Kennan's Cable

Presidents Trump and Xi are fighting the first skirmishes of a major trade war even while peace negotiations (excuse me, trade negotiations) continue. War always causes damage and the US economy is beginning to show the damaging effects of this trade war from a drop in the exports of agricultural products, rising prices on imported goods and reduced capital expenditures by apprehensive businesses.

President Trump is betting that the US will be the eventual winner of this dispute. He may be right. The US still has the largest economy in the world and it is still in pretty good shape with low unemployment and rising GDP. Further, trade represents a relatively small percentage of US economic activity, so tariffs and other trade barriers have less effect on us that other countries such as China that is more dependent on exports. However, as in any war, there will also be collateral damage inflicted on innocent bystanders as the global economy slows down.

The genesis of the trade war was America’s massive trade deficit with China which reached $323 billion in 2018. President Trump felt that the deficit, along with intellectual property theft and forced technology transfers, were very unfair and that China had taken advantage of the United States. He also blamed the preceding administrations (both Democrat and Republican) for allowing this to happen. President Trump has stated that trade should be reciprocal, by which he means balanced.

No matter that totally balanced trade between each country would be impossible to achieve without almost complete government control over imports and exports. No matter the fact that, because the US dollar is the world’s reserve currency the US, unlike other countries, can run trade deficits without harming the economy or weakening the currency. No matter that a trade deficit does not mean less economic growth overall.

It is true that the United States not only allowed China to run a trade surplus at our expense, but actually encouraged it. When Nixon opened the door to China, the country was desperately poor with a per capita GDP of only $132. It was felt that a very poor China would have nothing to lose and, therefore, could be potentially very dangerous. The thinking went that if China became more prosperous, it would become less warlike. So, trade with China began to grow but it would take more than a decade (and the death of Mao Zedong) before trade really started to take off.

Cheap labor made Chinese goods competitive and a huge market of over a billion people lured American companies to China. The theft of intellectual property also helped China compete. Of course, you only had to get caught in a go-slow in Lagos, Nigeria where the vendors walk among the cars selling pirated CDs and DVDs to know that China was not alone in this. But Chinese theft went further than taping a first-run movie and duplicating it thousands of times. The Chinese were stealing manufacturing techniques and proprietary technology (as Alexander Hamilton had once recommended).

Chinese cheating on the trade front was largely ignored. China was allowed entry to the World Trade Organization on the basis that they would begin to normalize their behavior and become a reliable trade partner within the international community. Everything worked out perfectly – except that China did not become a reliable trade partner within the international community. The search for comparative advantage became predatory. The theft of intellectual property went far beyond manufacturing practices to defense secrets and cutting-edge technology used, not by Chinese companies, but by the People’s Liberation Army.

And instead of a gradual liberalization politically in concert with the opening up of the economy, the Communist Party of China has used stolen technology as well as their own Chinese developed technology to clamp down on their people. They have used facial recognition software and artificial intelligence, buttressed by government oversight of financial transactions and social media, to create a social credit score that grades each citizen; rewarding good comrades and punishing dissidents.

The problem with China is much more than a trade deficit. But President Trump ignores the millions of people in the Uighur ethnic community held in “reeducation camps”. He gave the back of his hand to protestors seeking greater democracy in Hong Kong by commenting, “That’s between Hong Kong and that’s between China, because Hong Kong is a part of China.”

China has risen from a desperately poor country to become a powerful country that, although it cannot challenge the United State on a global basis yet, is a regional power with the ability to thwart US policy and threaten our friends and allies in the Asia-Pacific region. It has a repressive autocratic system under the control of President-for-Life Xi Jinping and a predatory and mercantilist form of state capitalism that has no intention of conforming to international standards.

President Trump appears to view this strategic challenge only in commercial terms. He may not be showing all his cards. He likes to be unpredictable. He thinks it gives him a competitive advantage in negotiations. But a country is not a poker game and he is being unpredictable, not only to our economic rivals, and not only to our friends and allies, but also to his own people.

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Sometimes president Trump seems to stumble onto the right policy, or at least an approximation of a right policy. Or maybe he is not as clueless and narrow minded as he appears. Who knows? He’s not telling.

But he sanctioned Huawei and ZTE as national security risks even though the investigation of these Chinese companies began during the Obama administration. And the investigation of Broadcom’s acquisition of Qualcomm by the Committee on Foreign Investment in the United States (CFIUS) prompted President Trump to block the deal on national security reasons.

Although these companies are owned by Chinese citizens (and in many cases also by foreign investors) and not the state, there is no such thing as a private sector in an authoritarian state. Everything is subordinated to the authoritarian power of the government. Communist Party cadres are placed in oversight of these companies and their board of directors. Company owners and their officials follow the will of the Party or they will be subject to reeducation (if they are lucky). Their subsidiaries and acquisitions in the United States and other foreign countries are likewise subject to the Party’s authority.

But tariffs are President Trump’s principal weapon against China in this trade war/cold war. And he is doing it alone. He has not coordinated with any allies in this conflict. In fact he has threatened our allies with tariffs as well as our partners in the North American Free Trade Agreement (NAFTA).

This go-it-alone strategy is typical of President Trump’s America First policy. But it ill serves our country. In past global conflicts we have always put together a strong band of allies to support us against our common adversaries. Trade dependent Europe has as much or more at stake as Chinese mercantilism erodes their competitive position in international markets.

It took five decades for the United States to outlast the Soviet Union through a policy called “containment” based on the 1946 cable (the "Long Telegram") from Moscow by American Diplomat George F. Kennan. Containment was actually relatively easy because the Soviets largely contained themselves. Except for the countries behind the Iron Curtain, the Soviet military basically stayed at home with few foreign bases and no direct military engagements. The only time their military ventured outside was when they invaded Afghanistan (which was actually contiguous with the southern border of the Soviet Union) and that became one of the causes of their eventual demise.

The Soviet Union engaged in very little foreign trade outside their Iron Curtain dependents. Their currency, the ruble, was not convertible into other currencies and so they were relegated to a barter system with regimes they chose to work with. The lack of foreign trade combined with the sclerotic growth of communalistic societies left their economy distorted and weak. Not so China. China is a foreign trade powerhouse. They abandoned Communist orthodoxy in favor of a mercantilist state capitalism that has powered them into creating the second largest economy in the world. Containment will not be so easy with China.

And we cannot confront China alone. We need the active participation of other Western nations in order to protect our way of life and our common Enlightenment values.

The policy of engagement with China over the last three or four decade has failed – miserably. We have not only given them the tools to challenge us militarily and economically, we have given them a greater ability to oppress their own people with advanced technological efficiency. We need a new policy that will protect our interests (and those of our friends and allies) while making the world a safer place.

America needs to disengage from China and we must convince our friends and allies to join us in the effort. Further engagement will only give China a greater ability to challenge Western civilization and further subjugate their own people. Supply chains need to be reoriented (one of the consequences of the tariffs that is actually working). Chinese private sector companies (and their subsidiaries abroad) must be considered arms of the communist state.

A new expanded Western Alliance needs to be created. NATO should be expanded to include all democratic countries. The new NATO should also include economic and political coordination to act as a block within international organizations that, although created by the West after WWII, have been coopted by non-democratic countries and others opposed to Western civilization.

The tariff war with friends and allies must stop (as should their tariffs on US products). The Trans-Pacific Partnership must be reconstituted and a trade agreement with the United Kingdom and the European Union concluded. Non-aligned nations (a term we haven’t used since the Cold War with the Soviet Union) will be able to trade with this new economic union, but access to sensitive technology must be carefully controlled.

China’s only natural allies are other authoritarian regimes. Its neighbors fear China and do not want to become vassal states to the new dynasty arising in Beijing. Democratic movements should be encouraged where possible. Proxy wars are a possibility, but the threat of a unified NATO reaction would be a powerful deterrent to war.

These actions would seem to propel us into a new and dangerous future. But a continuation of the current disorganized and fragmented responses from the West will only provoke more extreme provocations and make the likelihood of armed conflict greater.

The Democratic presidential hopefuls seem narrowly focused on giving free stuff to potential voters and are oblivious to the dangers to Western civilization (which many progressives openly disdain anyway). President Trump’s go-it-alone strategy as exhibited by his dealings with China, North Korea and Iran have not been successful because these nations see a disorganized Western opposition and are taking advantage of it. America and our friends and allies face great challenges in the coming decades. We need to take decisive action if our way of life is to continue.