war on the rocks

The Perfect Storm Confronting Xi Jinping

June 5, 2019

Entering 2018, Chinese President Xi Jinping appeared to be charting a very new path not only for China but for himself. With the 13th National People’s Congress, Xi effectively ended term limits, amending the constitution of the People’s Republic of China to ensure he could remain president indefinitely. Since there are not formal term limits on the position of general secretary of the Chinese Communist Party (CCP), the actual top position of power, nor on the attendant chairmanship of the Central Military Commission, this meant Xi could hold the reins of power for as long as he wished. Xi was now the most powerful Chinese leader since Deng Xiaoping.

Not only had Xi overturned Deng’s efforts to ensure orderly and regular transfers of power within the CCP system, he was also ever more clearly abandoning Deng’s famous dictum governing foreign policy: “Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.” This was evidenced in Xi’s willingness to take up the challenge posed by President Donald Trump on U.S.-China trade relations.

Whether it was confidence due to his growing domestic strength, a belief that the balance of economic power in the U.S.-China relationship had already shifted, or a concern about appearing weak in front of Trump, Xi seems to have reached the conclusion that China, under his leadership, can successfully challenge the United States. This appears to have been a dangerous miscalculation. Xi may soon find that a perfect storm of agricultural problems, internal unhappiness, and his own chosen hard line on the trade war could undermine the domestic power he has worked so hard to consolidate.

Even before the 19th Party Congress in 2017, Xi had been steadily consolidating power. Since rising to the position of general secretary in 2012, he has become the head of many of the “leading small groups,” which coordinate interactions between the CCP (which sets policy) and the various ministries of the government (which have the bureaucratic means of implementing power). In essence, he has been concentrating power in himself to an extent not seen since Deng, if not Mao Zedong.

Xi’s efforts to concentrate power, however, have had the ironic effect of also increasing internal duress. Juliette Genevaz, for example, has noted the impact of divergent national and local economic policies, the anti-corruption campaign, and the crackdown on social media and dissent in elevating pressures on his leadership.

At the same time, Xi has been propounding the idea of “the China Dream of the great revival of the Chinese people.” Though the precise meaning of this dream has not been specifically laid out – and has almost certainly evolved – it appears to clearly set certain milestones. These include China becoming a “moderately prosperous society in all respects” by 2021 (the CCP centenary) and “a modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious and beautiful by the time the People’s Republic of China celebrates its centenary in 2049.”

This may have been intended simply to rouse domestic pride, but the concomitant announcement of economic policies such as “Made in China 2025” has raised suspicions of whether the China Dream might not also include a strong element of economic dominance. Chinese behavior over Sri Lankan debt, ninety-nine year leases on Australian ports, and ongoing cyber economic espionage has created concerns that an economically stronger China might pursue policies that would benefit China — and few others.

This might not have led to the ongoing breakdown in U.S.-China economic relations, except for the presence of Donald Trump in the White House. While Xi’s relationship with Trump does not appear a negative one (such as the rocky one between Trump and German Chancellor Angela Merkel), the two nations find themselves now engaged in a trade conflict shaping up to be a trade war. This was partially precipitated by Trump’s decision to invoke tariffs against what were termed unfair Chinese trade practices. The decision should not have come as a surprise, given Trump’s 2016 campaign, which included a heavy dose of economic nationalism. But while candidate Trump campaigned on Chinese currency manipulation and the trade deficit, President Trump’s actions appear to have been motivated less by these elements and more by Chinese trade practices related to intellectual property.

The November 2018 letter from the U.S. Trade Representative’s office outlining why the United States was preparing to impose additional tariffs listed four key complaints. First, China uses foreign ownership restrictions, such as joint venture requirements, as well as administrative processes to compel U.S. companies to transfer technology to the People’s Republic. Second, U.S. companies seeking to license technologies to Chinese firms must often transfer key information and processes. Third, Chinese technology acquisition includes unfair methods such as access to the state banking system for funds. Finally, China engages in a variety of cyber economic espionage activities. This last element contradicts a commitment made by Xi to President Barack Obama in 2015, in which both sides agreed not to engage in economic cyber espionage. While China appears to have reduced the level of such actions, it has certainly not suspended them, a point made clear in the 2018 National Counterintelligence and Security Center report.

The Chinese have offered, in response to Trump’s pressure, to address the trade deficit. China has floated, at various points over the past two years, increasing purchases of American goods by $200 billion to $1 trillion. But Beijing has been far less forthcoming on the issue of intellectual property, as the U.S. Trade Representative letter notes.

In the last several weeks, the Chinese have taken an increasingly hard line. American officials claim that China was reversing changes it had previously agreed to implement, effectively overturning the results of months of negotiations. Trump promptly applied new tariffs to a variety of Chinese goods, elevating them to 25 percent, effective May 10. Chinese officials in turn have now raised the possibility of embargoes on rare earth exports and blacklisting American companies like FedEx.

 

 

It may be that Xi believes that China could weather any trade war with the United States. After all, as an authoritarian state, especially one with control over news media and social media, it could limit any discontent with rising prices. Moreover, since China is not a market economy, and the state plays a major role in not only manufacturing but finance (because almost all banks are state-owned), Xi and the rest of the Chinese leadership may also believe they have the levers to keep the Chinese economy on a largely even keel, whatever the state of U.S.-China relations.

Alternatively, perhaps Xi and the Chinese Politburo believe China’s economy and overall comprehensive national power have reached the point where the People’s Republic can, in fact, challenge the United States. This challenge would not be military (and fortunately there is little evidence that U.S.-China relations have deteriorated to the point of military confrontation); rather, it would be economic. The threat about rare earths would seem to support this view — China’s dominance of the market for rare earth metals, which are vital for cell phones and electric cars, as well as many military applications, would seem to give China a particular economic advantage over its rival. Xi, like Mao, would like to signal that China has “stood up” under his rule.

Several recent developments, however, should serve as a warning that China’s assumptions are by no means assured. In the realm of information and communications technologies, there is a presumption that China is in the advantaged position, especially when it comes to supply chains. After all, China is one of the largest manufacturers of integrated circuits, the microchips that make everything from microwaves to military radars function, as well as a major supplier of rare earth minerals.

As the 2018 clash over China’s ZTE showed, however, that does not mean that China dominates the supply chain even for Chinese companies. ZTE, it turns out, is crucially dependent on American suppliers for a range of parts from optical components to microchips to software. When the Department of Commerce proposed a seven-year ban on sales of any American components to ZTE for violating sanctions on North Korea, this would have been fatal for China’s second-largest provider of information and communications technology. While the ban was lifted (after ZTE paid a $1 billion dollar fine), it is clear that an intertwined supply chain works both ways.

Another concern for Xi has to be food security. As every Chinese leader is undoubtedly aware, regime change has often occurred in the thousands of years of Chinese history because of famine and food supply problems. More recently, some have attributed the Arab Spring to a rise in food prices. Xi would undoubtedly want to avoid any parallel problem arising in China.

China, however, has been a net food importer since at least 2007. This includes both grains and soybeans, central pillars of the Chinese diet. This is partly due to the growing need for animal feed, as China’s livestock production has expanded to meet increasing demands from a wealthier population.

Unfortunately, Xi is now confronted with a double-barreled threat. First, fall armyworm has arrived in China. Since it was first detected in January, the pest has spread across some 8,500 hectares of Chinese grain production areas, affecting six provinces mostly in southern China. The U.S. Department of Agriculture worries that this voracious creature may affect staple crop production such as corn, rice, wheat, and sorghum, as well as others to include soybeans and cotton. “Experts report that there is a high probability that the pest will spread across all of China’s grain production area within the next 12 months.” There is no natural predator in China that feeds on the fall armyworm, nor are there any registered pesticides in China to counter it.

At the same time, African Swine Fever is now threatening China’s pigs, spreading across the country since the first confirmed case in northeast China last year. Cases of this disease have now been reported in every province. As the world’s largest producer and consumer of pork, African Swine Fever is a direct threat to the livelihood and diet of a substantial portion of China. Unfortunately, there is no cure; the only solution is to cull herds, impose quarantines on affected farms, and hopefully halt the disease from spreading.

This combination of agricultural threats means Xi will likely have to substantially increase his imports of foreign foodstuffs in order to keep food prices stable in China — and even then, pork prices are likely to rise. Indeed, domestic meat prices are likely to increase substantially as feed supplies are affected by fall armyworm. Yet a key Chinese tool in its trade war with the United States are the tariffs it has placed on agricultural products, including soybeans. It is not at all clear whether this is sustainable, especially since the United States is one of the world’s most efficient agricultural producers. At a minimum, raising tariffs on American agricultural products will mean a rise in the price of those products when they are imported to counter domestic shortfalls.

Moreover, if Xi is worried about domestic stability, he likely cannot pass along tariff-induced rises in food prices to the consumer (at least not in full). Indeed, given the combination of agricultural threats affecting vegetables, meat, and grains, he may have to substantially subsidize food prices to keep them from rising excessively, even before tariffs are taken into account. This combination is likely a substantial increase in governmental outlays, some of which will have to come from China’s hard currency holdings (e.g., any major purchases of foreign grain or meat).

This does not necessarily mean China will lose the trade war with the United States. Xi is correct that the CCP retains many levers of power and influence to manipulate the population. But neither can Xi be confident that he will emerge triumphant, especially if questions arise within the party about his handling of these various crises.

In a year that marks both the 70th anniversary of the founding of the People’s Republic of China and the 30th anniversary of Tiananmen Square, Xi may yet regret assuming the mantle of concentrated power.

 

 

Dean Cheng is the Senior Research Fellow for Chinese Political and Security Affairs at the Heritage Foundation.

 

Image: Wikimedia