite complicated differences between the two countries. First, the US holds general elections, whereas looking at China's domestic political governance, the process of transferring power is considerably more complex. That's why, without any check on his term, they're amending the constitution for Xi Jinping. I personally understand this to have been one of the first major developments.

Second, if you look at which products from the US side are being tariffed, and which products China is taxing in this recent trade fight, analysts note that both sides have quite deliberately chosen products designed to have a strong negative effect on large blocs of each other's voters. So that's also a weakness of the US — a weakness of the democratic system — that policy can be influenced through elections in this way. But this whole process itself has been building up inevitably over time regardless. I think the deeper underlying factor here is that America's energy-sector strategy has been changing considerably. Worldwide, the energy sector is essentially one of the most important sectors that has shaped 20th-century geopolitics. The US economy, especially its domestic economy, was very strongly tied to automobiles and to oil-related products, which is also why, as European countries developed, issues kept arising in the Middle East. Political conflicts, clashes, and armed conflicts have mostly been connected to oil-exporting countries.

Behind all of this, energy strategy issues have always been at play. And recently, the US has turned into a completely different kind of country — this is tied to the emergence of shale, meaning new technology developed for extracting shale oil and gas at scale. Since 2016 the US has become an exporter of energy products. What does this mean in practical terms? Even though it still imports some, because it also exports, looking at the net figures, the US has become self-sufficient in energy. And it's becoming a major global exporter. This has become a process bringing about a major shift in global geopolitics.

On top of that — although this doesn't directly affect US-China relations, sorry, I mean Russia — looking at it from a geopolitical angle, it means the US itself has turned into a competitor to energy-exporting countries. That's precisely why, in the recent dispute with the EU over tariffs, where an initiative had been launched to impose tariffs on certain goods, when they finally reached an agreement, part of it was that the US secured permission to supply its oil products into 11 European ports. And the gas pipeline that was going to run from Russia to Germany — that, for example, is now not going ahead, is it? So there are underlying interests at play among the countries competing in the energy sector. On top of that, the US has placed fairly heavy sanctions on Iran and on Russia.

And these sanctions are actually working out quite favorably for China, because it opens up opportunities to import cheap oil and cheap natural gas. So these are the underlying factors behind what's being called this trade war, if you will. There's a pattern of using tariffs as a way to hold down the growth of what each side manufactures for the other — and another underlying factor is the enormous technological revolution now underway in America. The fundamental reason behind China's remarkable economic growth over the past fifteen years was manufacturing cheaper products for Europe and the US than they could make themselves — and China is now losing that advantage.

In other words, industrial robots are being adopted in the US. The robots being adopted in industrial use in Japan have become cheaper than Chinese labor. So, that's an underlying factor causing both sides' interest in trading with each other to diminish somewhat. Because of this, the current total value of products subject to US tariffs is $250 billion. Yes — and there's also talk of another $267 billion. Last year, imports from China totaled around $1,505 billion worth of products. So can we understand this as an outright effort to put tariffs on all imported goods entirely?

This is a very interesting question. For example, some people also view this as purely a political policy choice by Trump. Why? Because, in general, 20th-century geopolitics — especially in economic cooperation — has been built on countries defining things in terms of multilateral cooperation. As we know, a recent set of negotiations went forward and then simply stopped. Take, for instance, the Trans-Pacific Partnership free trade agreement among Pacific Rim countries, or before that the North American trade agreement, and the European trade agreement. Mechanisms of economic cooperation built on negotiations involving many countries developed in this way.

Throughout the 20th century — but then along comes Trump. This is something that has stood since the end of the Second World War, with institutions underpinning what we now call globalization. Multilateral trade agreements, and trade and investment agreements, have been carried out through the WTO. But a politician like Trump is operating from a rather different angle. He's saying: we will not negotiate together with everyone.

We will negotiate one-on-one. And so this multilateral relationship, meant to serve everyone's collective interest, has become disadvantageous to the US in every respect. So it's a case of: if we're going to talk to Japan about an issue, we'll talk only to Japan; if we're going to talk to China, we'll talk to China — and multilateral cooperation of this kind is essentially becoming quite uncertain. But behind this lies a further doubt: perhaps this great process called globalization won't keep moving as fast as it did over the successful decade behind us. Because in quite a few countries, nationalism — national nationalist sentiment, if you will — has been gaining ground, and in some respects it is threatening the democratic system.

In some countries, this has had a very strong effect on elections, and nationalist parties are winning. This is a little different from outright trade protectionism as such, but it's a marked departure from the notion of a mutually interconnected global community built on shared values. So there's a fear that we are returning to something resembling pre-World War II Europe of the 1930s — as a certain UN Secretary-General once put it — that we're heading back to that kind of era. Wherever that leads, whatever happens with this process, countries that have their own solid, independent domestic policies will find their footing and chart their own path to development.

So both Trump and Putin say the same thing: every country has its own interests. But the US is viewed differently. Because the US is a great power that upholds liberal democracy. It's essentially the major force defending the ideology of democracy itself, and the societies built on it.

It carries an enormous responsibility. That's why people are now openly saying that Trump's self-interested policy — protecting the domestic market, and even demanding money from allies — poses a new danger to the global order. This was already being said back in 2016 too. So how long will the US continue on this path? Well, as a researcher, forecasting the future is quite difficult. The US alone accounts for a quarter of the world's economy, and in political and strategic terms, nearly more than half on its own. If you just look at global defense spending, nearly half of it belongs to the US alone. On top of that, this country, having reached such an extremely high level of technology, will clearly play a role in shaping the global order — that much is certain.

On the other hand, this country has also served as something like a guiding star for building democratic systems worldwide. As a country that has led and championed the global process of protecting human rights — and beyond that, third, there's another interesting point: the US is itself historically a country of immigrants. The people who originally lived there, the native inhabitants, are now few in number. Nearly everyone else came from somewhere else. So, looking at this whole process, it's true that this historical origin doesn't quite fit with today's policy. But at the same time, the concept of the nation-state — something we've perhaps somewhat neglected — should still hold a place.

This is essentially about a person identifying with a particular nation, right? And someone who identifies with others like themselves, saying "my homeland," feels a certain love and devotion toward their people, is patriotic — and that becomes part of the meaning of their life. In a society like this, the concept of the nation-state is an inevitable phenomenon. Even though we talk about globalization, this process is happening very intensively in the US, and although we don't tend to notice it much, recently some very interesting countries have joined the ranks of those building themselves into nation-states. And it's being carried out very successfully.

Well, of course, there's China — it's made up of more than fifty ethnic groups internally, and yet it's presented as a single nation. But since the late 1980s, right up to today, China's policy has been a major undertaking to build "the Chinese people" as a nation. Other interesting countries recently added to this list are New Zealand, Australia, and Canada — and the US is now formally counted among them too. Why? Because we can essentially say that a fundamental shift has taken place: we no longer view the US simply as a country of immigrants, but now as a nation-state. That's the angle from which it's saying: let's have good Canadians too. And by comparison with China — China's population is overwhelmingly counted as a single ethnicity, the Han Chinese, though that's a fairly interesting case in itself.

I read a study last year. A rather interesting study — it noted that we used to understand the US as a multiracial, multiethnic country, even one made up of people without a single shared background. Together, they've formed a single society built on shared values. Today, for example, we can easily see how a particular group in American society — Black Americans — has become a different kind of nation from Black people living, say, in South America, or in Africa, or in Europe. They practically even speak using more or less a shared, common vocabulary among themselves now.

That is really the major foundation of them beginning to embody a distinctly national character of their own. It's something new now. And Donald Trump, in his own way, has been actively amplifying that very trait, in effect. Something like: this is an American's job, this is an American company. But on the other hand, what about the flip side?

The US is also suffering fairly significant losses from this trade war, on two fronts. On one front — and this is interesting economically — most people expected that if Trump won, the US economy would fall into considerable uncertainty. But interestingly, the very next day US stock market indices posted quite a strong, substantial rise — something like a 1-2% gain, if I recall. Even now, the US economy is doing very well. But on the other hand, the consumer price index is trending upward.

What's happening now is that products previously manufactured in China are, at minimum, becoming more expensive to bring in once tariffs are applied. That added tariff cost is passed through, and life is becoming somewhat more expensive as a result. Following that, it looks like the Federal Reserve is pursuing a policy of tightening its policy rate. On the other hand, this technological shift means that, contrary to what Trump is saying, it's become impossible to sustain those jobs in the long run. Even if products currently made in China were made in America instead, it wouldn't be people manufacturing most of them — it's clear that machines would be doing most of the manufacturing. That's simply a matter of the times.

Thank you for another interesting interview. I wish you success in your research work. Well, thank you — that concludes this episode of the Source interview series. See you again next Saturday.