Sun Tzu and the Art of Trade War

December 19, 2018

In ancient China, a respected military strategist wrote a book in which he infused his lifetime of expertise. General Sun Tzu's Art of War became a manual on aligning aspirations with capabilities. The strategist set forth principles, selected for their validity across space and time, and then connected them to practices, bound by time and space. The Art of War, therefore, became a compilation of precepts, procedures -- and categorical claims.
General Sun's treatise was written sometime between 771 and 476 BC. Giving the Chinese roughly 2600 years to perfect his art of strategic dominance. Of course, the Chinese always played the long game. Believing that, given their history, size and geographic positioning, they would always have a chance to be at or near the center of the earthly universe, if only they played their cards correctly.
"The nature of water is that it avoids heights and hastens to the lowlands...
If you attack your enemy where he least expects it -- if you avoid his strength
and strike his emptiness -- then, like water, none can oppose you."
To that end, the Chinese government has abided by a long-standing policy aimed at stealing the intellectual property, technology and innovations of its opponents, friends and partners. Even after its 2001 admission to the World Trade Organization (WTO), a move the West believed would curb China's nefarious habits, the Chinese only increased the speed and efficiency by which they pilfered the work of others.
Nor is there any commercial arena that has been immune to their tactics. The Pentagon spent over a decade, billions of dollars and countless resources developing the F-15 Assault Aircraft. A few years later, the Chinese miraculously had an identical aircraft in their arsenal.
And that's only the beginning. Conservative estimates posit that China's intellectual property theft costs the U.S. economy between $225 billion and $600 billion per year. A staggering figure that renders the new U.S. tariffs on Chinese goods negligible by comparison. Worse, any number of intellectual property and trade experts will vigorously argue that China's growth into the world's leading manufacturer was largely dependent upon stealing the trade secrets of foreign companies.
"Know the enemy, know yourself. Know the ground,
know the weather. Your victory will then be total."
Sun Tzu believed in deploying maximum leverage against minimal resistance. After which success would be achieved quickly, with the least expenditure of solider's lives and other resources.
Today, China's leadership understands how desperately its wealthy, hyper-innovative opponent is to access China's massive consumer markets. As well as its opponents lack of vigilance regarding its innovations and technologies. China realized that it need not spend decades becoming a global leader in manufacturing and technology. Not if it could surreptitiously take what it needs. An opponent will only see what he wants to see. Until it is too late.
Democrats and Republicans agree that something need be done. As does most of the Western world. The Chinese cannot continue to flout internationally accepted trade practices to the detriment of those playing by the rules.
Which brings us current.
More than any Western leader, President Trump has confronted the Chinese on their illegal trade practices. Largely with the support of the Western world. Threatening tariffs and trade wars if China did not adopt practices similar to those of other WTO members.
Last week, global investors were hopeful that President Trump's Saturday pre-G20 dinner with China's President Xi might yield good news on trade relations. And China's intent to curb its habits.
"Do not gobble proffered baits. The fish which covets
bait is caught; troops who covet bait are defeated."
By all appearances, the meeting in Buenos Aires appeared to yielded progress. As the U.S. and Chinese declared a temporary cease fire. Providing both sides with a temporary reprieve from the razor's edge. As the U.S. had been prepared to initiate another $200 billion in tariffs on Chinese goods. Which would have demanded further escalation by the Chinese. Last weekend's meeting provides an opportunity to find a mutually amicable solution.
The agreement means that the 10 percent tariff rate imposed on $200 billion of Chinese imports will not rise to 25 percent on January 1. In return, China agreed to make a "very substantial" purchase of U.S. goods, including immediate purchases of U.S. agriculture.
Wednesday of last week, China took another step towards Western trading partners. Announcing it would scrap its Made in China 2025 policy, Xi Jinping's blueprint to make the country a leader in high-tech industries. The revised plan softens China's bid to dominate manufacturing. And make its markets more accessible to foreign corporations.
A few days later, China agreed to reduce tariffs on U.S. cars to 15 percent, down from the current 40 percent rate.
Some detractors contend that these moves are merely cosmetic. Tossing China's critics a bone without relinquishing any of the meat. Others believe China may be more eager to make concessions as its economy has struggled. Last week saw Chinese industrial production numbers came in below the most pessimistic estimates, and Chinese retail sales growth hit the weakest level since 2003.
Given China's unerring focus on the long game, it's understandable to view any Chinese concessions as tactics, as opposed to actual reconciliation. Sun Tzu counseled, "Do not gobble proffered baits. The fish which covets bait is caught; troops who covet bait are defeated." Are recent concessions bait? Mere gifts meant to assuage an adversary and buy time?
Paul Ashworth of Capital Economics notes the temporary nature of the cease fire. With both sides agreeing to a 90-day negotiation over the broader trading relationship. Meaning, if the negotiations fail or drag on too long, the tariff rate on the $200 billion of China exports to the United States could still be raised by early February. While the White House could look to impose tariffs on the remaining $250 billion in tariff-free Chinese imports.
China and the U.S. thought they'd reached a deal last May. Which included a Chinese pledge to buy more U.S. goods. A deal brokered by Commerce Secretary Wilbur Ross. But, facing Congressional criticism, Trump ripped up the deal. Announcing a first round of tariffs one week later.
The difference between then and today? Trump negotiated this deal himself. Which should make him more reluctant to scrap it. Though you can bet China will have to offer more than the minor concessions that South Korea, Mexico and Canada agreed to reach trade deals with the U.S.
Jonathan Swan of Axios argues that the Chinese are doing what they always do. Making vague promises of reform and seeking to delay confrontation while continuing to steal intellectual property and abuse trade rules. According to one of his sources: "The whole effort with China has been brought to a grinding halt." Then comparing the delay to a short-term continuing resolution to kick the government funding fight down the road. No real progress. Just a perpetuation of the problem.
In other words, proffering bait to extend an untenable situation.
In a recent telephone interview with the Financial Times, U.S. Treasury Secretary Mnuchin urged Beijing to flesh out pledges made in Buenos Aires in negotiations over the next three months. "There's a 100 percent unanimous view on our economic team that this needs to be a real agreement," Mnuchin said. "These can't be soft commitments from China. There need to be specific dates, specific action items," he added.
The Chinese appear to already be shirking their promises.
Wire services reported that many Chinese-language state media outlets left out apparent key points the White House said it had secured at the G-20 meetings. Including the provision that the agreement to not increase tariffs is conditional on the two sides reaching a resolution on other issues within 90 days.
Chinese media continued by saying the two countries will work toward eliminating all tariffs. Though that was not mentioned in any U.S. statements.
So, to what ends did both sides agree?
-- No increase in the current 10 percent U.S. tariffs on Chinese goods for 90 days.
-- China will buy more American agricultural and energy products (but no hard numbers).
And to what benefit?
-- Chinese officials get the opportunity to goose their local economies before facing more U.S. tariffs.
-- U.S. companies gain some relief from having to reconfigure their global supply chains without the pressure of a month-end deadline before 25 percent tariffs were to begin.
Still, most analysts believe trade disputes and tariffs will continue to be an overhang on markets in 2019. Especially as the Chinese realize that the current situation, impasse or not, has worked in their favor.
"The supreme art of war is to subdue the enemy without fighting."
Chinese leaders have long viewed their legal system, and the global trade architecture around the World Trade Organization, as tools to be manipulated for political and economic ends. Placing China at an advantage to other developed market WTO members that operate by the rule of law.
General Tzu would have approved. The Art of War may appear like a tome filled with high-minded platitudes. But, according to strategy expert John Lewis Gaddis, those platitudes are actually tethers. Meant to help leaders and generals align how they live with their guiding principles. Enabling such principles to become lodestars for all decisions along the road to victory.
Tzu grounds each precept in some crackling sharp reality. He tethers what's obvious to what's much less so: how states, without defeating themselves, can win wars.
His precepts lead to advantages that offer leverage. Wise leaders will seek these out. They'll sail with the winds, not against them. They'll skirt swamps, not slog through them. They'll avoid battles until they're sure they can win them. They'll try to benefit from the absence in life -- if not in all games -- of level playing fields. Understanding all along the futility of, as the military might say, "shoveling shit uphill."
China may believe that, ultimately, it need only not defeat itself. Which could bring real change. But more likely involves the continuation of small profferings. Offering small gifts that temporarily subdue adversaries. Even as China plays the long game. Running like water down the path of least resistance.

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