Donald Trump’s trade war with China has only just started, says Kevin Rudd

Kevin Rudd interview by Jacob Greber from the Australian Financial Review.

Published Sept. 19 2018.

 

Kevin Rudd has issued a stark warning to Washington that Beijing won’t buckle under the worsening US-China trade clash, which the former prime minister described as a “slippery slope” towards a cold war that could one day descend into a military conflict.

In an interview with The Australian Financial Review on Tuesday (Wednesday AEST), Mr Rudd said the Trump administration’s demands for change in China have escalated to a point where they can no longer be easily resolved.

While the actions of the US president – who this week followed through on his long-telegraphed threat to slap tariffs on $US200 billion ($277 billion) of Chinese imports to the US – have blown the whistle on China’s unfair “mercantilist” and predatory approach to trade, the administration’s ever-changing demands and internal strife mean Beijing cannot concede ground without a politically dangerous loss of face at home.

“The Chinese know something has to give – big time – in their position on trade and investment rules,” Mr Rudd said, begging answers to “how much, in what form, and by when?”

China won't buckle to Trump, warns Kevin Rudd.
China won’t buckle to Trump, warns Kevin Rudd. Jason Alden

“Secondly, the problem the Chinese have is they have no idea what the administration’s fundamental position is.”

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Signs of divisions within the White House on how to prosecute the trade war have been apparent for more than a year. Since April there’s been a shift, coinciding with the departure of the president’s then top economic advisor Gary Cohn, a former Goldman Sachs investment banker and staunch internationalist on trade.

Until that point, the Chinese understood the dispute with Mr Trump as purely a contest over what to do about America’s $US375 billion bilateral trade deficit, with talk of agreeing to a solution that would narrow that deficit in several steps over time.

Levels of complexity ‘massive’

However the dispute has morphed into a broader “trade investment plus” fight, Mr Rudd said, which now includes the deficit issue plus demands for changes on investment rules, advanced technology transfers and intellectual property rights.

“So the levels of complexity from a Chinese negotiating perspective are massive,” said Mr Rudd, who believes there is almost no chance of an effective resolution before the US mid-term elections in early November.

“The Chinese want to know who they’re dealing with after the mid-terms; will the President be weaker or stronger?; will he make changes to the administration?; and what will be the composition of Congress?”

Mr Rudd’s remarks come as Australia’s top diplomat, DFAT secretary Frances Adamson, rebuked Mr Trump for unsettling the international trading system that has allowed prosperity to flourish for decades.

The White House on Tuesday didn’t respond to Ms Adamson’s criticism.

However a source with close links to the Trump administration told the Financial Review the White House was unlikely to be swayed by such criticism.

“The one thing that unites everyone in Washington is taking on China – whether it’s the Democrats or the Republicans.

“The sole defender of China is Wall Street.”

‘This will get a lot worse’

Even there, sentiment has swung away from concern about the deteriorating tit-for-tat dispute, with the benchmark Dow Jones index rising 200 points in New York on Tuesday. The Australian dollar also rallied strongly overnight to a two-week high of US72.28¢.

Many have attributed the rebound in stock prices to a lower-than-expected tariff of 10 per cent.

“While this is true, there’s also a bigger issue out there. Markets believe that the tit-for-tat will ultimately result in a still free but fairer system,” wrote prominent investor Mohamed A. El-Erian in a tweet.

Mr Rudd, who is president of the Asia Society Policy Institute in New York, where he lives, warned the first “substantive efforts” to find a resolution won’t take place until the end of the year – which will coincide with the January 1 deadline when Mr Trump’s latest tariff rate ratchets up to 25 per cent.

“In my judgement we have a long way to go yet and I think the Chinese view is that this will get a lot worse before it gets better.”

Asked how resilient China is to Mr Trump’s efforts to squeeze a deal out of Beijing, Mr Rudd said while Chinese business confidence was being negatively affected by the trade dispute, the government is well-prepared.

“If you look at the monetary and fiscal policy measures embraced by the Chinese government in the last several months, they know there’s an effect coming.”

“But what people underestimate the significance of in Washington, is that the Chinese have politics too; it’s not just a western political reality.”

“The whole notion of backing down – or being seen to back down within Chinese politics to US pressure – is almost as politically unsaleable in Beijing as it is in the Trump heartland,” he said.

Chinese far from desperate for a resolution

The real challenge, or “diplomatic craft” required, involves finding a mechanism and outcome that can save “face” for both countries, he said.

“So the bottom line: China wants this dispute resolved as quickly as possible but it is a misreading to assume the Chinese are politically desperate to resolve it.”

“This is compounded by two factors. How far the US administration now expects them to go, and also domestic critique within China if China is seen to lose face in the final landing point.”

Mr Rudd remarks come after he delivered an alarming speech in California last week in which he warned that 2018 is shaping up as a watershed year in which the world is set on a course towards another big power war.

It starts as a “trade war” that “metastasises” into a technology war that will either drive or destroy the economies of the 21st century, he said.

“It is an open question if and when this will begin to fuse into another ‘Cold War’, let alone if and when the unpredictable forces now being unleashed by this rapidly unfolding new economic war erupt into one form or other of military confrontation in the future.

“Until relatively recently, this sort of language was almost unthinkable in mainstream public policy. The problem now is that it has entered the realm of the thinkable … nobody is any longer confident where all this will land.”