Switching around the 18,927 codes that identify imported goods is an increasingly popular way some Chinese exporters are ducking American tariffs
One day in June, seven months after the U.S. imposed stiff tariffs on plywood from China, a wood importer in Oregon got a call from a supplier asking if he would like to get some Chinese plywood tariff-free.
How would that work, asked importer David Visse. The products carry an identification code that is checked by U.S. Customs agents.
“Don’t worry about it,” Mr. Visse says the supplier told him. The plywood would be stripped of its Chinese markings, and “we’ll ship it under some other code.”
Every product imported into the U.S. carries a 10-digit designation called an HTS code, of which there are 18,927 in all. Like a taxonomic version of Noah’s Ark, the code provides a common language to bridge disparate markets and identify products in all their variety.
In a world of increasing tariffs, the code has another function: evading those levies. The business of code-fudging is expanding in step with tariff increases, undermining U.S. efforts to shield American business from foreign competition, according to importers, customs officials, trade attorneys and shipping brokers.
As trade conflict grows between the two largest economies, these professionals say, code misclassification is starting to compete with transshipment—the rerouting of goods through third countries—as a way to duck tariffs.
Data on misclassification are scarce. One indication it is growing can be seen in a surging number of U.S. Customs rulings on questionable export classifications originating from China. There were 146 rulings in July, nearly triple the number six months earlier.
U.S. Commerce Department investigations of possible dumping—selling abroad at below the cost of production at home—also are rising, up 60% last year.
“What comes along with dumping orders is often a significant increase in the duty rate, and anytime you have that, there is much more incentive to change classification,” said Brenda Smith, executive assistant commissioner for U.S. Customs and Border Protection. The number of U.S. tariff orders has grown 38% in the past two years, on products ranging from rubber bands to aluminum sheets.
After President Trump in March ordered 25% levies on steel, Chinese steel plates were being imported coded as turbine parts, said Timothy Brightbill, a trade partner at law firm Wiley Rein LLP, which often works on misclassification and trade-remedy cases. In the first six months of 2018, imports of steel plates fell 11%, year-over-year, while imports of “electric-generating sets,” a turbine classification, soared 121%.
Diamond saw blades imported from China are subject to 82% tariffs because of a past dumping ruling by the Commerce Department. In July, according to U.S. Customs, two California importers controlled by a Chinese manufacturer tried to dodge the tariff by coding diamond saw blades as grindstones.
The manufacturer, Danyang Like Tools Manufacturing Co., said it was independent of the California importers, Customs said, even though one of them told the agency Danyang was its owner. The California firms have disputed the charges. Danyang didn’t respond to calls for comment.
In the freight-heavy seas south of China, a belt of smaller nations has become the center of a lively trade supporting alleged Chinese tariff evasion. Shipping hubs from Vietnam to Singapore, many of which now count China as their top trading partner, evolved to help Chinese exporters.
Freight brokers abound in Penang, an island off Malaysia’s west coast, nestled among metal-roofed shophouses, high-rise offices and grimy industrial zones. One broker’s phone number appeared on a redacted shipping invoice showcased online by a Chinese shipper as a successful example of its tariff evasion. The broker was situated in a small house near a church in a suburb of George Town, Penang’s largest city.
In Malaysia, trade middlemen refer to tariff-dodging practices as “switching BL,” meaning replacing shipping documents to disguise ports of origin, tariff codes or both. “BL” refers to the bill of lading, a cargo inventory provided by a carrier.
“I’m not going to say it doesn’t happen,” said Jalaluddin Harun, director-general of the Malaysian Timber Industry Board. “It may happen. But in Malaysia, that is one thing we try to regulate, and customs is quite sharp on this.”
Malaysia would like to check all shipments but can’t, said Paddy Halim, deputy director-general of the Royal Malaysian Customs Department. “You’re not going to disturb the trade that way, no way. For a few guys, you stop 99% or even 95%? That’s not how it works.”
In China, exporters swap information about tariff codes on websites such as Yishanghuiyou—“Friends Through Commerce”—an offshoot of the wholesale platform 1688.com owned by Alibaba Group Holding Ltd.
“We want to export a batch of plywood trays,” wrote someone using the name Zhang Liang on a Yishanghuiyou forum in January. “What’s the tariff code for plywood that can make it avoid inspections?”
“Our company can help,” replied another user, suggesting they get in touch. Neither user responded to requests for comment.
Misclassification of trade goods has a long pedigree. In 1879, trade attorneys say U.S. tariff collectors said an importer was coloring sugar with molasses to pass it off as a lower-tariff product.
Which code to apply to a shipment is often a matter of discussion between a shipper and a U.S. import broker. Chinese and other Asian middlemen say they develop code workarounds with U.S. import brokers, who help with the documentation and regulations.
Consultations with shippers about how to code products have tripled in recent months at Quicksilver Customs Brokers LLC in San Diego, said the import broker’s owner, Alcides Silva. “Definitely we’ve been getting more misclassification inquiries,” Mr. Silva said, adding that he doesn’t cooperate with them.
“I’ve got a family to raise, so I’m not going to risk it if some Chinese shipper wants to bypass the rules,” he said.
American officials estimate the U.S. loses at least $550 million in customs revenue each year to tariff evasion. Customs says less than 5% of U.S. imports are physically opened for checks. And classification cases, when they develop, can be a minefield.
The U.S. coding system called HTS—for Harmonized Tariff Schedule—contains 88 separate plywood codes, differentiating by types of wood and thickness variations down to the millimeter.
An industry group called the Decorative Hardwoods Association has long said Chinese plywood imports crowd out thousands of American jobs and put mills out of business. The U.S. Commerce Department opened a dumping investigation in November 2016 relating to the most common type of plywood, called hardwood-faced.
Almost immediately, Chinese producers began to ship plywood under four other codes, from 4412.39.10.00 through 4412.39.50.00, attorneys say. These codes apply to softwood-faced plywood, which is slightly different and drew low tariffs ranging from zero to 8%.
U.S. imports of Chinese hardwood-faced plywood fell 20% in 2017. Imports coded as softwood-faced plywood soared 549%.
In November 2017, the U.S. imposed a 183.4% antidumping tariff on hardwood-faced plywood. Chinese shipments under the four softwood-faced plywood codes rocketed higher. They were up 983% in the first half of 2018 from a year earlier.
The Chinese government forbids false customs declarations. “China is closely monitoring the U.S. probe on Chinese plywood, and hopes the American side can carry out its investigation fairly,” the Chinese Ministry of Commerce said in an email. It didn’t comment on misclassification but has generally responded to U.S. trade criticisms by accusing the U.S. of protectionism.
U.S. customs authorities say they haven’t always received full cooperation from China. “The Chinese legal system and the ability to go after specific business entities in China are a challenge for us,” said Ms. Smith, the official at U.S. Customs and Border Protection.
The trade lawyer Mr. Brightbill, who represents American plywood producers, said some Chinese exporters had taken to coding hardwood-faced plywood sheets as parts of ready-to-assemble kitchen cabinets. Imports of such cabinet parts rose 18% in the first six months in 2018, customs data show. The Commerce Department in September moved to subject such parts to its antidumping order and agreed to a probe of Chinese softwood-faced plywood.
Mr. Visse, the Oregon importer, says he received the call offering him tariff-free Chinese plywood as the U.S. was intensifying its tariff threats and U.S. producers were asking for an expansion of the kinds of Chinese plywood subject to anti-dumping tariffs.
Plywood was included in $200 billion of Chinese products on which the Trump administration levied additional 10% tariffs effective in September. That move came on top of tariffs the administration imposed in June on $50 billion of Chinese imports. These weren’t anti-dumping tariffs—the administration justified them based on a law allowing retaliation for alleged foreign discrimination against U.S. commerce.
Mr. Visse said he turned down the tariff-free-plywood offer, uncomfortable with the ethics of the proposition. His stance isn’t necessarily shared by his competitors, he added.
“With this whole global trade war bubbling, I just don’t think people understand how common it is to jerk with the system,” Mr. Visse said. “It’s quite the growing cottage industry.”
It would not be hard for Beijing to offset a loss of demand in a trade war with the US
Martin Wolf October 2, 2018
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” This tweet of March 2 set out the aims and means of Donald Trump’s trade policy. The apparent victory over Canada and Mexico and the signing of a new trade deal will convince him he is right. But China is not Mexico.
The US president believes if a country sells more goods to a trade partner than it buys, it has “won”. He also thinks that if it buys more goods from a trading partner than it sells, it can “win” a protectionist war, because the other side has more to lose. These two convictions — bilateral mercantilism and asymmetric balance of pain — are his guides. His policy is to use the way in which the US “loses” to secure victory. Since the US is also the most powerful country in any bilateral relationship, it has to win.
Serious economists, back to Adam Smith, would insist that seeking a surplus with every trading partner is not “winning”. It is absurd. This is not even intelligent mercantilism, which would focus on the overall balance. Yet, particularly with free capital flows, overall balance is a foolish goal and one that trade policy cannot achieve. It is incredible that such primitive ideas rule the most sophisticated country on earth.
Put the sense of this to one side. Are trade wars easy for a superpower to win against countries with large bilateral trade surpluses? The answer is “yes and no”. Mexico’s exports to the US were 28 per cent of gross domestic product in 2017, while Canada’s were 19 per cent. US exports to Mexico were only 1.3 per cent of GDP, while its exports to Canada were 1.5 per cent. When countries are as asymmetrically dependent as Canada and Mexico, some sort of victory is likely. In a bilateral negotiation, the US was likely to get much of what it wanted (though it seems not to have got it all).
China is a different story. Its exports to the US are a substantially larger share of its GDP than vice versa, at 4.1 per cent, against 0.7 per cent, in 2017. China’s bilateral surplus was about 3.1 per cent of its GDP, which is far down from the 10.2 per cent in 2006. Imagine that the US imposed prohibitive tariffs on all its exports. One might think the effect would be to lower China’s GDP by 4.1 per cent. One would be wrong. US exports to China would also fall, as Chinese retaliation bites. Furthermore, a third of the value added in China’s exports is imported. Chinese exporters could also sell their goods elsewhere.
In the end, the fall in China’s GDP in such a trade war would be less than 2 per cent, other things equal. This is about four month’s growth. Moreover, it would not be hard for China to offset such a loss of demand. Meanwhile, the overall US trade balance would probably not change a wit, since that is determined by domestic supply and demand.
While Beijing prefers a deal, it will not pay a high price. All Chinese are taught about the “century of humiliation”. Xi Jinping, China’s president, is in a strong domestic position. Yet even he might not survive grovelling before a bully.
Mr Trump has made two characteristic mistakes. First, he has over-reached. China cannot deliver bilaterally balanced trade because it is unable to force Chinese people to buy goods they do not want. The point about US trade with China is not that its imports are so high: relative to GDP, they are much the same as the EU’s. The difference is the low level of its exports. That shows lack of competitiveness. Finally, China will not abandon hopes of technological upgrading. No power would.
Second, he has exaggerated US power. In other areas of trade policy, deals might be done. One could imagine changes in Chinese policy on intellectual property and exclusion of US companies. One could imagine a deal in which China gave up developing-country status, in return for being treated as a market economy. But to achieve these outcomes, or better, Mr Trump needs allies, especially the EU and Japan, whom he despises, maybe because they are not tyrannies. But it is not clear he wants such deals: if intellectual property were better protected, yet more US companies would invest in China. That seems the opposite of what he wants.
Mr Trump might surprise us by trumpeting the greatest trade deal in history in which he gets rather little. But suppose the conflict escalates instead, ending up with high bilateral tariffs. Who wins? The broad answer is nobody: trade is disrupted, the rules-governed trading system is devastated, relations between the US and China are damaged and the world becomes more perilous.
Yet, which side loses more? This is difficult to model, because no one knows what would happen. One possibility, analysed by the European Central Bank, is that the conflict goes global. Even the Trump administration might realise that trade diversion is working against them: they stop imports from China and get them from, say, Vietnam. So they go for a 10 per cent across-the-board tariff. The rest of the world retaliates with a 10 per cent tariff on the US. In this case, argues the ECB, the US loses in the short run and China even gains. In a trade war, the larger economy loses less, because the trade it loses is less important to it. The rest of the world’s economy is three times bigger than that of the US.
The US could get a deal on intellectual property and market liberalisation with China. But it cannot get a deal on balancing bilateral trade or stopping China’s economic development. It could get such a deal by co-operating closely with allies. If the US persists 0with pure bilateralism, it will not win. But it will do damage to itself, trade, the world economy and international relations. Trade wars are not good. With great powers, they are not easy to win either.
The world order that the U.S. built after World War II required sacrifice and commitment, but it brought unprecedented benefits. What happens if it disappears?
Robert Kagan
The liberal world order established by the United States a little over seven decades ago is collapsing. This should not be surprising. It was always a historical anomaly. The long period of prosperity, widespread democracy and peace among the great powers was a dramatic departure from the historical norm. It certainly was not where the world had been heading before 1945.
Less than 80 years ago, liberalism outside North America was on its death bed. Dictatorships were thriving, the great powers were fighting their second global conflagration, and acts of unspeakable inhumanity were being committed in the very heart of Western Judeo-Christian civilization and in the ancient civilizations of the East. The very idea of progress seemed absurd.
The dramatic change of course after 1945 was not due to some sudden triumph of our better angels or embrace of Enlightenment principles that had been around for centuries, nor was it the natural unfolding of Universal History in the direction of liberalism. Liberal ideals triumphed because, for the first time, they had power behind them. A new player arose on the international scene: the United States. It possessed a unique and advantageous geography, a large, productive population, unprecedented economic and military power, a national ideology based on liberal principles, and a willingness, after the war, to use its power to establish and sustain a global order roughly consistent with those principles.
That order—with its mutually reinforcing security, economic and political components—has created a geographical and geopolitical space in which liberalism has taken root, spread and evolved. But it was always artificial and tenuous, challenged from within and without by natural forces—the always potent antiliberal aspects of human nature and the competitive and anarchic tendencies of geopolitics. Like a garden, it can last only so long as it is tended and protected. Today, the U.S. seems bent on relinquishing its duties in pushing back the jungle.
Among the many complaints heard now against the liberal order is that it was imposed by an often oppressive, selfish, hypocritical and incompetent American hegemony. And there is truth in that—the liberal order was erected and defended by humans. But what, in the real world, was the better alternative?
The world the United States confronted after World War II had been on a steady course toward destruction since the 19th century. The rise of Germany and Japan, and the relative decline of Great Britain, had produced a seemingly endless cycle of war in Europe (1870, 1914, 1939) and in East Asia (1894, 1904, 1914, and 1931-1945). The global economy had broken down into protectionist enclaves and become an arena for geopolitical competition. Fascism and communism had been on the rise since the 1920s. Even after the defeat of Germany and Japan, populations were devastated and inclined to radical or authoritarian solutions.
No one contemplating the direction of history in those years put their money on the triumph of either peace or liberalism. And had the United States simply gone home after World War II, as it did after World War I, the old patterns would likely have persisted.
President Harry Truman (left) with Secretary of State Dean Acheson in 1950. Photo: Associated Press
Regretting their abstention in the interwar years, Americans decided that they could no longer sit “in the parlor with a loaded shotgun, waiting,” as Secretary of State Dean Acheson put it in 1950. Protecting what he called the “American experiment of life” required creating “an environment of freedom” in the world and deterring aggressors before they gained control of distant continents. The only guarantee of peace was “the continued moral, military and economic power of the United States.” America would have to be “the locomotive at the head of mankind.”
The architects of the new order were not utopian idealists. They believed in the inherent sinfulness of humans, the competitiveness of nations and the tendency of all orders to collapse. They had stared into the abyss and seen the depths to which humankind could fall. They knew the world they created would be flawed and costly to defend, but they believed an imperfect liberal order was better than none at all.
We tend to view the decades after 1945 through the lens of the Cold War, and Soviet communism certainly preoccupied Americans. Yet the response to the Soviet threat, which included the deployment of U.S. forces permanently in both Europe and East Asia and the creation of the global alliance structure, produced a geopolitical revolution. Within the confines of that system, normal geopolitical competition all but ceased. Nations within the order, in Western Europe and East Asia, didn’t compete with each for military superiority, form strategic alliances against one another or claim spheres of influence. Since no balance of power was necessary to preserve the peace among them, as it always had been in the past, they could shift substantial resources and energy from military to economic and social purposes.
Today, some call this “free-riding,” but that misunderstands the revolutionary transformation that proved essential to global peace and prosperity. Historically, Japanese and German economic success had translated into military power and a challenge to the geopolitical hierarchy. But after 1945, their economic miracles simply added to the strength of the liberal world order against potential challengers, most notably the Soviet Union.
The liberal world order was not really “rules-based,” as some say today, at least not in military and strategic matters. The U.S. generally paid little more than lip-service to the United Nations when it used force, and often did not even consult with allies. Yet it did make substantial concessions. At the heart of the order was a grand bargain: The other liberal powers ceded strategic hegemony to the U.S., but in return the U.S. would not use that hegemony to constrain their economic growth. It could not insist on winning every transaction. There had to be a relatively level playing field—at times even one that favored the other liberal powers.
The success of the order was critical to the peaceful conclusion of the Cold War. The Soviets, deprived of opportunities for geopolitical gain, saw themselves falling dangerously behind economically, to the point where they ultimately sued for peace. And yes, the success of the liberal order was accompanied by disasters like the Vietnam War, and American policies were often misguided, selfish, oppressive and resented. Nor in the end did Russia and China, the two great powers outside the order, ever choose to join it except as trading partners.
Yet American hegemony was never so intolerable as to drive other members out. On the contrary, nations banged on the door to come in. Participants in the order, then and now, have shared the implicit understanding that however flawed the American-led liberal world order might be, the realistic alternatives would almost certainly be far worse.
Today many Americans seem to have lost sight of that eminently realistic judgment, and this has happened, unfortunately, just at the moment when the world is slipping back into old patterns. Autocracy, not so long ago dismissed as an anachronism, has shown a strength and resilience that Franklin Roosevelt’s generation would have recognized, while the democracies suffer from paralysis and self-doubt, as they did in the 1930s.
Advanced communications and computing technologies, once thought to be forces for cooperation and freedom, have been turned into weapons of illiberalism. The globalized economy, instead of producing convergence, remains an arena for great-power competition. Nationalism and tribalism are re-emerging. Territorial aggression and obsessions with borders have returned.
In short, the forces of history and powerful elements of human nature are bringing us back to where we were before the U.S. took responsibility for global peace and the preservation of liberalism.
German Chancellor Angela Merkel, flanked by other world leaders and top advisers, faces President Trump at the G7 summit in June 2018. Photo: Jesco Denzel /Bundesregierung/Getty Images
And Americans today are responding much as they did then. Some still believe in the inevitable march of progress, putting their faith in social and economic revolution. Others bid the liberal order good riddance. On college campuses it is synonymous with imperialism and white capitalist exploitation. In the White House and on the American and European right, it is seen as an international elite conspiracy working against the interests of ordinary people.
And across the political spectrum, there is broad agreement that American foreign policy since the end of the Cold War has been a series of disasters. This is said to include not just the Iraq and Afghan wars but also a range of longstanding strategies and attitudes: supporting democracy overseas, expanding NATO and regarding the U.S., hubristically, as the world’s “indispensable nation.”
None of this began with Donald Trump. His “America First” is a pithier version of Barack Obama’s call to focus on “nation-building at home,” and the policies of the two administrations have more in common than either would like to admit. A new “realism” is in vogue, best articulated by thinkers such as Barry Posen and John Mearsheimer. It calls for paring back commitments in Europe and Asia, pulling out of the Middle East and adopting a policy of strategic “restraint.” It is time to accept the world “as it is,” not as we might wish it to be.
It all sounds so sensible. The problem is that, after decades of living within the protective bubble of the liberal world order, we have forgotten what the world “as it is” looks like. To believe that the quarter-century after the Cold War has been a disaster is to forget what disaster means in world affairs.
Which other quarter-century would we prefer? The first quarter of the 20th century included World War I and the birth of communism and fascism. The second saw the triumph of Hitler and Stalin, the Ukrainian famine, the Holocaust, World War II and the invention and use of nuclear weapons. Even the quarter-century beginning in 1950 included the Korean War, the Vietnam War, three Arab-Israeli Wars and the Cuban Missile Crisis.
Perhaps our biggest failure is our unwillingness to imagine that things could look again as they did in the first half of the 20th century, with a few besieged democracies hanging on in a world dominated by dictatorships. Aggression was the norm then, not the exception, and every weapon invented by scientists was eventually put to use.
It should be hard to have a 1930s mentality today, since we know what happened next. But we comfort ourselves that those past horrors cannot be repeated. We see no Hitlers or Stalins on the horizon, forgetting that our forebears did not see them either. Those ambitious tyrants rose to power at a time when they faced few constraints: No nation or group of nations was willing or able to sustain an international order of any kind, much less one that might resist them.
Chinese President Xi Jinping (left) toasts Russian President Vladimir Putin in Moscow in 2017. Photo: Mikhail Svetlov/Getty Images
Today we know that Vladimir Putin has grand ambitions but not yet the capacity to realize them. He reveres Stalin, but he is not Stalin. What would a less constrained Putin do? A Russia that restored its Soviet and imperial borders would be a far different player on the international scene than the Russia now confined east of Ukraine and the Baltic nations.
Today a more powerful China, with a new premier-for-life, is moving away from the cautious foreign policies of the Deng era. We cannot yet know what an even more powerful and less constrained China will want or do as it expands its regional and global influence, especially if it does so by military means.
We should also recall that the European peace established since the Cold War is less than three decades old. Prior to World War II, wars in Europe were brought on by a combination of growing nationalism, collapsing democracies and global instability, all of which are visible today. Those who oppose the American promotion of democracy abroad generally have non-Western nations in mind, but let’s not have too much faith in the West. Few of Europe’s democracies date back before World War II. It was in the West that fascism and communism arose, and it is in the West that democracy is at risk once again.
The emerging consensus today is that the U.S. has been doing too much. But what if we have been doing too little? We wanted to believe that the course of history was taking us away from the war, tyranny and destruction of the first half of the 20th century, but it may be taking us back toward them, absent some prodigious effort on our part to prevent such regression. Those who call themselves realists today suggest that we can do less in the world and get more out of it. It is a lovely fiction. Our real choice is between maintaining the liberal world order, with all its moral and material costs, or letting it collapse and preparing for the catastrophes that are likely to follow.
Nothing is determined, not the triumph of liberalism or its defeat. As we have seen these past 70 years, tremendous human progress and human betterment are possible even in a dangerous world. To know that the jungle will always be there is not to despair of keeping it at bay, as we have done more or less successfully for decades. But make no mistake: The liberal order is as precarious as it is precious. It needs constant tending lest the jungle grow back and engulf us all.
This essay is adapted from Mr. Kagan’s new book, “The Jungle Grows Back: America and Our Imperiled World,” which will be published by Knopf on Sept. 18. He is a senior fellow at the Brookings Institution in Washington, D.C.
The Crisis in U.S.-China Relations
The Trump administration has staked out an aggressive position, but its critique of Chinese behavior is widely shared and points to the need for a new American strategy.
Richard N. Haass
Like all such meetings with senior Chinese officials, mine last week took place in a cloistered government compound, the overstuffed chairs placed side by side with only a small table between them, an arrangement that requires turning your entire body or twisting your neck to make eye contact. Just behind the table dividing us was the interpreter; my host was flanked by a phalanx of aides, all of whom took notes but said nothing throughout the hourlong session.
Just minutes into our meeting, his voice rose. “The Chinese people are upset and angry. From beginning to end he was just bashing China. In 40 years, we have never seen a speech like this. Many believe it is a symbol of a new cold war. We find this speech unacceptable, as it turns a blind eye to our joint efforts of the last 40 years and what China has achieved.”
The “he” is Vice President Mike Pence, and the speech is the much-publicized one that he delivered on Oct. 4 at the Hudson Institute in Washington. Another of my Chinese interlocutors compared the speech to the talk delivered in March 1946 by Winston Churchill in Fulton, Mo. The only difference, this person said, was that the “Iron Curtain” has been replaced by a “Bamboo Curtain.” “Winter is coming,” predicted a Chinese scholar over dinner.
The vice president’s speech heralds a new era in modern Sino-American relations. Many in China believe that the trade war being waged by the United States has evolved into a comprehensive effort to block China’s rise. U.S. sanctions introduced in response to a Chinese purchase of weapons from Russia, new U.S. arms sales to Taiwan, U.S. freedom of navigation operations in the South China Sea—all reinforce the view that the Trump administration’s aims are strategic and not just economic.
To be sure, the speech by the vice president was broader and deeper in its criticism of China than any other U.S. government statement of the past several decades. A number of its accusations are debatable if not unfounded. That said, the remarks, which build on the December 2017 National Security Strategy describing China (along with Russia) as a “revisionist power,” are consistent with a critique of China that many in the foreign policy establishment, Democrats and Republicans alike, have voiced in recent years.
The critique has three parts. First, there is the view that China has violated the spirit and letter of the World Trade Organization, which it joined in 2001. The U.S. list of complaints includes higher-than-warranted tariff and nontariff barriers, forced transfers of technology, theft of intellectual property, government subsidies and currency manipulation designed to make exports cheaper and to reduce demand for imports.
Mao Zedong, left, and President Richard Nixon shook hands as they met on Feb. 21, 1972. Nixon's visit marked the first time an American president had visited the People's Republic of China. Photo: associated press
Second, China’s integration into the world economy has not brought about hoped-for reforms. Large state-owned enterprises, once expected to be wound up, remain. President Xi Jinping’s anti-corruption campaign seems to be motivated in part by a desire to root out his opponents, and he has managed to abolish term limits for his own office. As many as one million Muslims in western China are in re-education camps. Civil society has been further circumscribed. China appears to be more authoritarian today than at any time since Mao Zedong was in charge.
Third, China’s foreign policy has become more assertive. China has acted unilaterally to militarize the South China Sea despite an international legal ruling rejecting its claims and a personal pledge from President Xi that China would not do so. It unilaterally declared an air-defense identification zone in the East China Sea and regularly challenges Japan on disputed islands. China is also pursuing its global “Belt and Road” infrastructure initiative, which looks less like a project to promote development than a geoeconomic ploy to increase its access and influence around the world.
This is hardly the first time that the U.S. and China have been at loggerheads. Their difficult modern history goes back to World War II. The Chinese, divided between Communist guerrillas led by Mao and authoritarian, pro-capitalist Nationalists led by Chiang Kai-shek, were fighting the Japanese occupation as well as one another. The U.S. provided extensive military assistance to the Nationalists. Even so, by 1949 the Communists controlled the mainland and the Nationalists were forced to flee to Taiwan. The U.S. retained diplomatic ties with the nationalist-led Republic of China and refused to recognize the newly declared People’s Republic of China.
Soon after, American and Chinese soldiers fought in Korea, and there were several crises over the status of islands in waters separating China and Taiwan. At one point in 1954, the U.S. seriously considered using nuclear weapons against China only to hold off when allies weighed in on behalf of restraint. The U.S. did, however, sign a mutual defense treaty with Taiwan.
There matters stood until the late 1960s, when American analysts realized that China and the Soviet Union increasingly saw one another as rivals. Acting on the adage that “the enemy of my enemy is my friend,” Richard Nixon and his national security adviser Henry Kissinger exploited the Sino-Soviet split to forge ties with the mainland in the hope it would give the U.S. leverage in its struggle with the far more dangerous U.S.S.R. Within a decade, the U.S. moved to recognize the People’s Republic of China as the sole legal government of China, and relations with Taiwan were formally downgraded.
This second phase of Sino-American ties—in which, among other things, the two countries cooperated against the U.S.S.R. in Afghanistan—lasted some two decades, until the end of the Cold War. What provided the impetus for a third era in Sino-American relations was growing economic interaction, initiated by Deng Xiaoping, who took power after Mao and in 1978 declared a policy of “reform and opening.” Each side sought access to the market of the other, and the Chinese economy began its long and spectacular rise.
Many Americans hoped that engaging with China would open the country politically and economically and moderate any temptation on its part to challenge U.S. primacy. Nor was American policy just based on hope. The U.S. also hedged against the possibility that China would become a strategic rival by maintaining its alliances in the region along with air and naval forces to signal U.S. resolve.
Jimmy Carter, left, and Deng Xiaoping during Deng’s visit to Washington on Jan. 28, 1979. Photo: Gilbert UZAN/Gamma-Rapho/Getty Images
This third, optimistic era has now drawn to a close, as Vice President Pence’s speech emphatically showed. The economic ties meant to buttress the relationship have now become a major source of friction. Limited strategic cooperation on North Korea or issues such as climate change cannot offset this trend, which has been made worse by political shifts in China itself. It is a non-starter to think that China—whose economy is 30 times larger than it was three decades ago and is now the world’s first or second largest—will be content as a mere “responsible stakeholder” (to use then-Deputy Secretary of State Robert Zoellick’s 2005 phrase) in a U.S.-designed and dominated international system.
Not surprisingly, this liberal-democratic order holds little appeal for a Communist Party leadership that sees liberalism and democracy as a threat to its rule. Just as important, this order is fast fading. It has been rejected by Russia, North Korea, Iran and others, and new issues have emerged (climate change, cyberwar) that the order was not designed to handle. The Trump administration, for its part, has made clear that, unlike its predecessors, it sees the post-World War II order as inconsistent with U.S. interests.
The question now is what a new, fourth era of Sino-American relations will look like. There is a good deal of speculation that it will be a new cold war, but a cold war is a possible (and undesirable) outcome, not a strategy. The containment strategy that shaped U.S. policy against the Soviets doesn’t apply to a new challenge that is more economic than military. Indeed, some disagreements between the U.S. and China can be narrowed or even resolved, including those over tariff and nontariff barriers, requirements for joint ventures and the size of the trade imbalance. But these are exceptions.
The possibility of a U.S.-China armed confrontation over the South China Sea, Taiwan or even North Korea cannot be ruled out. But even if such a dramatic scenario does not materialize, it is easy to see how the relationship could deteriorate. As we know from the earlier Cold War, such competitions are risky and costly, and all but preclude cooperation even when it would be in the interests of both sides.
The most realistic option for the future is to focus on managing the two countries’ major disagreements. This approach has worked for four decades when it comes to Taiwan. The U.S. acknowledges the Chinese position that there is but one China and Taiwan is part of China. The task now is for China, Taiwan and the U.S. to avoid unilateral steps that would jeopardize an arrangement that has kept the peace and allowed Taiwan to flourish economically and politically.
Management is also likely to be the best approach for the South China Sea. As with Taiwan, “final status” issues are best left vague. The emphasis ought to be on avoiding unilateral actions that could trigger a crisis.
In other domains, the U.S. will simply have to accept China for what it is. China will continue to maintain a large (if somewhat reduced) state role in the economy and a closed political structure. “As China enters middle income, we need a strong anchor for our society,” one senior Chinese official told me. “We need to strengthen the Party. You equate authority with authoritarianism, and think China is a dictatorship. This is wrong.” The U.S. should call out human-rights abuses in China, but the focus of our foreign policy should be China’s foreign policy, where we are more likely to have influence.
Attempting to hold China back is simply not a realistic policy for the U.S. Worse, it would stimulate nationalist impulses there that will set the countries on a collision course.
To avoid outright conflict, the U.S. needs to persuade Chinese officials that taking on the U.S. militarily is a fool’s errand—a calculation that depends in some measure on our international support. The Trump administration has adopted a tough line toward China, but it has undermined its own policy by weakening our alliances and rejecting the Trans-Pacific Partnership, which would have pressured China to further reform its economy. Such strategic inconsistency doesn’t serve U.S. interests.
The U.S. also needs to adopt new policies on several fronts. The just-signed-into-law “Build Act” to encourage private American investment in the developing world is a useful, if limited, response to China’s Belt and Road Initiative. Strengthening controls on Chinese investment in the U.S. is also a step in the right direction. Some supply chains may need to be rerouted away from China, although such interdependence is one bulwark against conflict. Universities and think tanks should refuse to accept Chinese government funding. And if the U.S. isn’t to be left behind by Beijing’s major technology push, “Made in China 2025,” the public and private sectors will need to cooperate much more in developing critical fields such as artificial intelligence.
The U.S. must also get its own house in order. China is not responsible for America’s health-care crisis, aging infrastructure, poor public schools, exploding debt or inadequate immigration policy. Foreign policy must truly begin at home for the U.S. to compete successfully. Progress across these areas would also disabuse the Chinese of the idea that the U.S. is in decline and lacks the will and ability to stand up to a dynamic new power.
Finally, it would be foolish to give up on the prospect of selective cooperation. North Korea is a case in point. Afghanistan could be another, given China’s influence in Pakistan. Sino-American cooperation is also essential if the world is to weather the next financial crisis, make progress on climate change, reform the WTO and set forth rules for cyberspace. The U.S. will want to avoid holding areas of potential cooperation hostage to areas of competition.
China will have to do its part as well. China’s economy is too large for it to hide behind the argument that it remains a developing economy that should not be expected to live up to global norms. President Xi has called for a new type of great power relationship between the two countries, but he has not explained what he means in such a way as to clarify or resolve current tensions. Doing so would be one mark of a great power.
Competition between the U.S. and China need not be “a four-letter word,” as Matthew Pottinger, the senior staff member on the National Security Council responsible for Asia, has said. A reasonable goal would be managed competition that allows for limited cooperation. For now, however, the Trump administration has adopted a confrontational approach without making clear what it seeks to achieve. It has thus ignored Clausewitz’s prudent advice—that battle should be joined only “as the means towards the attainment of the object of the War.”
Mr. Haass is president of the Council on Foreign Relations. His most recent book is “A World in Disarray: American Foreign Policy and the Crisis of the Old Order.”
Why a U.S.-Chinese War Could Spiral Out of Control
Caitlin Talmadge
As China’s power has grown in recent years, so, too, has the risk of war with the United States. Under President Xi Jinping, China has increased its political and economic pressure on Taiwan and built military installations on coral reefs in the South China Sea, fueling Washington’s fears that Chinese expansionism will threaten U.S. allies and influence in the region. U.S. destroyers have transited the Taiwan Strait, to loud protests from Beijing. American policymakers have wondered aloud whether they should send an aircraft carrier through the strait as well. Chinese fighter jets have intercepted U.S. aircraft in the skies above the South China Sea. Meanwhile, U.S. President Donald Trump has brought long-simmering economic disputes to a rolling boil.
A war between the two countries remains unlikely, but the prospect of a military confrontation—resulting, for example, from a Chinese campaign against Taiwan—no longer seems as implausible as it once did. And the odds of such a confrontation going nuclear are higher than most policymakers and analysts think.
Members of China’s strategic community tend to dismiss such concerns. Likewise, U.S. studies of a potential war with China often exclude nuclear weapons from the analysis entirely, treating them as basically irrelevant to the course of a conflict. Asked about the issue in 2015, Dennis Blair, the former commander of U.S. forces in the Indo-Pacific, estimated the likelihood of a U.S.-Chinese nuclear crisis as “somewhere between nil and zero.”
This assurance is misguided. If deployed against China, the Pentagon’s preferred style of conventional warfare would be a potential recipe for nuclear escalation. Since the end of the Cold War, the United States’ signature approach to war has been simple: punch deep into enemy territory in order to rapidly knock out the opponent’s key military assets at minimal cost. But the Pentagon developed this formula in wars against Afghanistan, Iraq, Libya, and Serbia, none of which was a nuclear power.
If deployed against China, the Pentagon’s preferred style of conventional warfare would be a potential recipe for nuclear escalation.
China, by contrast, not only has nuclear weapons; it has also intermingled them with its conventional military forces, making it difficult to attack one without attacking the other. This means that a major U.S. military campaign targeting China’s conventional forces would likely also threaten its nuclear arsenal. Faced with such a threat, Chinese leaders could decide to use their nuclear weapons while they were still able to.
As U.S. and Chinese leaders navigate a relationship fraught with mutual suspicion, they must come to grips with the fact that a conventional war could skid into a nuclear confrontation. Although this risk is not high in absolute terms, its consequences for the region and the world would be devastating. As long as the United States and China continue to pursue their current grand strategies, the risk is likely to endure. This means that leaders on both sides should dispense with the illusion that they can easily fight a limited war. They should focus instead on managing or resolving the political, economic, and military tensions that might lead to a conflict in the first place.
A NEW KIND OF THREAT
There are some reasons for optimism. For one, China has long stood out for its nonaggressive nuclear doctrine. After its first nuclear test, in 1964, China largely avoided the Cold War arms race, building a much smaller and simpler nuclear arsenal than its resources would have allowed. Chinese leaders have consistently characterized nuclear weapons as useful only for deterring nuclear aggression and coercion. Historically, this narrow purpose required only a handful of nuclear weapons that could ensure Chinese retaliation in the event of an attack. To this day, China maintains a “no first use” pledge, promising that it will never be the first to use nuclear weapons.
The prospect of a nuclear conflict can also seem like a relic of the Cold War. Back then, the United States and its allies lived in fear of a Warsaw Pact offensive rapidly overrunning Europe. NATO stood ready to use nuclear weapons first to stalemate such an attack. Both Washington and Moscow also consistently worried that their nuclear forces could be taken out in a bolt-from-the-blue nuclear strike by the other side. This mutual fear increased the risk that one superpower might rush to launch in the erroneous belief that it was already under attack. Initially, the danger of unauthorized strikes also loomed large. In the 1950s, lax safety procedures for U.S. nuclear weapons stationed on NATO soil, as well as minimal civilian oversight of U.S. military commanders, raised a serious risk that nuclear escalation could have occurred without explicit orders from the U.S. president.
The good news is that these Cold War worries have little bearing on U.S.-Chinese relations today. Neither country could rapidly overrun the other’s territory in a conventional war. Neither seems worried about a nuclear bolt from the blue. And civilian political control of nuclear weapons is relatively strong in both countries. What remains, in theory, is the comforting logic of mutual deterrence: in a war between two nuclear powers, neither side will launch a nuclear strike for fear that its enemy will respond in kind.
The bad news is that one other trigger remains: a conventional war that threatens China’s nuclear arsenal. Conventional forces can threaten nuclear forces in ways that generate pressures to escalate—especially when ever more capable U.S. conventional forces face adversaries with relatively small and fragile nuclear arsenals, such as China. If U.S. operations endangered or damaged China’s nuclear forces, Chinese leaders might come to think that Washington had aims beyond winning the conventional war—that it might be seeking to disable or destroy China’s nuclear arsenal outright, perhaps as a prelude to regime change. In the fog of war, Beijing might reluctantly conclude that limited nuclear escalation—an initial strike small enough that it could avoid full-scale U.S. retaliation—was a viable option to defend itself.
STRAIT SHOOTERS
The most worrisome flash point for a U.S.-Chinese war is Taiwan. Beijing’s long-term objective of reunifying the island with mainland China is clearly in conflict with Washington’s longstanding desire to maintain the status quo in the strait. It is not difficult to imagine how this might lead to war. For example, China could decide that the political or military window for regaining control over the island was closing and launch an attack, using air and naval forces to blockade Taiwanese harbors or bombard the island. Although U.S. law does not require Washington to intervene in such a scenario, the Taiwan Relations Act states that the United States will “consider any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States.” Were Washington to intervene on Taipei’s behalf, the world’s sole superpower and its rising competitor would find themselves in the first great-power war of the twenty-first century.
In the course of such a war, U.S. conventional military operations would likely threaten, disable, or outright eliminate some Chinese nuclear capabilities—whether doing so was Washington’s stated objective or not. In fact, if the United States engaged in the style of warfare it has practiced over the last 30 years, this outcome would be all but guaranteed.
The most worrisome flash point for a U.S.-Chinese war is Taiwan.
Consider submarine warfare. China could use its conventionally armed attack submarines to blockade Taiwanese harbors or bomb the island, or to attack U.S. and allied forces in the region. If that happened, the U.S. Navy would almost certainly undertake an antisubmarine campaign, which would likely threaten China’s “boomers,” the four nuclear-armed ballistic missile submarines that form its naval nuclear deterrent. China’s conventionally armed and nuclear-armed submarines share the same shore-based communications system; a U.S. attack on these transmitters would thus not only disrupt the activities of China’s attack submarine force but also cut off its boomers from contact with Beijing, leaving Chinese leaders unsure of the fate of their naval nuclear force. In addition, nuclear ballistic missile submarines depend on attack submarines for protection, just as lumbering bomber aircraft rely on nimble fighter jets. If the United States started sinking Chinese attack submarines, it would be sinking the very force that protects China’s ballistic missile submarines, leaving the latter dramatically more vulnerable.
Even more dangerous, U.S. forces hunting Chinese attack submarines could inadvertently sink a Chinese boomer instead. After all, at least some Chinese attack submarines might be escorting ballistic missile submarines, especially in wartime, when China might flush its boomers from their ports and try to send them within range of the continental United States. Since correctly identifying targets remains one of the trickiest challenges of undersea warfare, a U.S. submarine crew might come within shooting range of a Chinese submarine without being sure of its type, especially in a crowded, noisy environment like the Taiwan Strait. Platitudes about caution are easy in peacetime. In wartime, when Chinese attack submarines might already have launched deadly strikes, the U.S. crew might decide to shoot first and ask questions later.
Adding to China’s sense of vulnerability, the small size of its nuclear-armed submarine force means that just two such incidents would eliminate half of its sea-based deterrent. Meanwhile, any Chinese boomers that escaped this fate would likely be cut off from communication with onshore commanders, left without an escort force, and unable to return to destroyed ports. If that happened, China would essentially have no naval nuclear deterrent.
Platitudes about caution are easy in peacetime. In wartime, U.S. forces might decide to shoot first and ask questions later.
The situation is similar onshore, where any U.S. military campaign would have to contend with China’s growing land-based conventional ballistic missile force. Much of this force is within range of Taiwan, ready to launch ballistic missiles against the island or at any allies coming to its aid. Once again, U.S. victory would hinge on the ability to degrade this conventional ballistic missile force. And once again, it would be virtually impossible to do so while leaving China’s nuclear ballistic missile force unscathed. Chinese conventional and nuclear ballistic missiles are often attached to the same base headquarters, meaning that they likely share transportation and supply networks, patrol routes, and other supporting infrastructure. It is also possible that they share some command-and-control networks, or that the United States would be unable to distinguish between the conventional and nuclear networks even if they were physically separate.
To add to the challenge, some of China’s ballistic missiles can carry either a conventional or a nuclear warhead, and the two versions are virtually indistinguishable to U.S. aerial surveillance. In a war, targeting the conventional variants would likely mean destroying some nuclear ones in the process. Furthermore, sending manned aircraft to attack Chinese missile launch sites and bases would require at least partial control of the airspace over China, which in turn would require weakening Chinese air defenses. But degrading China’s coastal air defense network in order to fight a conventional war would also leave much of its nuclear force without protection.
Once China was under attack, its leaders might come to fear that even intercontinental ballistic missiles located deep in the country’s interior were vulnerable. For years, observers have pointed to the U.S. military’s failed attempts to locate and destroy Iraqi Scud missiles during the 1990–91 Gulf War as evidence that mobile missiles are virtually impervious to attack. Therefore, the thinking goes, China could retain a nuclear deterrent no matter what harm U.S. forces inflicted on its coastal areas. Yet recent research suggests otherwise. Chinese intercontinental ballistic missiles are larger and less mobile than the Iraqi Scuds were, and they are harder to move without detection. The United States is also likely to have been tracking them much more closely in peacetime. As a result, China is unlikely to view a failed Scud hunt in Iraq nearly 30 years ago as reassurance that its residual nuclear force is safe today, especially during an ongoing, high-intensity conventional war.
China’s vehement criticism of a U.S. regional missile defense system designed to guard against a potential North Korean attack already reflects these latent fears. Beijing’s worry is that this system could help Washington block the handful of missiles China might launch in the aftermath of a U.S. attack on its arsenal. That sort of campaign might seem much more plausible in Beijing’s eyes if a conventional war had already begun to seriously undermine other parts of China’s nuclear deterrent. It does not help that China’s real-time awareness of the state of its forces would probably be limited, since blinding the adversary is a standard part of the U.S. military playbook.
Put simply, the favored U.S. strategy to ensure a conventional victory would likely endanger much of China’s nuclear arsenal in the process, at sea and on land. Whether the United States actually intended to target all of China’s nuclear weapons would be incidental. All that would matter is that Chinese leaders would consider them threatened.
LESSONS FROM THE PAST
At that point, the question becomes, How will China react? Will it practice restraint and uphold the “no first use” pledge once its nuclear forces appear to be under attack? Or will it use those weapons while it still can, gambling that limited escalation will either halt the U.S. campaign or intimidate Washington into backing down?
Chinese writings and statements remain deliberately ambiguous on this point. It is unclear which exact set of capabilities China considers part of its core nuclear deterrent and which it considers less crucial. For example, if China already recognizes that its sea-based nuclear deterrent is relatively small and weak, then losing some of its ballistic missile submarines in a war might not prompt any radical discontinuity in its calculus.
The danger lies in wartime developments that could shift China’s assumptions about U.S. intentions. If Beijing interprets the erosion of its sea- and land-based nuclear forces as a deliberate effort to destroy its nuclear deterrent, or perhaps even as a prelude to a nuclear attack, it might see limited nuclear escalation as a way to force an end to the conflict. For example, China could use nuclear weapons to instantaneously destroy the U.S. air bases that posed the biggest threat to its arsenal. It could also launch a nuclear strike with no direct military purpose—on an unpopulated area or at sea—as a way to signal that the United States had crossed a redline.
If such escalation appears far-fetched, China’s history suggests otherwise. In 1969, similar dynamics brought China to the brink of nuclear war with the Soviet Union. In early March of that year, Chinese troops ambushed Soviet guards amid rising tensions over a disputed border area. Less than two weeks later, the two countries were fighting an undeclared border war with heavy artillery and aircraft. The conflict quickly escalated beyond what Chinese leaders had expected, and before the end of March, Moscow was making thinly veiled nuclear threats to pressure China to back down.
If nuclear escalation appears far-fetched, China’s history suggests otherwise.
Chinese leaders initially dismissed these warnings, only to radically upgrade their threat assessment once they learned that the Soviets had privately discussed nuclear attack plans with other countries. Moscow never intended to follow through on its nuclear threat, archives would later reveal, but Chinese leaders believed otherwise. On three separate occasions, they were convinced that a Soviet nuclear attack was imminent. Once, when Moscow sent representatives to talks in Beijing, China suspected that the plane transporting the delegation was in fact carrying nuclear weapons. Increasingly fearful, China test-fired a thermonuclear weapon in the Lop Nur desert and put its rudimentary nuclear forces on alert—a dangerous step in itself, as it increased the risk of an unauthorized or accidental launch. Only after numerous preparations for Soviet nuclear attacks that never came did Beijing finally agree to negotiations.
China is a different country today than it was in the time of Mao Zedong, but the 1969 conflict offers important lessons. China started a war in which it believed nuclear weapons would be irrelevant, even though the Soviet arsenal was several orders of magnitude larger than China’s, just as the U.S. arsenal dwarfs China’s today. Once the conventional war did not go as planned, the Chinese reversed their assessment of the possibility of a nuclear attack to a degree bordering on paranoia. Most worrying, China signaled that it was actually considering using its nuclear weapons, even though it had to expect devastating retaliation. Ambiguous wartime information and worst-case thinking led it to take nuclear risks it would have considered unthinkable only months earlier. This pattern could unfold again today.
A U.S. B-2 Spirit bomber, capable of carrying nuclear weapons, in Hawaii, September 2018
KEEP THEM GUESSING
Both the United States and China can take some basic measures to reduce these dangers. More extensive dialogue and exchange—formal and informal, high level and working level, military and political—could help build relationships that might allow for backchannel de-escalation during a conflict. The two countries already have a formal military hot line in place, although it does not connect political leaders. A dedicated and tested infrastructure for senior military and political leaders to reliably and easily communicate during wartime would provide at least one off-ramp in the event of a crisis.
But better communication can only do so much for a problem that ultimately stems from military doctrine and grand strategy. Given that the United States’ standard wartime playbook is likely to back China into a nuclear corner, it would be logical for Washington to consider alternative strategies that would leave China’s nuclear capabilities untouched. For example, some analysts have proposed coercing China through a distant naval blockade, and others have suggested confining any U.S. campaign to air and naval operations off China’s coast. The goal in both cases would be to avoid attacks on the Chinese mainland, where the bulk of Chinese nuclear forces reside.
The problem with these alternatives is that the mainland is also where the bulk of Chinese conventional capabilities are located. The United States is unlikely to voluntarily leave these capabilities intact, given its predilection for reducing its own casualties and rapidly destroying enemy forces. If China is using its mainland bases to lob ballistic missiles at U.S. troops and allies, it is hard to imagine a U.S. president ordering the military to hold back in the interest of de-escalation. U.S. allies are particularly unlikely to accept a cautious approach, as they will be more exposed to Chinese military power the longer it is left intact. No one wants a U.S.-Chinese war to go nuclear, but a U.S. campaign that avoids escalation while letting China’s conventional forces turn Taiwan—not to mention Japan or South Korea—into a smoking ruin would not seem like much of a victory either.
Of course, Beijing could also take steps to ameliorate the problem, but this is just as unlikely. China has chosen to mount both conventional and nuclear warheads on the same missiles and to attach both conventional and nuclear launch brigades to the same bases. It likely sees some strategic advantage in these linkages. Precisely because these entanglements raise the prospect of nuclear escalation, Beijing may believe that they contribute to deterrence—that they will make the United States less likely to go to war in the first place.
But just as China benefits if the United States believes there is no safe way to fight a war, the United States benefits if China believes that war would result not only in China’s conventional defeat but also in its nuclear disarmament. In fact, the United States might believe that this fear could give it greater leverage during a conflict and perhaps deter China from starting one at all.
In short, neither side may see much value in peacetime reassurance. Quite the opposite: they may be courting instability. If this is the case, however, then U.S. and Chinese leaders should recognize the tradeoffs inherent in their chosen policies. The threat of escalation may make war less likely, but it also makes war radically more dangerous if it does break out. This sobering reality should encourage leaders on both sides to find ways of resolving political, economic, and military disputes without resorting to a war that could rapidly turn catastrophic for the region and the world.
This November, we will commemorate the 100th anniversary of the end of what was called “the war to end all wars” between the great powers of the early twentieth century. Of course, the war to end all wars turned out to be anything but. Because of a catastrophic series of unintended consequences, more wars followed in its wake, and the geopolitical map of the world has been redrawn three times since then.
When future generations look back on 2018, it could well be as the year in which the relationship between the two great powers of the twenty-first century—the United States and China—shifted from peaceful coexistence to a new form of confrontation, although its final trajectory remains far from certain.
In a speech at the Hudson Institute earlier this month, U.S. Vice President Mike Pence accused China of unfair trade practices, intellectual property theft, increasing military aggression, and interference in the United States’ domestic politics. The vice president’s speech is the latest in a long line of authoritative statements and policies from the Trump administration redefining future U.S. strategy toward China. These include the U.S. National Security Strategy published last December, January’s new U.S. Defense Strategy, last month’s Department of Defense report on the future of U.S. defense manufacturing and, of course, the initiation of the trade war with China in June.
This series of doctrinal statements by the United States has formally declared an end to a 40-year period of U.S. strategic engagement with China, and its replacement with a new period of strategic competition. All rest on the assumption that engagement has failed; that China’s domestic market has not opened up sufficiently to foreign export and investment penetration; that, rather than becoming a responsible stakeholder in the global rules-based order, China is now developing an alternative international order with Chinese characteristics; and that instead of becoming more democratic in its domestic politics, Beijing has now decided to double down as a Leninist state.
Washington’s decision to push back against Chinese foreign policy and economic strategy is an inevitable structural response to the fact that China’s aggregate military and economic power has now begun to challenge U.S. global dominance. This radically new approach to U.S. declaratory policy toward China also appears to have attracted widespread support across U.S. government agencies, from the U.S. Congress, and from a wide cross-section of U.S. businesses. But as U.S. strategists think through its operational implications, they will need to anticipate and deal with a number of potential unintended consequences—including the possibility of a rapid escalation from strategic competition to decoupling to confrontation, containment, and, perhaps, ultimately, to armed conflict.
TEN QUESTIONS ABOUT STRATEGIC COMPETITION
The United States and its partners and allies around the world will need to consider a number of critical questions as Washington undertakes the translation of this fundamental change in declaratory strategy into operational policy. First, what is the United States’ desired endpoint? What does the United States do if China does not acquiesce to the demands outlined in the vice president’s speech—including a “fair and reciprocal” trade deal, and ends to “the theft of American intellectual property” and “the predatory practice of forced technology transfer”—but instead explicitly rejects them? What happens if the new U.S. strategy not only fails to produce the desired objective but instead produces the reverse, namely an increasingly mercantilist, nationalist, and combative China? There are two broad possibilities here: either Beijing will concede to the changes that Washington wants, or it will double down on its current policies.
Second, if we are now in a period of strategic competition, what are the new rules of the game? How can Washington reach a common understanding with Beijing as to what these new rules might be? Or are there now to be no rules other than those which may be fashioned over time by the new operational dynamics of strategic competition? How, for example, will the United States now manage dangerous incidents at sea (such as recently occurred when a Chinese warship came within 45 yards of the USS Decatur’s bow); incidents in the air; cyberattacks; nuclear proliferation; strategic competition in third countries; the purchase and sale of U.S. Treasury Notes; the future of the exchange rate; and other major policy domains?
Third, and closely related to these first two questions, is whether or not any common strategic narrative between China and the United States is now possible to set the conceptual parameters for the future bilateral relationship. In the absence of new rules that delimit the parameters of the relationship, and without a common conceptual framework of what the relationship is ultimately about, how can these two powers avoid, consciously or subconsciously, simply sliding into a new Cold War? And then a hot one?
Fourth, to the extent that some U.S. strategic planners may be considering further reorienting U.S. China policy from strategic competition toward full-blooded containment and comprehensive economic decoupling, George Kennan’s famous “Long Telegram” of 1946 and his “X” article on “The Sources of Soviet Conduct,” published in Foreign Affairs the following year, are worth a careful rereading. Kennan argued that if properly contained the Soviet Union would likely break up under the weight of its internal pressures. It would be a heroic assumption, however, that holds that in a new Cold War, the Chinese system would collapse under the weight of its own internal contradictions should a similar policy be applied. It might. But the size of China’s domestic economy, the extent of its continuing economic engagement with the rest of the non-U.S. world, together with the new technologies of political control now available to an authoritarian state, should give those who think that China will turn out just like the Soviet Union pause for thought.
Fifth, is the United States convinced that Chinese authoritarian capitalism actually poses a potent ideological challenge to democratic capitalism, the way that Soviet communism once did? The Soviet Union constructed client regimes around the world of a similar ideological nature to its own. Is there evidence that China is doing the same? If there is, what is the evidence to date of China’s success or failure? Or is China doing something qualitatively different—essentially being agnostic about the domestic political systems of other states, while still building their own coalition of the willing around the world based on the growing size of China’s global economic footprint, to be drawn upon when Chinese foreign policy interests are at stake?
Sixth, is the United States prepared to make a strategic counteroffer to the world to the financial and economic commitment reflected in a multitrillion-dollar set of Chinese programs—including the Belt and Road Initiative, concessional loans, and bilateral aid flows? Or will Washington continue to slash its own aid budgets and reduce the size of its foreign service? The United States won western Europe from the Soviet Union because of the Marshall Plan. It will not win its strategic competition with China on the basis of fine sentiment alone in Eurasia, Africa, and Latin America.
Seventh, beyond concessional finance and grant aid, there is the broader question of how the United States will compete over time with the magnitude of China’s trade and investment volumes in both Asia and Europe. How will the cancellation of the Trans-Pacific Partnership with Asia and the Transatlantic Trade and Investment Partnership, its counterpart with Europe, affect the relative significance of the United States as a trade, investment, and technology partner with these regions in the future? Beijing is already a bigger economic partner with Asia and Africa than with Washington. Europe and Latin America are likely to follow.
How confident is the United States that its friends and allies around the world will embrace its newly competitive strategy toward China?
Eighth, for these and other reasons, how confident is the United States that its friends and allies around the world will embrace its newly competitive strategy toward China? Many U.S. allies may decide to hedge their bets, waiting until it becomes clearer whether this U.S. shift is permanent and whether it will succeed.
Ninth, what ideational case can the United States make to the world for supporting its new strategy as an alternative to Chinese regional and global domination? Pence consciously and eloquently couched his call to arms in terms of U.S. interests. But he made no appeal to the international community based on common interests and shared values, which have been historically articulated though the U.S.-led, rules-based order crafted after World War II. Where is the shining city on the hill? Or are we left with a choice between one realist power and another?
Finally, U.S. and allied strategists need also to consider how a major cleavage in U.S.-Chinese relations would affect the global economy and global action on climate change in the more immediate term. A radical decoupling of the U.S. and Chinese economies could lead bilateral trade to collapse, or else fall significantly; this shock would in turn have a significant negative impact on U.S. and global growth in 2019, possibly even triggering a worldwide recession. Or consider the just-released United Nations report on climate change, which warns of potential planetary disaster because the world’s major carbon emitters have failed to take adequate action so far. What will happen if China reverts to its own more limited national measures at carbon mitigation in the absence of a functioning global environmental order? China is at present bound by its commitments made under the 2015 Paris agreement on climate change. The United States’ absence from the negotiating table is already seeing a weakening of that regime. China may use formal U.S. withdrawal from Paris, or a wider collapse in the U.S.-Chinese relationship, to walk away altogether. Although the current U.S. administration may not care about this, practically all of its allies do.
A THIRD WAY?
Those who have spent decades dealing professionally with the rise of China in general, and the U.S.-Chinese relationship in particular, know that these are challenges of formidable intellectual and policymaking complexity. Nonetheless, I fear that the public space for open, considered debate and discussion on the China question is shrinking as name-calling grows. There is a danger that those who seek to address complexity are accused of being China appeasers or “panda huggers.” And that those who recommend a harder-line approach are simply written off as unrequited Cold War warriors or just plain warmongers. We also need to be wary of the emergence of any form of new McCarthyism, whereby anyone seeking to explain the complexity of China’s rise is simply accused of “un-American” activities if they off a complex response to what are otherwise rendered as simple but critical questions—namely what is China now doing, what is different, and what should the rest of us do about it. There are already tremors of this emerging around the edges of the foreign and strategic policy community, including think tanks and the academy. What we should all be seeking, at critical times like this, is analytical and policy clarity.
At this stage of the unfolding great global debate on China, as a lifelong supporter of Australia’s 100-year alliance with the United States, I’m on the side of avoiding an unnecessary war between the United States and China. In other words, both Washington and Beijing, together with others in the international community, need to identify whether there is a credible third way, beyond the demands of either capitulation or confrontation, to help navigate our way through the Thucydidean dilemma that we now confront.
Output per hour for workers in nonfarm businesses rose 1.3% in the third quarter from a year earlier, marking the 32nd straight quarter of yearly growth below 2%
WASHINGTON—Despite strong economic growth and historically low unemployment, a government report released Thursday pointed to an important missing ingredient so far in the U.S. expansion: worker-productivity improvements.
Output per hour for workers in nonfarm businesses rose 1.3% in the third quarter from a year earlier, marking the 32nd straight quarter of yearly growth below 2%, a long and consistent stretch of anemic growth that hasn’t happened before in the post-World War II era.
There were some signs of improvement. For a six-month period between April and September, worker productivity gains beat a 2% annualized growth rate. Jim O’Sullivan, an economist at High Frequency Economics, called that “strong by recent standards” and Daniel Silver at JPMorgan Chase & Co. called it “solid.”
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Still, there have been previous six-months bursts of growth like that in this expansion that weren’t sustained and thus didn’t develop into strong yearly growth. If the latest six-month stretch doesn’t hold up, some economists say, the economy’s fast overall growth rate won’t be sustained.
“Since we’re getting slow growth of productivity, and...relatively slow growth of the workforce, that means we’re going to get slower growth of gross domestic product,” said Martin Baily, senior fellow at the Brookings Institution in Washington and former adviser to President Clinton.
An economy’s long-run growth is determined by its number of workers and how much they produce. During the late 1990s and early 2000s, yearly productivity gains routinely beat 3%, sometimes exceeding 4%. Without productivity gains, economic growth depends on growing the workforce, something that is hard to accomplish now because so many baby boomers are retiring.
To boost growth for much of the expansion, businesses have been hiring more workers, as opposed to aggressively boosting the output of the workers they have.
That meant more jobs and more income for millions of Americans, which is good news, but it has also been a conundrum. Advances in technology such as artificial intelligence led some economists to foresee big gains in worker productivity that haven’t shown up in the statistics. Moreover, with the jobless rate so low and workers in many industries scarce, companies have a big incentive to invest aggressively to help their workers become more productive.
One factor at play: The historically low unemployment rate means companies are hiring less-skilled workers to fill jobs, a potential drag on productivity.
Increases in business investment earlier this year could offset that drag, but business investment in the third quarter grew at a meager 0.8% annual rate, in part because spending on oil and gas rigs was down.
Beth Ann Bovino of S&P Global Ratings said that one quarter of investment pullback doesn’t make a trend, but “if that continues, that’s a concern down the road” for productivity gains. In another potential warning sign, the Institute for Supply Management on Thursday said its manufacturing index fell to a six-month low in October, including a drop in its new orders index.
Tariffs could also pose operational challenges for some companies. Frans van Houten, the CEO of Netherlands-based health-technology company Philips NV, said last week that headwinds created by the recent tariffs between the U.S. and China “will require us to work on additional productivity measures to absorb these negative impacts.”
Advances in worker wages and inflation are also closely tied to productivity gains. Wages tend to rise when productivity is strong. While wages show signs of picking up, some of the gains for workers are being eaten up by inflation, which has also risen. Hourly compensation for workers in nonfarm businesses, adjusted for inflation, was up just 0.1% in the third quarter from a year earlier.
Chicago Fed President Charles Evans underscored the need for stronger productivity in a September speech.
“Higher sustainable growth would be great. However, we can’t get there without boosting the underlying trends in labor input or productivity,” Mr. Evans said.
Airlines and food makers among industries passing along higher costs, raising inflation fears
U.S. companies are raising prices on everything from plane tickets to paint, passing on to customers higher costs for fuel, metal and food after years of low inflation.
Clorox Co. CLX 0.31% said it raised prices in the latest quarter on such products as cat litter, and Coca-Cola Co. KO 0.54% reported higher prices for the quarter. Other goods makers, as well as airlines, also have announced price increases over the past week.
The higher prices have effectively ended a long period of low inflation that led the Federal Reserve to keep short-term interest rates near zero for years.
“We think 2019 will be more inflationary than we have seen historically since the recession,” Kellogg Co. K -1.56% Chief Executive Steve Cahillane said in an interview Wednesday.
It is a tricky moment for the U.S. economy. Unemployment is at the lowest point in decades, and economic growth is strong. Inflation is near the Fed’s 2% target, but price rises could pick up if pressure from labor shortages and tariffs intensify in a still-robust economy. Alternatively, other factors could offset such pressures, including the stronger U.S. dollar, which makes imports cheaper.
At some point, higher prices could damp the economy’s growth. Investors worry that a pickup in inflation will prompt the Fed to raise interest rates more quickly to prevent the economy from overheating.
Oreo cookie and Ritz cracker maker Mondelez International Inc. MDLZ -0.92% plans to raise prices in North America next year. Chief Executive Dirk Van de Put said in an interview Monday that consumers and retailers in the region have become more amenable to paying more.
“The consumer environment is strong,” Mr. Van de Put said.
The rising costs companies face are various. Mondelez said price hikes on some of its cookies and crackers are in response to rising ingredient and transportation costs. Airlines are paying about 40% more for jet fuel than they were a year ago. Trucking costs were up 7% annually in September, as trucking companies passed along their own higher labor costs. Private-sector wages and salaries in the September-ended quarter rose 3.1% from a year earlier, the strongest gain since 2008, the Labor Department said Wednesday.
Meanwhile, U.S. manufacturers are paying roughly 8% more for aluminum and 38% more for steel than a year ago as the industry adjusts to tariffs the Trump administration levied on imports of those metals. Also, a 10% tariff the administration imposed in September on $200 billion worth of various goods from China is weighing on businesses that buy those imports.
Steven Madden Ltd. said this week it was raising prices on handbags and other products it imports from China and that it would shift production to other countries to avoid the tariff. The leather-goods maker said prices on items made in China could rise by as much as 10% at company-owned stores.
“These are all things that point to prices going up,” said Diane Swonk, chief economist at Grant Thornton. “We might see a pop of inflation in the first quarter.”
Paying Up
Companies are raising prices on food and other products as costs rise.
*Seasonally adjusted †16 oz. Grande Notes: PPI data are for Final demand. CPI represent U.S. city average, all urban consumers. Restaurant menu items reflect price at one outlet for each.
Sensing that consumers are getting used to higher prices, some companies are also charging more to improve profits. Arconic Inc. ARNC -0.52% said it had widened operating margins on its rolled-aluminum products by charging more as the tariff boosted prices overall. Apple Inc. AAPL -6.63% recently raised prices on new MacBook Air and iPad Pro products by about 20% and 25%, respectively.
“This pickup in inflation is coming from strength in the domestic economy,” Barclays economist Blerina Uruci said. The bank predicts core U.S. inflation, which excludes energy and food prices, will reach a post-recession high next year.
Rebekah Tull, an interior designer for Whiski Kitchen in Royal Oak, Mich., said she is paying 15% more for Chinese-made quartz countertops and 10% more for imported cabinets because of U.S. tariffs. Higher supply costs added $500 to one client’s $25,000 renovation recently.
“It’s going to be more of a challenge to get the looks they see on Pinterest for their budgets,” she said.
“The economy is healthy,” Delta Air Lines Inc. Chief Executive Ed Bastian said in September. “To the extent oil prices were to continue to rise, we expect to be able to pass along the cost of that.”
Some smaller airlines say they can’t risk alienating customers with higher fares. Budget carrier Allegiant Travel Co. said its passengers were more sensitive to price hikes than those of big carriers. Allegiant is cutting some off-peak flying to trim costs.
Paint makers Sherwin-Williams Co. and PPG Industries Inc. in recent weeks said they would keep raising prices next year to cover the steeper climb in costs for ingredients such as titanium dioxide, a pigment used to make paint white. Sherwin-Williams raised prices in its own stores by as much as 6% in October.
“Raw material inflation has been unrelenting and accelerating,” Sherwin-Williams Chief Executive John Morikis said last week.
Some restaurant companies are raising prices even as they try to attract customers with deals. McDonald’s Corp.’s 2.4% same-store sales growth in the U.S. in the third quarter was fueled by higher-priced burgers. Brinker International Inc. said it raised the price of the two-entrees-and-an-appetizer deal at its Chili’s Grill & Bar chain to $25 from $22.
Habit Restaurants Inc. HABT 4.06% raised prices by 3.9% in late May. The upscale burger chain beat sales expectations for the third quarter, but the growth was driven entirely by price hikes, as its traffic fell by 3.4%.
Food makers had struggled earlier this year to raise prices because supermarket chains and online grocery services insisted on holding down prices as they fought for market share. Some suppliers have turned to other tactics to make more from their products.
Hershey Co. HSY -1.40% said it will sell candy in new packaging next year at higher prices per ounce. Kellogg released a chocolate variety of its Thick & Fluffy Eggo waffles and priced it 12% higher than similar products.
“The days of straight list-price increases are gone,” Kellogg’s Mr. Cahillane said. “It would lead to a decrease in consumer demand.”
Michele Buck, chief executive of Hershey, said in an interview last week that at the same time retailers have become more willing to raise prices because consumer spending and economic growth remain strong. “Retailers understand that when costs go up, something has to give,” she said.
Cheryl King, a 50-year-old personal shopper in Chicago, said she has noticed slightly higher prices on some groceries, especially the gluten-free and organic foods she buys for her two kids. But she said she and her husband, a surgeon, haven’t changed their shopping list.
“I try to look for sales or coupons, but we’re doing OK. We’re not pinching pennies,” she said.
