Thucydides, Trade and Taiwan

Is a trade war the new Thucydides’s trap; and could the ‘old’ one be sprung by Taiwan?

The end of a geopolitical cycle...

“In 1750, Asia had more than half of the world population and product. By 1900, after the Industrial Revolution in Europe and America, Asia’s share shrank to one-fifth of world product. By 2050, Asia will be well on its way back to its historical share.”

Joseph S Nye, The Future of Power (2011)

In a series of presentations dating back to March 2008 I have been reflecting on the geopolitical implications of the shift back from west to east of the global economic centre of gravity, ie the north/south line which has half of global GDP to its west and half to its east. At that time, the global economic centre of gravity ran north/south more or less through Cairo, having shifted, according to Professor Danny Quah, from somewhere just off the west coast of Africa in 1980. Today it runs north/south through the Gulf.

Just prior to that presentation, two economist, Ronald Findlay and Kevin H O’Rourke, published Power and Plenty: Trade, War and the World Economy in the Second Millennium, which remains in many respects a cornerstone of my own thinking on third millennium geopolitics. It is, in my opinion, the best history of globalisation over the past 1,000 years yet written. As such, it identifies seven periods of hegemony which removed barriers to trade and, as a result, saw a major uptick in economic growth. However, the previous six periods — the seventh being the US’s culminating in the so called ‘unipolar moment’ — all ended badly with rising protectionism, economic slowdown and violent conflict between the (relatively, if not in absolute terms) declining power and a rising power.

Ingrained in this pattern is rising nationalist sentiment, a phenomenon which is increasingly evident worldwide and about which I wrote on 18 March in the context of the Trump Administration.

In other words, what we are seeing worldwide today is exactly what one would expect to see at this stage in the geopolitical cycle, ie increasing challenges to a United States in relative (if not absolute) decline and to its post-1945 politico-economic model.

...and the return of history

“…conflict is endemic to our species. The return of the great power rivalry in the 21st century reminds us that we are not purely economic animals…. Geopolitics is back.”

Edward Luce, Financial Times, 10 May 2015

Among these challenges, geopolitical theory — and the history of the past millennium, as recounted by Findlay & O’Rourke — tells us that by far the most important ones are almost certainly those posed by China. As Graham Allison opined in the Financial Times (subscriber access only) as long ago as August 2012:

“The defining question about global order in the decades ahead will be: can China and the US escape Thucydides’s trap?”.

Thucydides (c.460-c.400BC) — pictured above — was an Athenian political philosopher and general, who is widely viewed as the father of political realism, ie the theory that states and individuals act primarily out of fear and self-interest. His History of the Peloponnesian War recounts the 5th century BC conflict between rising Athens and declining Sparta. Mr Allison goes on:

“[Thucydides’s] metaphor reminds us of the dangers two parties face when a rising power rivals a ruling power — as Athens did in the 5th century BC and Germany did at the end of the 19th century. Most such challenges have ended in war.”

And his article published by The Atlantic on 24 September 2015 offers an elaboration which argues that, to judge from history, war is more likely than not.

Is a trade war the new Thucydides’s trap?

“China does not want a trade war with anyone. But China is not afraid of and will not recoil from a trade war. China is confident and capable of facing any challenge. If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.”

Embassy of the People’s Republican of China to the United States of America, 22 March 2018

This being said, in the light of the ongoing sharp increase in trade frictions between China and the US, it is worth asking the whether a trade war could be the 21st century equivalent of the more ‘traditional’ Thucydides’s trap. After all, the pugnacious President Donald Trump has gone as far as to describe China as an economic enemy.

We are still not in a trade war yet. But China and the US are edging closer to the brink thanks to escalating frictions, ie:

Details of the next wave of US tariffs are due to be released on 6 April. But it is already clear that they will primarily target sectors which China has prioritised under the Made in China 2025 plan, which aims to replace advanced technology imports with domestic products. USTR Robert Lighthizer and White House trade adviser Peter Navarro have readily conceded that this is in an effort to sustain America’s technological edge over China.

[Note (added 4/4/18): In fact, the US Administration detailed its proposals on 3 April, listing over 1300 goods, totalling around US$50bn of imports per year, which will be subject to a 25% tariff. The list is indeed heavily focused on products relevant to the Made in China 2025 plan underlining, in the eyes of some commentators (myself included) that this is indeed about much more than 'just' trade. This is all subject to consultation with business, with a public hearing set to take place in Washington on 15 May and 22 May set for the final date for the submission of objections to the proposals. There will almost certainly be a barrage of objections; but it is not clear at this stage how likely the Administration is to make amendments. One way or the other, we can expect the resultant uncertainty to add to existing volatility in equity markets.

China's protests in the immediate aftermath of the announcement were quickly followed up by an announcement of retaliatory measures against 106 categories of goods, also said to be worth around US$50bn of imports per year, including cars, smaller commercial jet aircraft, chemicals and soybeans. The uncharacteristic speed with which China has hit back — and perhaps in particular the targeting of soybeans, on which China is highly dependent on imports from the US (worth US$14bn in 2017 and grown largely in states which Mr Trump needs to win if he is to secure a second term in 2020) — makes it absolutely clear, to my mind, that Beijing is up for a fight and will dig in accordingly unless the US blinks first.]

Unfortunately, whatever the rights and wrongs of Washington’s case, this must all sound in Beijing like a US attempt to contain China’s rise, not by the long-feared possibility of a naval blockade of some sort but by a budding de facto economic blockade. And especially when put alongside the declaration in the 2018 National Defence Strategy (NDS) of China as a “strategic competitor using predatory economics to intimidate its neighbors while militarizing features in the South China Sea”, which has been interpreted by many (including Beijing itself) as a return to — inherently confrontational — ‘great power politics’. Although the summary of the NDS states that the US’s aim is a military relationship with China based on “transparency and non-aggression”, it asserts that China “will continue to pursue a military modernization program that seeks Indo-Pacific regional hegemony in the near-term and displacement of the United States to achieve global preeminence in the future”.

Viewed in this context, it is clear that both China and the US are going to have to exercise more restraint than seems likely at present if the latter day Thucydides’s trap of a trade war is to be avoided.

Xi Jinping — Strait shooter

“It is the shared aspiration of all Chinese people and in the fundamental interests of the Chinese nation to safeguard China's sovereignty and territorial integrity and realize China's complete reunification. In front of the great national interests and the tide of history, any actions and tricks to split China are doomed to fail. They are certain to meet with the people's condemnation and the punishment by the history. The Chinese people have the resolve, the confidence, and the ability to defeat secessionist attempts in any form! The Chinese people and the Chinese nation share a common belief that it is never allowed and it is absolutely impossible to separate any inch of territory of our great country from China”

President Xi Jinping, 20 March 2018

It would be some consolation to think that a trade war could lessen the likelihood of a shooting war between China and the US. However, given what history tells us about the probability of violent conflict erupting between a declining hegemony and a rising competitor one certainly cannot rule this out. Indeed, to judge from the stance of both Beijing and Washington neither of them has ruled out the possibility.

Indeed, I would additionally underline that the US’s National Security Council (NSC) appears to be playing a key role in determining the precise targeting of the next wave of tariffs, at least insofar as it bears on the race to develop 5G technology. According to the former Chief Information Officer at the Department of Homeland Security, Richard Staropoli, writing in the 3 April edition of the Financial Times (subscriber access only), the NSC’s (justified, in my view) involvement is because:

“…China’s role in cyber space is a growing national security threat”…

…thus making an explicit link between the US’s trade measures and relative, if not absolute, military capability.

There are multiple potential flashpoints; but, to my mind, two in particular stand out. First, much attention has rightly been given over the past several years to tensions in the South China Sea. However — and second — I cannot help but wonder in the context of ongoing events whether Taiwan poses a greater risk.

Xi Jinping's words on secession during his speech at the close of the 19th National Party Congress last month (see above) is the (so far) latest move in what experts see as growing Chinese pressure on Taiwan. As Keith Brasher of The New York Times recently put it:

“In recent months, Chinese strategic bombers have been conducting ‘island encirclement’ flights, escorted by fighter jets. The Chinese government has discouraged tourism to Taiwan and imports of goods like fish over the past year and a half, hurting its economy. And China persuaded the island’s most important remaining diplomatic ally, Panama, to switch diplomatic recognition last summer from Taipei to Beijing.”

Meanwhile, China appears to be working hard to persuade the Holy See to switch its diplomatic recognition from Taipei to Beijing too — which would almost certainly cause the handful of remaining Latin American recognisers of Taiwan to follow suit.

Furthermore, Beijing/Taipei relations are unlikely to be improved by the latter’s call for Taiwanese businesses on the Mainland to return ‘home’ in order to try to avoid getting caught up in a possible China/US trade war (from which Taiwan stands to take a heavy ‘hit’ to its GDP in any case).

On the other side of the Pacific, the US Congress has recently passed legislation encouraging exchange visits by senior Administration officials, thereby riling Beijing, which claims it breaches the ‘One China’ principle. In the light of this legislation, it will be interesting to see who represents the US at the opening of the new American Institute in Taiwan offices in Taipei (ie the de facto US embassy) now likely to take place in June.

Furthermore , Mr Trump’s signing in December of a bill which included mutual port calls by naval vessels has made such visits — as well as ones by senior Administration officials — more likely in the future (although technically there was no reason why either should not have been taking place previously).

Put together, these measures, although seemingly largely symbolic, appear to indicate a determination by Congress, backed by the US Administration, to bolster existing support for Taiwan in addition to the (legally debatable) obligations to come to the island’s defence set out in the 1979 Taiwan Relations Act.

To be clear, I do not think we are at imminent risk of another major crisis across the Formosa Strait, if only because China is likely not to want to do anything which could jeopardise the prospects of the nationalist (Guomintang) candidate in November’s mayoral election in Taipei. Nevertheless, I have personally been following Taiwan closely for some weeks now, intending to write something for over a month but diverted by other ‘events’. Credit then to my expert friends at Predata (subscriber access only) for beating me to the punch with their 27 March note straplined: “All eyes are on trade war, but the real flashpoint might be Taiwan”. The text of which is worth reproducing at length, as follows.

“Last week, the Trump Administration threatened to impose tariffs on up to $60 billion worth of Chinese imports. The announcement, like a similar one earlier in March on steel and aluminum, sent Predata's digital volatility index for US-China trade relations skyrocketing. It appears online observers fear a trade war is on.

Still, despite threatening retaliatory tariffs against a handful of US goods, China's response to the tariff threat has been relatively measured. Where Beijing has shown less restraint is over Taiwan. Two weeks ago, President Trump signed a law that encourages US officials to meet with Taiwanese counterparts. Xi Jinping reacted angrily. In a bellicose speech, he said Taiwan would face ‘the punishment of history’ for any attempted ‘separatism’. He ordered a carrier group into the Taiwan Strait, and drilling Chinese warplanes buzzed the southern edge of the island.

In the digital realm, concern over the cross-strait relationship has been mounting. Our volatility index hit its highest level since October 2017, when Xi [Jinping] used forceful rhetoric against Taiwan in his speech at the Chinese Communist Party's 19th Congress.

It's an open secret that one of Xi [Jinping]’s great foreign policy ambitions is to unify Taiwan with the mainland. Among observers in China and Taiwan, attention to that goal appears to be increasing. Traffic on Chinese-language web pages related to China-Taiwan unification has spiked three times this year.”

One must hope that the general escalation in military preparedness by both China and the US in what US strategists now refer to as the Indo-Pacific theatre is consistent with the Latin adage “Si vis pacem, para bellum”, ie “If you want peace, prepare for war”. For, to quote Predata’s bottom line:

“Should Xi [Jinping] push forward with an aggressive policy toward Taiwan, a tit-for-tat over trade may prove to be the lesser risk to US-China relations.”

Alastair Newton