The recent negotiation stalemate between the U.S. and China has taken the markets and the media by storm.
Pundits are arguing over what caused it, with theories ranging from President Trump’s re-election tactics to Beijing’s overconfidence about the strength of its economy.
But I believe there is a deeper reason, one that has little to do with political maneuvering and more to do with history.
This Is Not The First Time Sino-West Trade Negotiations Have Failed
Since Chinese leaders first began dealing with the West, the objective has always been the same—to profit from Western wealth without accepting its norms and ideals.
The best example of the strategy is the trade tensions between the 18th-century British Empire and the Qing Dynasty.
At the time, the Chinese court imposed strict control over tea and porcelain prices, something British merchants deemed unfair and opposing the spirit of free trade. The situation prompted King George III to send a negotiating team to China to ask the country’s rulers to open and reform their markets.
Negotiations failed. The Qing Dynasty never accepted Western-style trade… at least not willingly. It was the cannon fire of the Opium Wars in the 19th century that eventually opened China to foreign commerce.
As the Qing Dynasty fell apart, ideas about Westernizing China took root, and the country adopted many Western practices, including elections, Western-style education, and a constitution.
That spirit lingered throughout most of the 20th century, with the Communist Party opening its markets, adopting free enterprise, and joining the World Trade Organization.
Chinese Protectionism Is On The Rise
However, apprehension to do with the adoption of Western ideas never disappeared entirely and has been increasing in recent years. As the Chinese economy has grown, so has its determination to plan its own course.
Xi Jinping’s government in particular is the epitome of the country’s “China First” prejudice.On the international stage, the administration is pushing the Belt and Road Initiative, which challenges the existing Western trading system. Domestically, they are favoring the state over further liberalization and emphasizing traditional Chinese principles to prevent the spread of unpopular ideas like democracy.
It is this long-standing Chinese ambivalence toward Western principles that is true explanation for the country’s handling of the current trade negotiations. Beijing understands there are benefits to belonging to the U.S.-led global order, but it isn’t ready to play by Western rules.
The Trump administration now finds itself in the same situation as King George III in the 18th century, except that tariffs are playing the role of British cannons. The message, however, remains the same—if you don’t accept our trade rules on your own, we will force them on you.
Unfortunately, “gunboat diplomacy” won’t be as effective this time around.
Everyone realizes that military escalation or even a threat of such action is out of the question.
Further, the current Chinese government can easily mitigate the effects of U.S. tariffs through the massive economic stimulus it has at its disposal. They already displayed their willingness to resort to it in January when they pumped a record $1.22 trillion of credit into the economy. That was only a sample of what Xi Jinping is capable of, and I expect more stimulus to come now that negotiations have stalled.
All of this means one important thing—namely that this trade rift will drag on a lot longer than the market initially expected. Make sure your portfolio can withstand it.