Huawei offers experience, expertise and value; its kit makes up 70% of Germany’s 4G network.


But securocrats worry that Chinese spooks may exploit “back doors” or other vulnerabilities supposedly built in to Huawei equipment.


Others worry about relying on suppliers linked to potential adversaries.


What if the Chinese government banned Huawei from “exporting” crucial software patches during a trade dispute with Europe?


The American government, which banned Huawei in 2011, has threatened to withdraw intelligence-sharing from Western governments that fail to fall into line.


Germany’s Huawei row has become perhaps Europe’s biggest debate over China policy yet.


The country’s large export sector leaves it exposed to trade chills; China and America are its first- and third-biggest trading partners.


It is eager to lose its reputation for telecoms backwardness.


But it fears another breach with America after splits on Iran, defence, energy and much else.


Angela Merkel, the chancellor, and Peter Altmaier, her economy minister, wish to keep the door open to Huawei by leaving technical agencies to adjudicate; the foreign ministry and intelligence services are opposed.


Even livelier resistance has emerged in the Bundestag.


The Social Democrats, junior coalition partner with Mrs Merkel’s centre-right Christian Democrats (CDU), have taken a notably tough line on exposing “critical infrastructure” to Huawei.


Opposition parties, such as the Greens, are Huawei-sceptical, too.


Its MPs are normally loyal to Mrs Merkel, but for many Huawei is a red line.


Norbert Röttgen, head of the Bundestag’s foreign-affairs committee, is trying to convince his CDU colleagues to back a resolution that would urge the government to make foreign telecoms suppliers pass a “trustworthiness” test.


Given the links between the Chinese state and business, that could prove impossible for Huawei to meet.


Mrs Merkel, in the twilight of her chancellorship, is losing control of the debate.


She fears a Huawei ban would trigger retaliation against Germany’s extensive interests in China; Beijing has a “huge menu” to choose from, says Janka Oertel, an Asia-watcher at the European Council on Foreign Relations.


Mrs Merkel also worries about an EU-China summit she will host in Leipzig in September.


Rows over Huawei could scupper goals like a bilateral investment treaty.


But Mrs Merkel also has geopolitics in mind.


She wants to avoid taking sides in the burgeoning US-China tech cold war.


A Huawei ban in Germany, especially if aped by other European countries, could widen the rift.


Mrs Merkel chose the occasion of a transatlantic award ceremony this week to argue that China should be tied into the multilateral order, not excluded from it.


Having failed to win them over, Mrs Merkel may want to delay a Huawei decision until after a discussion among EU leaders in March.


A common European strategy could shield countries from Chinese retaliation.


The debate also suits those who want a more active European industrial policy.


Since the Chinese state props up its firms, dirigistes argue that the EU should help European 5G kitmakers like Nokia and Ericsson.


On January 29th the European Commission will suggest that governments should consider banning dodgy suppliers, as part of a “toolbox” of 5G security proposals to sway decision-makers who are still undecided.


Mrs Merkel may seek compromise by barring Huawei from “core” elements of Germany’s 5G network but not the (more lucrative) “peripheral” antennae.


Yet that is not good enough for her critics, who say 5G tech renders the core-periphery distinction defunct.


Finance & economics | Free exchange
The costs of America’s lurch towards managed trade
China’s vow to buy more American goods carries the risk of waste and distortion

STANDING BEFORE the global glitterati at the World Economic Forum in the Swiss mountain resort of Davos, President Donald Trump bragged of a “transformative change” to America’s trade policy.


The newly inked “phase one” deal with China, he said on January 21st, would lower trade barriers and protect intellectual property.


He crowed about China’s promise to buy an extra $200bn of American services, energy, agricultural produce and manufactured goods over the next two years.


The agreement on a level of purchases, rather than on the rules of trade, does indeed mark a fundamental shift in American policy.


America has embraced outcome-based rules in its trade relations before.


Mercantilists like Mr Trump manage trade in two ways: either by restraining foreigners’ sales to America, or by encouraging them to buy more American goods.


In the 1980s American negotiators spent most of their efforts on the first, as they faced political pressure to contain a burgeoning trade deficit and became convinced that Japan’s trade practices were unfair.


At their peak, these “voluntary” restraints affected around 12% of all exports to America, including cars, steel, machine tools, textile products and semiconductors.


Voluntary import expansions, where a trading partner agrees to import more, as China has, were less common.


Most famously, Ronald Reagan’s administration negotiated a commitment from the Japanese government that 20% of its semiconductor market would be imported.


The aim was not so much to target the trade deficit directly, but to prise open what America thought was an unfairly closed market.


The hope was that the intervention would jolt suppliers into investing in new economic relationships and lead to a sustained shift in trade patterns.


A generous interpretation of Mr Trump’s deal with China is that he is simply trying to do the same.


He is not alone in feeling that China’s market shuts out outsiders, or that its policymakers do not always play fair.


Veteran trade negotiators tell of haggling away one Chinese trade barrier, only for another to pop up elsewhere.


(Economists recognise this problem as the difficulty of writing down a “complete contract” that covers every contingency.


) An outcome-based trade deal, tied to easily verifiable trade flows, should help to overcome distrust, and could force China to provide real market access.


If it led to more investment in supply-chain infrastructure, then it could have lasting effects.


It could even be argued that managing trade with China would be easier than it was with Japan.


Later attempts to repeat Reagan’s semiconductor tactic failed, as Japan’s government had grown tired of cajoling its private sector into changing its sourcing decisions.


It had no direct control over who bought the managed products, and had to resort to pleading letters to firms, as well as surveys asking about who they were buying from.


By contrast, China’s government has the purchasing power of its state-owned enterprises at its disposal, and sway over the private sector too.


Dig into the details of Mr Trump’s new deal, though, and the risks of waste and distortion become clear.


The agreed increase in sales to China is large and rapid.


According to an analysis by Chad Bown of the Peterson Institute for International Economics (with whom your columnist hosts a podcast), China has, in effect, pledged to increase its purchases of certain American agricultural products by 60%, and manufactured products by 65%, by the end of this year compared with levels in 2017 (see chart).


This must happen regardless of economic conditions in China.


Whereas Japan agreed to increase the share of imported goods in domestic demand, China has signed up to buy fixed dollar amounts.


The risk is that China has promised to buy products that it either will not need or would rather get from elsewhere.


State-owned enterprises could suck up American commodities and leave them to rot.


American exporters, lured by higher prices to Chinese buyers, could switch from more sustainable relationships to ones that fizzle once their artificial advantage ends.


Or China could resort to logistical gymnastics to make it appear that it is buying American, such as by transporting goods from third countries through America.


It could also have more American goods shipped directly to China, rather than through Hong Kong, so that they appear in the mainland’s trade figures.


Another danger is that China simply diverts trade from its other trading partners, prompting complaints that the biggest actors are carving up markets between themselves—and carving others out.


Admittedly, members of the World Trade Organisation (WTO) are already allowed to agree on broad tariff cuts among themselves, which could lead to similar diversionary effects.


But trade deals are permitted, whereas discriminatory managed-trade arrangements are not.


And if, as Mr Bown warns, Brazilian and Argentine sellers of soyabeans or Russian and Canadian lobster-traders find themselves pushed out of China’s market, they are unlikely to react well.


Managed decline
If the deal sticks, it will threaten the world’s trading system.


That system, ironically, is the result of America’s turning away from managing trade in the 1990s.


Realising that it could not preach the virtues of free markets while itself practising something so different, America sought the creation of the WTO, as a shift towards a system based on rules rather than power.


Mr Trump’s presidency has consistently undermined those rules, and the deal with China again reinforces the idea that they do not matter.


Now that he has won his share of the Chinese market, other countries may demand the same.


But the deal could also very easily fall apart, ushering in another round of hostilities.


America is tightening its export controls, which could limit the goods available for China to buy.


So, whatever the deal’s fate, disruption looks inevitable.


Whether Mr Trump will still be in office when that becomes clear remains to be seen.


Official figures on whether China’s purchases have met this year’s target will not become available until early 2021, after the presidential election.


Leaders | Huawei and the tech cold war
China v America
Trade without trust

NINETEEN YEARS ago an unknown Chinese company set up its first European sales offices, in a suburb of Frankfurt and an English commuter town, and started bidding to build telecoms networks.


Today Huawei symbolises the daunting rise of China Inc—and a global trading system in which trust has collapsed.


With sales of $123bn, it is known for its razor-sharp prices and dedication to the industrial goals of China’s rulers.


Since 2018 America has subjected it to a legal assault, making it a flashpoint in the trade war.


Now Britain has said that it will block Huawei from its 5G networks (see article).


But far from showing the West’s resolve, the saga reveals its lack of a coherent strategy.


If open societies and authoritarian China are to keep their economic links and avoid a descent into anarchy, a new trade architecture is needed.


America’s security chiefs have always worried that Huawei’s equipment was designed to aid spying and would make its customers dependent on subsidised Chinese technology.


But over 170 other countries decided the risks were manageable.


Britain, which works closely with America on intelligence, created a “cell” of cyber-experts to monitor Huawei’s gear in 2010 and, later, confined it to less sensitive parts of the network.


It offered a middle way between a naive embrace of Chinese state capitalism and a cold war.


Such a finely balanced judgment has proved untenable.


The Trump administration has urged the world to ditch Huawei and enforced a unilateral embargo on its suppliers, preventing sales of some components as well as chips made abroad using American tools.


Forced to choose between an ally and a supplier, Britain was inevitably drawn to this week’s decision.


It has become riskier for anyone to do business with a firm Uncle Sam wants to cripple.


Huawei, for its part, has failed to reassure Britain’s cyber-experts, who have complained that its buggy software is getting harder to monitor, or to reform its opaque governance and ownership.


Any remaining illusions that China’s leaders respect the rule of law when it really matters have been shattered by events in Hong Kong.


The direct cost of ripping Huawei out of European networks is tolerable—adding less than 1% to Europeans’ phone bills if amortised over 20 years.


Ericsson and Nokia, two Western suppliers, can ramp up production and new competition may emerge as networks come to depend more on software and open standards.


The true burden has nothing to do with antennae but stems from the decay of the world’s trading system.


Perhaps a dozen countries might end up banning Huawei—Germany is sitting on the fence (see article).


But it will still be used in much of the emerging world, hastening the splintering of the tech industry.


Trade relies on common rules but Britain’s decision has been made amid a swirl of lobbying and threats.


It is hard to elicit a principle behind it that can be usefully applied more broadly.


If the problem is gear made in China, then Ericsson and Nokia do that, too.


If it is Chinese firms building systems which connect devices (in the case of 5G, robots and machines), then a similar logic could be applied across a digitising world economy.


German cars and Apple phones sold in China are packed with software, data and sensors.


This feeds a spiralling sense of lawlessness.


The average tariff on Sino-American trade is 20%.


Direct investment flows from China to Europe have dropped by 69% from the peak in 2016, according to Rhodium, a research firm.


Other firms are caught in the crossfire.


TikTok faces a ban in India and, perhaps, America.


China plans to impose sanctions on Lockheed Martin for selling arms to Taiwan.


Now that President Donald Trump has ended Hong Kong’s special status, HSBC, a bank with huge interests there, could be subject to punishment by both China and America.


Some Chinese lenders may be banned from dealing in dollars.


The logic of the Huawei ban is one of disengagement and containment.


But this will not work if it is applied across the entire economic relationship.


The West’s last great authoritarian rival, the Soviet Union, was a trade minnow.


China accounts for 13% of world exports and 18% of world market capitalisation, and is the dominant economic force in Asia.


Instead a new trade regime is needed that acknowledges China’s nature.


The World Trade Organisation (WTO), which aims to set universal rules, has failed to evolve with the digital economy.


Nor was it prepared for President Xi Jinping’s drive to increase state and Communist Party influence over private Chinese firms and those, like Huawei, which say they are mutually owned by workers.


Disillusioned with the WTO, the Trump administration’s negotiators unilaterally tried to wrestle China into liberalising its economy and cutting subsidies, using the threat of tariffs and embargoes.


So how should the trade architecture work in an age of mistrust?


The goal should be to maximise trade consistent with both sides’ strategic security.


That means fencing off flashpoints, such as tech, that generate lots of tension but a minority of trade: perhaps a third of Western firms’ sales to China based on our analysis of Morgan Stanley’s data, for example.


These sectors will require scrutiny and international security certification of the kind Britain tried with Huawei.


But at least commerce in other areas can flourish.


Chinese firms should also be required to accept open governance of their big subsidiaries in the West, including local shareholders, foreign directors and managers with real autonomy, and disclosures that all help create a degree of independence from the state.


This is not hard: multinationals such as Unilever have been doing it for decades.


The ultimate network effect
Open societies are stronger when they act in unison.


Europe may be tempted to go it alone, ending decades of transatlantic co-operation.


Yet at some point, soon if Mr Trump fails to win a second term, America will reinvigorate its alliances because it has been less effective without them.


The West cannot fundamentally change China or ignore it.


But by acting together, it can find a way to do business with an authoritarian state it mistrusts.


Finance & economics | Free exchange
Why trade imbalances are a worry during a global downturn
Monetary policy begins to look more like a zero-sum game

LIKE OTHER crises before it, covid-19 seems destined to accentuate troublesome features of the world economy.


Though these were briefly suppressed when the pandemic first struck, they have now rebounded.


America recorded its largest trade deficit in 14 years in August, despite having gone from being a big importer of oil to a net exporter in that time.


Its goods deficit is neatly matched by a resurgent surplus in China.


Temporary factors, such as a surge in China’s exports of personal-protective equipment, are partly to blame.


But there is reason to worry that these fault lines will persist, adding a dangerous element to an already fraught global policy environment.


Global imbalances reached a modern peak just before the onset of the financial crisis of 2007-09, when the absolute sum of countries’ current-account surpluses and deficits amounted to over 5% of world GDP.


Current-account gaps were pushed wider in part by what economists called the “global saving glut”, the result of soaring oil prices, and precautionary saving by emerging-economy governments prepared for sudden reversals in global risk appetites.


Gaps eased in the decade after the crisis as oil prices fell and China edged towards rebalancing its economy.


Yet on the eve of the pandemic, imbalances still remained at about 3% of global GDP, roughly one-and-a-half times the level common in the early 1990s.


And yawning trade gaps have since opened up in some places.


America’s current-account deficit, which stood at 2% of GDP at the end of 2019, had leapt to 3.5% of GDP six months later.


China’s current-account balance went from a surplus of 1.1% of GDP in late 2019 to a deficit in the first quarter of 2020, before flipping back to a surplus of 3.1% of GDP in the second.


Current-account gaps are not inherently bad.


A developing economy in need of investment, for instance, might consume more than it produces for a time as it builds up its productive capacity—and the wherewithal to repay accumulated foreign obligations in future.


But in some cases they can be a source of crisis, if they reflect a build-up of financial vulnerabilities.


And, most pertinently for the global economy today, in times of depressed demand they are particularly problematic.


Economies run current-account surpluses when they produce more than they consume.


When there is plenty of global demand to go around, this is at most a minor inconvenience for deficit economies, which enjoy more consumption than their domestic productive capacity alone would allow.


When demand is scarce, however, surplus countries siphon off spending power from trading partners when they have precious little to spare.


In a paper published in 2015, Ricardo Caballero of the Massachusetts Institute of Technology, Pierre-Olivier Gourinchas of the University of California, Berkeley, and Emmanuel Farhi, then also of Berkeley, described this effect.


The authors frame their argument in terms of the demand for safe assets.


Globally, every surplus must be matched by a deficit, and saving in one place must be met by borrowing elsewhere.


Surplus countries save by buying foreign government bonds.


When global interest rates are well above zero, these purchases simply push interest rates down, inducing deficit countries to borrow and spend more.


When interest rates drop to zero, however, this channel stops working, as rates cannot fall much further.


Instead, the offsetting rise in borrowing in deficit countries must come through squeezed incomes—a recession.


Since the financial crisis, interest rates across the rich world have been near zero, with a few brief exceptions.


And parts of the emerging world have edged closer to the low-rate quagmire this year.


In these circumstances, fiscal expansion—which increases the global stock of government bonds—is an effective way to boost growth, both within the stimulating country and beyond.


America’s large current-account deficit partly reflects strong consumption, supported by stimulus, of goods produced at home and abroad.


But decisions about monetary easing become more fraught.


Part of the boost, especially at low rates, comes from currency depreciation, which helps exporters grab a larger share of trading partners’ spending.


In the 1930s, countries on the losing end of such demand grabs put up tariff barriers, leading to escalating protectionism and the breakdown of global trade.


There goes the neighbourhood
Today, bold fiscal stimulus could spare the world this fate.


But governments are already less free-spending than they were in the spring.


On October 6th President Donald Trump ended talks on a new round of stimulus.


The day before, Rishi Sunak, Britain’s chancellor of the exchequer, spoke of the need to get public finances under control.


If fiscal stimulus is scaled back, that leaves monetary easing looking increasingly zero-sum.


A doveish tweak to the Federal Reserve’s strategy in August contributed to a decline in the dollar against the euro, exacerbating a deflation problem in Europe.


For its part, America is putting some surplus countries in the cross-hairs.


On October 2nd it opened an investigation into currency manipulation by Vietnam.


Rapid growth in the foreign-exchange reserves of a number of surplus Asian economies suggests that governments are intervening to depress their currencies, reckons Brad Setser of the Council on Foreign Relations, a think-tank.


American scrutiny of China might also intensify if imbalances stay wide.


Though the dollar has fallen against the yuan by around 5% since May, some evidence suggests that China has acted on the sly to slow the pace of its currency’s appreciation.


The trade spats of recent years were in many ways a delayed reaction to earlier economic grudges, inflamed by persistent imbalances.


Had the global expansion continued, they might have fizzled out.


Instead, the world finds itself bound once more by the harsh realities of depression economics.


If they are not defused by enlightened self-interest and co-operation, imbalances could easily become the basis for debilitating economic conflict.


Graphic detail | Daily chart
New data show the failures of Donald Trump’s China trade strategy
American exports have fallen well short of targets in the deal’s first year

DONALD TRUMP is rarely accused of subtlety.


His bellicose approach to China’s trade surplus and (more justifiably) its unfair practices was no exception.


Swingeing tariffs on Chinese goods did succeed in bringing China to the negotiating table.


In January 2020 the two countries signed a “phase-one” trade deal.


China agreed to raise its imports of a selection of American goods from $78bn in 2019 to $159bn in 2020, with yet more spending pledged in 2021.


The president hailed this as “a momentous step...toward a future of fair and reciprocal trade with China.


”
In reality, the deal was limited and trade disputes rumbled on regardless.


Worse still, China has “failed spectacularly” to meet that $159bn commitment in the agreement’s first year, according to a new analysis by the Peterson Institute for International Economics, a think-tank in Washington, DC.


In 2020 China spent only $94bn on the American goods covered by the deal.


That is about as much as it did in 2017, before Mr Trump began his trade war (causing the figure to tumble in the following years).


Granted, the numbers in 2020 may have been dampened by the covid-19 pandemic.


But China’s economy still recovered enough to grow by 2.3% last year.


By June its total imports had regained pre-coronavirus levels.


Most of the shortfall came in manufactures, which made up 70% of goods covered by the agreement.


America’s sales to China were meant to reach $99bn, but only managed $57bn—a 5% drop from the year before.


China’s purchases of cars and aircraft fell painfully short of the Trump administration’s aspirations.


Energy shipments did particularly poorly, reaching just $10bn of the targeted $26bn.


Embarrassingly, China may not even be the culprit.


America seems to have set ludicrously high targets that its own energy producers could not meet.


Farm exports also fell short, at $27bn of the pledged $33bn.


American farmers nonetheless gorged on billions of dollars of subsidies—dished out by Mr Trump’s administration to protect them from the effects of the trade war.


Even the deal’s few apparent successes could prove fleeting.


Sales of medical products to China beat the target, but were spurred by the pandemic.


So did semiconductor exports, but they were accelerated by America’s threat to limit future sales of chips on national-security grounds, which prompted Chinese firms to stockpile them.


The Peterson Institute has also measured the carnage that Mr Trump wrought in the first place.


The authors note that in 2009-17 China’s imports from America grew at a similar rate to those from other countries (when considering the goods covered in the phase-one deal).


They used this to create a hypothetical scenario, in which imports from the United States continued to track the growth rate of those from the rest of the world in 2018-20.


In this counterfactual universe, China’s spending on American goods in that three-year period would have been roughly $340bn.


Mr Trump’s tariffs helped reduce the real total to less than $260bn.


In contrast Europe, in its much-criticised recent trade pact with China, managed to get much of what Mr Trump won without launching a self-harming trade war to win it.


The bloc’s exports to China rose by a fifth in 2017-20.


As President Joe Biden devises his own trade strategy for China, parts of the Trump team’s approach may be worth adapting.


Among other worthy achievements, the think-tank highlights getting China to cut certain non-tariff barriers, accept more foreign investment and punish intellectual-property violations.


Yet overall, its report shows that Mr Trump’s approach was foolish.


To manage trade relations with bilateral purchase targets is to wield a blunt weapon that is easily overpowered by events.


America’s efforts would be better spent, the think-tank argues, working with allies who support free markets to tackle China together.


The Economist explains
Is the trade dispute between America and Europe over Airbus and Boeing over?


A deal marks a truce, but may not resolve the 17-year-old quarrel

IT IS THE longest trade dispute in the history of the World Trade Organisation (WTO) and its predecessors.


America and the European Union have been fighting for 17 years over subsidies provided to Boeing, an American planemaker, and its European arch-rival, Airbus.


On June 15th, amid the hubbub of President Joe Biden’s first trip to Europe, America and the EU signed an agreement to prevent the dispute, and the associated retaliatory measures, from escalating into a broader trade war.


Two days later America and Britain, where some Airbus factories are based, agreed on a similar deal.


The battle began in 2004, the year after Airbus first overtook Boeing in aircraft deliveries.


America ripped up a previous understanding on subsidies for large civil aircraft manufacturers after Boeing complained that its rival unfairly received what grew to become $22bn in repayable “launch aid” to develop new airliners.


Airbus and the EU soon hit back with their own claim, stating that Boeing’s commercial operations had benefited from generous military contracts as well as tax breaks worth $24bn.


The WTO eventually ruled in the two parallel cases that both firms had received illegal subsidies.


In 2019 it awarded America the right to slap tariffs worth $7.5bn on European goods.


It also gave the EU the right to impose tariffs worth $4bn on American products ranging from planes to Harley-Davidson motorcycles.


The dispute has dragged on for two main reasons.


The first is the sheer complexity of the case.


It has taken the WTO much longer to work out whether subsidies robbed each party of aircraft orders than it would have done to rule on the average trade case.


This is because the market for airliners is so different from the sort of commodity goods, such as steel or aluminium, that trade cases are usually fought over.


The second was the determination of the two sides to push litigation at the WTO as far as possible—a sign of how strong the lobbying power of Airbus and Boeing used to be.


A deal only became a serious possibility after the election of Joe Biden, who is keen to strengthen America’s alliance with Europe in the face of threats from China and Russia.


Both countries have taken advantage of 17 years of bickering between America and Europe to dish out subsidies of their own worth tens of billions of dollars, helping national champions develop jets to take on Airbus and Boeing.


Even so, the deal defers the dispute rather than ending it.


The retaliatory tariffs arising from the WTO litigation will be suspended for five years.


State financing “on market terms” (ie, broadly on borrowing terms available from private-sector lenders) for the development and production of airliners will still be allowed, while a working group led by American and European trade ministers attempts to reach a final understanding about past and future subsidies.


It is a sign that neither side appears to believe that large commercial aircraft can ever be built on fully commercial terms.


But the two sides remain far apart on what exactly counts as “market terms” and what a final agreement on subsidies should look like.


Without any detailed rules on what handouts are and aren’t allowed, the efforts of China and Russia to build planes to compete with Airbus and Boeing will continue unhindered this decade.


That certainly was not the outcome that America and Boeing were seeking when they started the dispute in 2004.


|WASHINGTON, DC

Briefing | Pushing back
Joe Biden is determined that China should not displace America
His China policy is looking even tougher than Donald Trump’s

AMERICA MUST focus on “blunting Chinese power and order and building the foundations for US power and order”.


That, at least, is the message of a recent book by Rush Doshi, until recently a scholar at the Brookings Institution, a think-tank in Washington, DC.


“The Long Game: China’s Grand Strategy to Displace American Order” argues that China has worked for years to undermine America’s geopolitical dominance and shape a more illiberal world order that better protects and serves China’s interests.


It concludes that these efforts need to be repaid in kind.


This is a striking rebuke to decades of American foreign-policy thinking focused on “engagement” with China.


The rebuke gains extra weight from the fact that Mr Doshi is now a China director on President Joe Biden’s National Security Council, where he works under Kurt Campbell, his mentor and a leading architect of the administration’s China strategy.


Donald Trump had replaced it with something more belligerent and capricious.


Many hoped that Mr Biden would bring some order to the chaos and lay down rules for a return to some sort of engagement, albeit on less friendly terms than those practised by the Obama administration in which he served.


But although Mr Biden’s administration is indeed forgoing the caprice and wilfulness of his predecessor, in other respects it is toughening policy, assiduously building a strategic framework for countering and checking China’s rise.


Unlike Mr Trump, Mr Biden seems sincerely worried about a world in which China’s authoritarian model wins.


That makes him more serious about the policies implemented, often haphazardly, by the hawks who served in the previous administration.


In its first six months Mr Biden’s administration has, to the surprise of many, officially affirmed the label of “genocide” applied by the last administration to atrocities in Xinjiang, and also worked with allies to impose further sanctions on the perpetrators.


It has kept in place and refined Mr Trump’s prohibitions on doing business with Huawei and a long list of technology companies and military-affiliated businesses (see chart 1).


It has made countering China a priority in talks with allies around the world, and shown no urgency to hold a summit with Xi Jinping, China’s president.


Mr Biden is positioning America as the West’s leader in a “contest with autocrats”, as he put it at the G7 summit in June.


In an interview with The Economist a senior administration official said China sees the next 10 to 15 years as a window of opportunity in which to “assert its authority globally”: continuing its attempts to dominate critical technologies and rewrite the rules of the global order, and cowing its critics so as to make the world safe for autocracy.


Mr Xi has outlined China’s ambitions to exert influence on the global order, seizing a moment when the Communist Party views the West to be in decline.


Even so, people in the West, the official said, are only beginning to recognise “that we’re dealing with a country that is perhaps less interested in coexistence, and more interested in dominance”.


The time to take a stand, therefore, is now.


Defining the relationship as one of two antagonists with antithetical values makes it sound like the cold war.


But there are crucial differences, none more notable than China’s inextricable integration into the global economy.


America cannot try to contain it as it did the Soviet Union; instead Mr Biden wants to counter China’s influence by increasing America’s own.


The emerging strategy, while still protean, sounds of a kind with Mr Doshi’s prescription for “blunting and building”.


Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.


“Rarely has a great power like the United States gone on such a detour,” says the senior official.


” America must recover from all that, and invest in itself, Mr Biden’s aides say, so that it can deal with China from a position of strength.


Hence the United States Innovation and Competition Act, which passed the Senate in early June packed with spending intended to improve America’s competitiveness.


It would authorise $52bn to boost semiconductor research and manufacturing in America and $29bn for a new applied-sciences fund that would support projects in advanced materials, robotics, artificial intelligence and other technologies.


It also contains extra money for going to the Moon.


Spending does not have to be aimed so precisely to be part of the policy.


Mr Biden’s $1.9trn pandemic recovery package, which passed in March; his multi-trillion dollar proposals for “hard” and “soft” infrastructure; his provisos on buying American: all can be read as part of a rebuilding policy aimed at China while also looking to fulfil lavish campaign promises.


But ambitious as they look in Washington, these numbers cannot compare with Chinese spending on infrastructure and industrial policy.


The core infrastructure plan has been whittled down to $600bn in negotiations with Republicans whose distaste for handing victories to Mr Biden exceeds their animosity to China (though Democrats want to add back $3.5trn in another package).


Republicans such as Ted Cruz, Marco Rubio and Josh Hawley, all self-professed China hawks, are unlikely to abandon their party’s opposition to Mr Biden’s domestic agenda when they have their eyes on his job.


Even if America were united in its efforts, though, building back at a rate that would seriously diminish China’s current prospects is not possible.


Barring a serious setback, China’s economy will become the world’s largest within its 10-15 year “window of opportunity”.


The country’s gigantic market will exert, as Communist Party lingo puts it, a “powerful gravitational field” far beyond its borders.


It will be able to spend even more on its armed forces.


The country’s investments in research and development will make its technological prowess increasingly formidable.


That is why an antagonistic policy requires what Mr Doshi calls “asymmetric blunting”: ways of undermining China’s attempts to rebuild the world order that do not cost too much.


Militarily, that means adopting an approach of “deterrence by denial” in areas just beyond internationally recognised Chinese waters, investing in state-of-the-art weapons to stop China seizing control of waters or islands (like Taiwan) to which it considers itself entitled.


Economic blunting tactics include enforcing export controls so that American companies do not fuel China’s rapid development of critical technologies—a tool that the Trump administration used to cripple Huawei and to impede China’s biggest chipmaker, Semiconductor Manufacturing International Corporation.


Political blunting includes countering China’s influence in the United Nations and other multilateral institutions.


Because such strategies require partners, their cultivation is a core tenet of Mr Biden’s strategy.


He has been courting other governments and sorting out old grievances.


He has agreed to a suspension of tariffs in a 17-year-old dispute with the EU over subsidies to Airbus, an aerospace company.


He has also waived sanctions on the company building the Russian-led Nord Stream 2 pipeline as a favour to Germany, which will be the recipient of most of its gas.


In so doing he signalled that his administration views potential co-operation with allies on China as more important than confronting Russia.


In March America agreed on a new cost-sharing deal for its military presence in South Korea.


In March Britain, Canada and the EU joined with America in imposing sanctions on Chinese officials and entities over Xinjiang—the first time any other governments had done so.


In May South Korean President Moon Jae-in, on a visit to the White House, agreed to a mention of preserving the status of Taiwan in the subsequent joint statement.


In June the G7 and, a couple of days later, a NATO summit both produced statements recognising the threat posed by China.


Serious blunting, though, requires more than co-ordinated statements and (largely symbolic) sanctions.


Build Back Better World, or B3W, a response to China’s Belt and Road Initiative announced at the G7 summit, has no new institutional framework or funding.


Mr Biden has worked with the G7 and the Quad, a military grouping with Australia, Japan and India, to counter China’s coercive, strings-attached vaccine diplomacy.


But the commitments of vaccine doses are tiny compared with the need.


He has not as yet put serious resources to his broader vision of providing middle-income countries with alternatives to taking money and business from China.


Where America does not lead, its allies seem unlikely to go of their own accord.


In May the European Parliament responded to China’s bullying over the EU’s earlier Xinjiang sanctions by freezing ratification of an investment treaty.


But many governments still want such deals and are not looking for trouble.


On July 1st Rishi Sunak, Britain’s chancellor, called for a “mature and balanced relationship” with China, eyeing the City’s potential to sell financial services into the world’s second-largest national market.


On July 7th Boris Johnson, the prime minister, said he did not want to scare away investment because of an “anti-China spirit”.


Emmanuel Macron, the French president, and Armin Laschet, who may succeed Angela Merkel as German chancellor, have shown a lack of enthusiasm for confronting China.


Not coincidentally, the number of countries with which China shares more trade than America is far greater than the other way round (see chart 2).


There are also American voices opposed to a tougher line.


Businesses and financial institutions are lobbying hard to maintain access to the China market and for the easing of export controls.


On July 7th more than 40 progressive groups wrote to Mr Biden urging him to drop America’s “antagonistic posture” towards China and to co-operate on climate change.


As Mr Doshi writes, Chinese officials routinely treat America’s wish for progress on major challenges—such as climate or nuclear non-proliferation—as opportunities for leverage.


China’s determination to link issues America would like to keep separate makes America’s interest in cordoning off areas for co- operation some what moot.


They are not decisions it can make on its own.


The climate looks likely to fall victim to this antagonism.


Both countries will lower their emissions (though Mr Biden’s ambitions may be thwarted by opposition at home) but it will be hard for them to come together to set rules of the road for others.


There are almost no advocates for free and unfettered trade around Mr Biden, and that suits the architects of his China policy well.


During the 2020 presidential campaign Jake Sullivan, now Mr Biden’s national security adviser, co-authored an article calling on foreign-policy experts to stop deferring to economists and move past the assumption “that more trade is always the answer”.


He is in no rush to get rid of Mr Trump’s tariffs and “phase one” trade deal, which required China to meet specific import quotas; they may not be to his taste, but they could supply leverage for future negotiations.


This was despite the judgment of economists outside the administration—and some inside—that the tariffs hurt America more than they hurt China.


There are also areas where trade with China is seen as a risk in and of itself.


China’s dominance over the markets for some key resources, while not yet a national-security problem, could become one.


Mr Sullivan, Mr Campbell, Mr Doshi and others want America to reduce the degree to which it relies on its antagonist for some critical commodities.


In June the administration completed a supply-chain review that identified areas that China dominates—including rare-earth metals, lithium and cobalt (vital for high-capacity batteries) and some drugs and drug ingredients—and called for America to work with other countries on how to wean themselves off the Chinese market.


Such concerns could lead to a bifurcation in global trade.


But voices warning of the economic costs such a split would impose are exactly those to which Mr Sullivan wants policymakers to pay less heed.


If his security-first view prevails Mr Biden may go further to decouple the two economies than did Mr Trump, parts of whose administration exploited his inattention in order to do less than he would have wished.


The treasury secretary, Steven Mnuchin, delayed efforts to impose sanctions on Chinese institutions.


Officials at the Bureau of Industry and Security (BIS) dragged their feet on drawing up a list of emerging technologies that could be subject to broad export controls.


Customs and Border Protection issued most of its orders to block imports of goods made by forced labour in Xinjiang only in 2020, after Mr Trump had taken to blaming China for the pandemic.


Mr Biden’s administration is more responsive to his intentions.


The machinery that can be used to blacklist more Chinese companies has been fine-tuned, in part to make it more resistant to legal challenges.


It has maintained virtually all the existing sanctions, export controls and customs orders, and instituted a few more that were under way before Mr Trump left office.


These included a ban in June on imports from a Xinjiang-based company which produces the type of silicon needed for solar cells, because of concerns about the forced labour of Uyghurs there.


Some 45% of the world’s supply of this highly refined silicon comes from Xinjiang, and sanctions against more of its manufacturers are expected, if not from the administration, then through a bill pending in Congress.


In a speech on July 13th Mr Sullivan signalled concerns about companies evading export controls “in ways that harm national security”.


What that posture means in terms of slowing China’s progress in technologies such as artificial intelligence and quantum computing is still a matter of concern for those watching proceedings.


The tech industry has its worries about China (particularly over the long-term security of Taiwan Semiconductor Manufacturing Company, the main supplier of the highest-end chips).


But it still wants to sell it more stuff.


The most ardent foreign-policy hawks want the toughest actions, including things they are sure the Biden administration would not dare to do, such as banning dollar-denominated transactions with leading Chinese chipmakers.


Both sides have been keenly interested in who would serve as the new head of the BIS, seeing the position as a bellwether.


But when, on July 13th, they learned it would be Alan Estevez, a former Obama-era Pentagon official with experience conducting national-security reviews of foreign investments, they seemed at first little the wiser.


As a nominee to a sensitive post his chief attribute may be a lack of preconceptions as to how he will approach the job.


Beyond the question of how hard to push, though, lies the disconcerting realisation that China may well be an immovable object.


If American businesses turn away from China, others will step in.


Bonnie Glaser, a China expert at the German Marshall Fund, a think-tank, says the best hope of shaping China’s choices lies in forming an “anti-China coalition” (though not explicitly calling it that).


Like those around Mr Biden, she believes that, even then, the odds of affecting change will not be good, but “we have to try”.


When Mr Biden presents it as a dichotomy of democracies versus autocracies, European officials wince—and the status of a country like Vietnam, which Mr Biden wants on-side, becomes problematic.


Jude Blanchette of the Centre for Strategic and International Studies, another think-tank, argues that the Biden administration would be better-served if it stopped paying such close-up attention to China and instead zoomed out to take a broader view of the world.


America reacts to everything Chinese leaders do, he says: they adopt an industrial policy, America adopts an industrial policy; they secure supply chains, so does America; they have a Belt and Road Initiative, so must America.


Mr Blanchette argues that America should take a different page out of Mr Xi’s playbook: talk less about its adversary and more about the world it wants to build.


“Xi just does not talk about America a lot.


When they articulate their vision it’s not an America strategy,” he says.


“It’s ‘this is the role China wants to play in the world over the next 10, 20, 30, 40, 50 years’.


” Like some members of the Biden administration, Mr Blanchette looks to the early days of the cold war for inspiration.


Then America placed its attempts to contain the Soviet Union within a broader vision of the world.


If today it could articulate such a vision again, it might become clearer how China fits in and open up a policy shaped by America’s continuing role, rather than purely by China’s rise.


|New York

China | Courting influence
China is becoming more assertive in international legal disputes
Party leaders are using such cases to reshape legal and regulatory norms

IN EARLY JANUARY the Communist Party published a five-year plan for the development of “socialist rule of law with Chinese characteristics”.


Most of the document is domestically focused, but one section is devoted to foreign matters.


It calls on China to help shape international law, to turn itself into the first choice of jurisdiction when resolving cross-border disputes and to encourage the use of Chinese law abroad.


The party’s goal, the plan says, is to promote “fair and reasonable” international rules.


But in the past year it has become increasingly clear that the party means to take a legal fight to the world.


President Xi Jinping wants China’s legal apparatus to grow bolder when dealing with international matters, and to reshape international legal and regulatory norms.


In areas such as patents, maritime rights, cyber-security, sanctions and extradition battles, the Communist Party is using its legal system to safeguard and advance China’s interests in ways it has not previously done.


The most visible part of this push has been the party’s aggressive response to Western sanctions imposed for the repression of ethnic Uyghurs, a Muslim minority.


China imposed retaliatory sanctions on Western officials and academics.


It then authorised the seizure of assets and blocking of transactions made by firms complying with foreign sanctions.


(In August the legislature delayed a vote on extending the same provision from mainland China to Hong Kong.


)
China is also advancing its conception of the rule of law—one that exists under the unquestioned leadership of the party—beyond its borders in other areas, such as intellectual property.


At a Politburo meeting last November Mr Xi called for greater assertiveness in cross-border disputes, saying China should “promote the extraterritorial application” of its intellectual-property laws.


Mr Xi was in effect “weaponising the judiciary” to defend China’s interests abroad, says Mark Cohen, a scholar of Chinese intellectual-property law at the University of California, Berkeley.


In the past year Chinese courts have issued sweeping orders on behalf of Chinese smartphone-makers that seek to prevent lawsuits against them in other countries over the use of foreign companies’ intellectual property.


The Chinese courts have ordered these “anti-suit injunctions” so that they (rather than foreign courts) can decide how much Chinese firms should pay in royalties to the holders of patents that their products use.


Jorge Contreras at the University of Utah says this marks an unusual escalation in the use of judicial power globally.


The assertion by China’s courts of a right to set global rates in patent disputes is not unprecedented; a British court did something similar in 2017.


But China’s courts have become much more activist than others in claiming this authority.


Chinese courts typically grant a fraction of what might be ordered by a Western court.


And China typically has leverage over the foreign parties in these cases.


Those that manufacture goods in China or sell to the Chinese market must heed such rulings or face big penalties.


In the past year Huawei, Oppo and Xiaomi have all won anti-suit injunctions against foreign patent-holders.


Out-of-court agreements on royalty rates are typical in such cases.


Experts say the Chinese injunctions helped Huawei and Xiaomi win better settlements, and may do the same for Oppo.


Another focus for the courts has been the Belt and Road Initiative (BRI), Mr Xi’s sprawling effort to finance and build physical and digital infrastructure all around the world.


It has spawned numerous disputes between foreign entities and Chinese contractors and banks.


China has set up a special international commercial court to resolve some disputes.


In 2019 the Supreme People’s Court called for the strengthening of Chinese courts’ capacity to hear international commercial cases and for the improvement of arbitration, the better to settle such matters in China.


Foreign experts say such cases would normally be handled in the country where the work was done.


“It would be unbelievable for any foreign company that’s doing business in their country, not in China, to accept dispute resolution in China unless they’re politically coerced or economically coerced into doing it,” says Jerome Cohen of New York University.


The party would argue that it has merely begun to take a more active role in shaping international law.


China entered international treaties and bodies, such as the UN and the World Trade Organisation (WTO), under rules it had no hand in writing, after years during which the Communist Party was either hostile to such institutions or followed the advice of Deng Xiaoping, a former leader, to keep a low profile in international affairs.


Foreign companies have begun to note the willingness of the Chinese courts to claim more authority in matters beyond their borders.


At least one, Samsung Electronics of South Korea, has tried to benefit from it.


In December a court in Wuhan granted an injunction to Samsung, forbidding Ericsson, a Swedish telecoms firm, from going to any other court in the world to resolve a global dispute over the use of Ericsson’s patents in Samsung’s hardware.


A judge in Texas, at Ericsson’s request, tried to rebuff the Chinese ruling with an “anti-interference order”, which some have called an “anti-anti-suit injunction”.


The Texas judge ruled that Ericsson deserved a hearing in America on a royalty rate for use of its patents in the American market.


But the Wuhan court had pre-emptively included an “anti-anti-anti-suit injunction” in its original ruling.


Samsung and Ericsson agreed on a global settlement in May, the Wuhan court having strengthened Samsung’s negotiating position.


Judges, officials and business people have bristled at the new aggressiveness of China’s courts.


In July the European Union filed a request with the WTO that China be more transparent about such cases.


Its rulings are often not made public, yet Chinese judicial authorities have tended to view these cases as important guideposts for future rulings.


The office of the US Trade Representative has also registered concern about China’s use of anti-suit injunctions.


Mr Xi might argue that the playing field has for too long been skewed against China.


Mr Contreras says Chinese officials now see judicial assertiveness as an important new tool that can help tilt things in their direction.


By Invitation | Global trade
Robert Lighthizer on the need for tariffs to reduce America’s trade deficit
The country’s deficits with China are so immense that new thinking—and hefty tariffs—are required, says the US trade representative under Donald Trump

INTERNATIONAL TRADE HAS largely failed America over the past three decades.


Indeed, it is slowly bleeding the country to death.


This is true not because the basic principle articulated by David Ricardo that there are gains from trade was wrong (it is not) but because a situation has developed that he never could have imagined.


One country has become a great, persistent trade debtor.


This has come about neither by intention nor by design.


America became the world’s great consumer and borrower quite by accident.


The scale of the problem is hard to comprehend.


America has rung up over $12trn dollars in accumulated global deficits since 2001.


Thirty years ago the trade deficit was around $80bn a year: today it is eight times larger and likely to grow even bigger this year—some believe it may exceed $1trn.


Over the same period, the economy’s nominal GDP merely grew by three and a half times.


People tend to think of trade deficits on an annual basis but the reality is that they are cumulative.


Deficits in some years and surpluses in others are unimportant because they might even out.


The important issue is not America’s annual global trade deficit nor its bilateral trade imbalances but the decades-long trend of enormous deficits without any surpluses.


The country has literally handed over trillions of dollars of its wealth to other countries, with China getting the lion’s share.


This was never supposed to be able to happen under the theory of trade espoused by economists.


None of this is to denigrate the benefits of trade.


International trade has clearly helped some parts of the United States.


The country is the second-largest exporting nation after China, and overseas markets help to support millions of American jobs.


For example, the profitability of the agricultural sector depends in large part on exports.


The country’s services sectors run substantial surpluses every year and it is a leader in technology, financial-services exports and other areas.


Clearly, America has many competitive advantages and often benefits from them.


The problem is that America is also by far the largest importer in the world—and that has contributed to making it the world’s largest debtor.


The country has been running trade deficits averaging well over $500bn a year (or 3%-5% of GDP) for more than 20 years and the figure is growing.


Deficits are bad for a number of reasons.


They can be a drag on economic growth, they can negatively affect the composition of the labour force and wages, and they can lead to macroeconomic distortions.


Perhaps more important, with these persistent deficits America has shipped trillions of dollars of its wealth to foreign countries in return for goods, often short-term consumer goods.


Those dollars don’t just sit in a foreign vault—our trading partners use them to purchase American assets and debt instruments.


In a real sense, America is trading ownership of its productive assets and economic future for short-term consumption.


America’s net-investment figures—how much it owns in other countries compared to how much they own in the United States—show that America has gone from being the country with the largest net-investment surplus to the one with, by far, the largest net deficit of more than $15trn.


(For perspective this figure is about one half the total value of America’s 100 biggest corporations.


) Ten years ago, the number was less than $5trn.


There are many reasons for this, including the recent increase in the value of foreign-owned US assets.


But undoubtedly the principal driver is the trade deficit.


There is much discussion about the causes of this trade imbalance: an overvalued currency, America’s tax policy, unfair foreign trade practices, closed markets abroad, subsidies and so forth.


But whatever the causes, the situation is unsustainable.


A country cannot exchange future wealth for short-term consumption indefinitely.


Of course, not all foreign investment in America is bad.


Some of it creates jobs and increases productivity.


But most of the inflow is not for new factories or manufacturing.


Indeed foreign direct investment is a tiny fraction of all capital flows into the country, on the order of 1%.


These investments bid up our equity markets but also transfer to the buyer a right to future profits and national wealth.


Some have suggested that the longstanding trade deficit results from a low savings rate among Americans.


But this claim simply renames the fundamental problem—it does not offer a solution.


Whether the trade deficit results primarily from foreign countries using market distorting policies to put American producers at an unfair disadvantage—as I believe—or whether American policymakers should do more to encourage savings in the country, society still face the same challenge: how to create a more balanced global economy in which Americans are not giving away their economic future by selling assets to fund their short-term consumption.


For years economists concluded that trade deficits were unimportant.


Ultimately there is balance because the dollars come back in the form of investment.


This construct, however, is usually based on a static, one-year analysis.


To appreciate the actual impact of these deficits we need to consider the nature of what is exchanged—often short-term consumption for a country’s wealth—and the long-term multi-year, dynamic effect.


Specifically, the annual transfers of half a trillion dollars have a compounding effect: they result in progressively more investment, jobs and innovation for one’s trading partners and less for the debtor country.


This sort of dynamic analysis provides a more accurate picture of the situation, albeit a darker one.


If wealth is the life-force of an economy, America’s persistent, massive trade deficit means it is being bled to death.


Some people have warned about this for years.


Almost 20 years ago the investor Warren Buffett was alarmed by these deficits and wrote an essay about two hypothetical lands, Thriftville and Squanderville.


He described what happens when a country consistently runs trade deficits.


It sells its assets to pay for short-term consumption and in the end the people of Squanderville are impoverished and working in a country owned by Thriftville.


Mr Buffett often explains that by running huge deficits America is like a farmer who spends more than he makes and sells pieces of the farm and gives mortgages on other parts to pay for the excess consumption.


And there is a brutal intergenerational aspect to it: current consumers are impoverishing their children.


In 2003, when Mr Buffett wrote the article, he warned that “the rest of the world owns a staggering $2.5trn more of the US than we own of other countries.


” As cited above, that figure now exceeds $15trn.


Even then, Mr Buffett warned: “We have entered the world of negative compounding—goodbye pleasure, hello pain.


”
It is interesting that very few countries run large trade deficits.


Among the largest are Britain, France, Canada, India and of course America, whose deficit is eight times larger than the next highest.


These numbers must be interpreted relative to the size of the economies but absolute numbers are also informative.


On the other side of the coin, only two countries consistently run huge surpluses—China and Germany.


Both benefit from what many believe to be an artificially weak currency, varying levels of industrial policy and citizens who are willing to forgo current consumption.


Another negative effect of this huge wealth transfer is that America’s biggest single bilateral trade deficit is with China.


I am primarily focused here on the dangers of cumulating enormous global trade deficits and I don't believe, generally, that bilateral deficits are a problem absent unfair practices or systemic issues.


But the wealth transfer to China is another matter.


China is not only our global adversary but it is in a competition with the Western, free, democratic system to determine if it or their system will endure—whether liberal democracy or autocratic socialism is better.


It is not an exaggeration to say that the hundreds of billions of dollars that we send to China every year has made the Chinese Communist Party much richer and helped pay for a great expansion of its military capability.


This is neither in the interests of America nor the free world.


Not so long ago the view of classical economists prevailed.


It was hard to fathom that one country could run up trillions of dollars in accumulated trade deficits year after year.


The assumption was that when a country ran a trade deficit it would see its currency adjust.


As one purchased from the surplus country, this bids up its currency; the converse is true of deficit countries.


So as the deficit went up, the value of the currency would go down, and imports would be more expensive and exports cheaper overseas.


In short, the situation would correct itself.


Yet this mechanism has not worked for America.


Its reserve currency status, the safe-haven effect of the dollar and foreign-currency manipulation have kept the dollar higher than it should be.


The IMF estimated in 2019 that the dollar was overvalued by as much as 12% and other economists argue it is even higher.


During the period of the gold standard this chronic deficit situation could not have existed because the deficit country would see its gold reserves disappear and it would be left with no means to purchase imported goods.


Under the postwar Bretton Woods system of fixed exchange rates, fears that accumulating trade deficits would lead to a draining of the American gold supply prompted the Nixon Administration to take the country off the gold standard and impose across-the-board tariffs on imports in 1971.


This persistent wealth transfer is fairly recent and unprecedented.


It is worth noting that Ricardo himself always framed the trade debate in a balanced context.


England would sell cloth and Portugal would sell wine.


Experts who studied these matters always assumed balance over time.


When John Maynard Keynes was outlining his thoughts for the International Trade Organisation after the second world war, he included a mechanism to allow countries to adjust their tariff rates to bring about balance when necessary.


This concept was carried forward in a vaguer form in article 22 of the General Agreement on Tariffs and Trade (GATT) in 1947 and now in the rules of its successor, the World Trade Organisation.


Countries facing balance of payment issues can suspend their GATT obligations following certain prescriptions.


There was always an assumption that trade would be more or less balanced over time.


Even Friedrich Hayek, Keynes’ adversary in debates over the role of the state in the economy, assumed that trade imbalances would be temporary, not perpetual.


Hayek would never have approved of any mechanism to bring about balance but, as Oren Cass points out in this essay “Hayek’s Broken Promise”, the great man always believed a country needed exports and imports and that balance would come from natural forces.


After decades of accumulated trade deficits, we are entitled to question Hayek’s confidence in natural forces and explore other ways to bring about needed balance.


Furthermore, trade deficits create political problems as well as economic ones.


America’s trade situation has contributed to a hollowing out of manufacturing capabilities, loss of millions of jobs, wealth inequality in the country and damage to the cities and towns that have relied on these jobs.


There is a strong sense in the American body politic that something is very wrong.


This is part of the reason why Donald Trump was elected president and populism is on the rise.


Economists can debate the importance of savings rates and productivity but voters have their own instinctive reaction.


President Trump followed through on his campaign promise in 2016 and radically changed the trade agenda.


He raised tariffs, renegotiated agreements and threatened to do much more.


The populist, worker-first United States-Mexico-Canada Agreement passed a historically divided Congress a year before the presidential election in 2020 with 90% of lawmakers, both Republicans and Democrats, in favour.


The backlash from farmers and others that was predicted by pundits never happened.


In fact, both presidential candidates ran on essentially the same trade platform.


Joe Biden abandoned his past support for comprehensive trade deals like TPP.


Both emphasised the need to bring back jobs that were outsourced overseas and to reduce dependency on China, even if their tone and preferred tactics differed slightly (though there has been little discernible difference so far).


In short, the public demands balanced trade and politicians of both parties are responding.


There are a number of possible ways to achieve greater balance.


In his article in 2003, Mr Buffett suggested that America require import certificates.


These would be issued to those who export and would be sold by them to importers.


This system would be effective because it would penalise imports and subsidise exports.


It would create a market for these certificates with possibilities for manipulation and speculation.


Others have suggested that America implement a so-called “market-access charge”.


Essentially, the Federal Reserve would impose a variable tax on capital flows into the country from foreign persons.


It would raise or lower the tax to disincentivise foreigners from buying American assets; this drop in demand for the assets would lower the value of the dollar.


The idea is that this would “realign” (that is to say, “weaken”) the dollar and bring about trade balance.


This mechanism also would work but the process is complicated and easily misunderstood.


Some might argue that it would discourage investment.


A third approach, more consistent with Keynes’s notion, would be for the United States or any country that experiences the emergence of a huge, regular trade deficit to impose a temporary tariff on all imports and gradually increase it or decrease it depending on the level of the deficit.


For example, a 10% tariff could be applied to all imports.


If the deficit did not go down in a couple of years, the tariff would be increased to 20% for several more years.


If this did not have the needed effect it might go up to 30%.


(Of course, the programme would make exceptions for critical goods.


) When the deficit was substantially reduced, the tariffs would also decline and eventually be eliminated.


All three of these approaches would reduce the trade deficit.


They would raise the price of imported goods (both for personal use and as inputs for companies) and discourage consumption.


They would add regulation to the economy and they would be opposed by our trading partners.


These downsides, however, would be temporary and surely would be outweighed by the benefits of balanced trade.


It would improve economic growth, encourage manufacturing and job creation and put upward pressure on wages.


Of the three approaches the best one would be that which would have the least interference with markets: yes, tariffs.


The mechanism is already in place to collect them.


As every ornate custom house in every international port attests, governments have collected tariffs for over a millennium and economists know their effects.


None of this is likely to reverse the negative net foreign investment that resulted from trade deficits in the past, but it may reduce or stop the outflow.


Most importantly it represents a vital shift in thinking.


America’s cumulative deficits hurt the country: the pain is apparent even if the reason is camouflaged.


Policymakers, business leaders, economists—and the public, most of all—need to abandon the dogma of trade from 18th-century philosophers of the political economy, and embrace new thinking for novel circumstances.


Special report | World trade
The new order of trade
Trade has been about growth and efficiency.


Now other goals are competing for attention, says Soumaya Keynes

THIS NEWSPAPER was founded in 1843 to campaign for the repeal of Britain’s protectionist corn laws (which was achieved three years later).


The case it made for free trade was that tariffs enrich the wealthy at the expense of the poor, and that discrimination against foreigners leads to copycat retaliation, making everybody worse off.


Our introductory issue lamented that governments, classes and individuals “have been too apt to conclude that their benefit could be secured by a policy injurious to others”.


For over 200 years, economists have largely accepted such arguments, although some politicians have displayed an atavistic fondness for protection.


But after 1945, most leaders around the world converged on support for freer trade.


Taken by the idea that more open markets promote innovation, competition and growth, they pursued them, first in the General Agreement on Tariffs and Trade (GATT), founded in 1948, and then after the GATT was transformed into the World Trade Organisation (WTO) in 1995.


The WTO was an extraordinary achievement.


For the first time—and almost uniquely for international institutions—the system included binding dispute settlement, so that victims of rule-breaking could win redress.


No longer could big countries throw their weight around and assume that any injury to others was consequence-free.


Such was the faith placed in the new institution that, when China belatedly joined it in 2001, many in the West hoped that it would lead to economic and political convergence with rich democracies.


Exceptions were permitted within the rules-based system, but they were carefully policed.


One for national security was invoked sparingly, as everybody saw it could too easily be abused.


Environmental protection was allowed as a justification for some trade restrictions, but no more than was absolutely necessary.


Labour lobbyists complaining of unfair competition were denounced as protectionist by those who saw cost differentials as legitimate forms of comparative advantage.


Indeed, economic integration was seen as a way to help achieve these other goals.


Not only would economies benefit from being bound together, but faster growth would mean higher environmental and labour standards.


All this translated into generally lower tariffs.


Between 1990 and 2017 the trade-weighted average global tariff applied under WTO rules fell by 4.2 percentage points.


The drop was greatest in poorer countries: in the same period China’s tariffs fell by 28 points, India’s by 51 and Brazil’s by 10.


It also prompted a push for bilateral and regional trade deals, which expanded from around 50 in the early 1990s to as many as 300 in 2019.


These have cut trade-weighted applied tariffs by a further 2.3 percentage points.


This system supported an explosion of global trade as a share of gross output, from around 30% in the early 1970s to 60% in the early 2010s.


Over the same period complex global supply chains grew from around 37% to 50% of total trade.


The stunning collapse in transport costs boosted international commerce.


After China joined the WTO, one study by Kyle Handley of the University of California, San Diego, and Nuno Limão of the University of Maryland found that reduction in uncertainty was responsible for around a third of the growth in Chinese exports between 2000 and 2005.


As those early campaigners predicted, freer trade has brought higher living standards.


A report by the World Bank in 2019 concluded that a 1% rise in participation in global value chains is linked with an increase in income per head of more than 1% in the long run.


A survey of the literature by Douglas Irwin of Dartmouth College found that poor countries which liberalised trade enjoyed higher growth of 1-1.5 percentage points, cumulating to 10-20% after a decade.


The United States International Trade Commission, an independent government agency, reckons America’s bilateral and regional trade agreements have raised real incomes by 0.6%.


Some moves towards further liberalisation have continued.


In November 2020 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership, the world’s biggest trade block.


Trading in the African Continental Free Trade Area, a deal ratified by 38 countries, began on January 1st this year.


Post-Brexit Britain is trying to cover 80% of its trade with preferential deals, albeit after erecting large new barriers with its closest neighbour, the European Union.


And America and the EU are discussing common international standards for the digital economy.


Yet the appetite for freer trade is not what it was.


There has not been a general round of liberalisation since the mid-1990s.


Partly that is down to a widespread perception that the ideology of free trade has failed to deliver its promises.


In the rich world, politicians have seen furious backlashes against trade agreements and complaints that liberalisation has created losers as well as winners, leaving many workers behind.


President Donald Trump embodied a rejection of the rules-based trade system.


Although the Biden administration no longer hands out random tariff threats, few think America is incapable of electing a protectionist like Mr Trump again.


Many believe that China took most of the benefits they were promised without offering enough in return.


It has become impossible to update the rules in a group with 164 members that all need to agree.


And the system that is meant to stop trade disputes spiralling out of control no longer works.


The covid-19 pandemic has revealed how quickly panicked nationalism can gum up global supply chains.


Over two-thirds of countries applying export controls on medical devices in 2020 still had restrictions in place in August 2021.


For all the post-war embrace of free trade, political support for it seems to rest on fragile foundations.


According to one study, the uncertainty associated with Mr Trump’s trade wars may have depressed global growth by 0.75 percentage points in 2019.


The WTO’s economists reckon that between 2000 and 2016 the cost of trade associated with policy fell from the equivalent of a 9% tariff in 2000 to a 6% tariff in 2016, but this includes an uptick since 2012.


A simulation from the IMF found that the equivalent of a 10% tariff would reduce global output by around 1% after three years, and by 1.5% if productivity losses from the protection of inefficient firms are added.


As freer trade loses favour, other priorities have crowded in.


There was so much focus on liberalisation and what it would bring that, as time went on, “trade became a negotiating thing—trade for trade itself,” says Ngozi Okonjo-Iweala, director-general of the WTO.


Now, she notes, non-trade goals that had lost out to the cause of greater liberalisation are coming back.


This special report explores how trade policy is being used to achieve non-trade objectives, including greater resilience, human rights and a healthier planet.


And it asks whether the open trading system can survive this shift.


The place to start is with a look at the strains created by America’s turn away from the rules-based multilateral trading system that it did so much to create.


Leaders | Building back best
Latin America could become an alternative to China
But only if the protectionist policies of the region’s politicians don’t get in the way

LATIN AMERICA’S economies are punch-drunk from the pandemic.


No other region suffered a bigger drop in GDP in 2020 or a higher death rate.


Even before the coronavirus arrived, the larger Latin economies lagged behind emerging-world success stories in Asia and Europe.


They were held back by poor governance, excessive dependence on commodities and protectionism.


In the steepness of its barriers to trade, the region is second only to sub-Saharan Africa.


From 1995 to 2015 its participation in global supply chains rose by just 0.1%; in the rest of the world supply-chain trade jumped by 19%.


But the Americas now have a chance to make progress.


The capriciousness of Chinese regulators, the tangled state of global trade and the trend towards reshoring and nearshoring are prompting firms in the United States to reassess where they should build factories and invest their cash.


With the right policies, Latin American countries could be attractive locations for new plants supplying the United States and each other.


This is the best chance in decades to pursue a policy of regional economic integration.


Whether that actually takes place will depend in part on President Joe Biden.


Already, Latin American governments are being courted to take part in Mr Biden’s Build Back Better World partnership, an infrastructure-investment programme that is intended to counter China’s Belt and Road Initiative.


Yet, for all its good intentions, the Biden plan lacks ambition.


As well as promoting infrastructure-building, Mr Biden should urge his neighbours to lower trade barriers, harmonise provisions across the hundreds of trade agreements which already criss-cross the region and clear up onerous customs procedures.


This could help persuade investors to take the plunge.


Nobody should underestimate how hard it will be to overcome Latin America’s scepticism of markets.


Big economies such as Brazil and Argentina have long been protectionist, coddling domestic firms behind high trade barriers.


The results of past trade deals have sometimes been disappointing.


Left-wing leaders, such as Andrés Manuel López Obrador of Mexico, want less private capital in the economy, not more.


Peru has recently elected a far-left leader, Pedro Castillo, who has been seeking to calm the market’s apprehension about his economic policies, with only some success.


Partly as a result, Latin America has failed to transform itself economically as East Asia has done over the past generation.


Since the North American Free Trade Agreement took effect in 1994, real income per person in Mexico, measured by purchasing power, has fallen further behind that in the United States.


However, you can find signs of openness.


Uruguay is seeking new trade deals with China and, as part of a regional grouping, South Korea.


In Ecuador Guillermo Lasso, the president and a former banker, is valiantly battling populism.


Countries that have been open to trade, like Chile and Costa Rica, have outgrown their inward-looking Latin American peers.


In recent years its exporters competed directly with China’s in industries that China came to dominate.


Whereas the country’s overall growth has been disappointing, its manufacturers have shifted from low-value textiles into automotive, aerospace and semiconductor industries that will benefit from being close to the United States and far from China.


Mr Biden could help by pairing access to badly needed investment through Build Back Better with a drive for trade liberalisation.


In September members of the Biden administration visited Colombia, Ecuador and Panama to gauge interest in the initiative, which could also boost Latin America’s defences against climate change.


Further economic stagnation in Latin America would leave governments struggling to cope with the rising costs of climate change.


A lack of jobs and growth would rile their increasingly frustrated citizens, many of whom have taken to the streets in recent years.


Similarly, a further inward lurch in Latin America would not serve the security and commercial interests of the United States.


At the very least it would be a missed opportunity to expand markets for the country’s firms.


Mr Biden has a chance to help create a more prosperous region.


Finance & economics | Free exchange
New research counts the costs of the Sino-American trade war
It has been a lose-lose ordeal

THE INITIAL two-year segment of the “phase one” trade deal between America and China comes to an end on December 31st.


Neither country is in a mood to mark the occasion.


Mutual antagonism is as fierce as ever; a new American law banning goods made with forced labour in Xinjiang is the latest flashpoint.


Still, it is a good moment to take stock of the economic outcomes of the Sino-American trade war.


The verdict is unremittingly negative for both countries—with one important exception.


As part of the phase-one deal, signed on January 15th 2020, China promised to import dramatically more from America, by buying an additional $200bn in goods and services in 2020 and 2021, compared with 2017 levels.


Having long complained about China’s manipulation of its economy, America demanded that it manipulate trade flows.


As it turns out, Chinese officials lacked either the willingness or the ability to get it done.


China will reach barely a tenth of its purchase target for goods, according to data compiled by Chad Bown of the Peterson Institute for International Economics, a think-tank.


Even allowing for pandemic-related disruptions, America’s strategy of browbeating China into buying more of its wares has underwhelmed.


More broadly, the trade war has hurt both the Chinese and American economies, as a growing body of research shows.


The superpowers started hitting each other with tariffs in early 2018, giving economists two full pre-covid years of numbers to crunch.


During that time average American tariffs on Chinese imports soared from 3% to 19%, while average Chinese tariffs on American imports went from 8% to 21%.


It is hard to overstate how big a shock this was to the world’s biggest bilateral trading relationship.


Pablo Fajgelbaum of Princeton University and Amit Khandelwal of Columbia University calculate that the tariffs were applied to even more trade as a share of American GDP than were the notorious Smoot-Hawley levies of 1930, which led to a spiral of international retaliation and may have worsened the Depression.


Mercifully, the Sino-American trade war has precipitated no such disaster.


The global economy was in much better shape to begin with.


And price effects have been muffled by complex supply chains.


At the onset of the trade war, a common assumption was that both sides would bear the costs of the tariffs: Chinese suppliers would charge a little less for their goods, and American importers would pay a bit more.


Yet an early study by economists including Gita Gopinath, now of the IMF, found that American importers in fact bore more than 90% of the cost of America’s tariffs.


The obvious explanation was that they had little choice but to rely on Chinese suppliers, at least in the short run, and could not negotiate lower prices.


In addition, prices to consumers barely budged, suggesting that retailers absorbed the costs through thinner profits.


This could not last, wrote Ms Gopinath and her colleagues: at some point American importers would pass higher costs on to customers.


Chinese economists might gleefully point to America’s current surge in inflation to argue that this is now happening.


At the margin they are surely right that tariffs can be inflationary, as even Janet Yellen, America’s treasury secretary, has conceded.


But dislocations stemming from the pandemic—from microchip shortages to a quintupling of shipping costs—are far bigger factors in driving up prices.


The trade war only adds to the headache.


One reason why America levied tariffs was to encourage manufacturers to relocate there.


Yet trade friction has in fact depressed business investment in America, suggests research by Mary Amiti of the Federal Reserve Bank of New York and others.


The share prices of companies trading with China fared especially badly after tariff announcements.


This reflected lower returns to capital and, by extension, weaker incentives to invest.


All told, the annual investment growth of listed American firms was likely to have shrunk by 1.9 percentage points by the end of 2020.


Aaron Flaaen and Justin Pierce of the Federal Reserve Board estimate that exposure to higher tariffs was associated with a decline in American manufacturing employment of 1.4%.


The burden of higher import costs and retaliatory levies outweighed the benefits of being sheltered from foreign competition.


So far all this might sound like a win for China.


But more recent papers show that it too has taken some blows.


Because of a lack of granular official Chinese data, Davin Chor of the Tuck School of Business and Li Bingjing of the University of Hong Kong studied satellite images of night-time lights to gauge economic activity.


The bulk of China’s population, they found, would have been oblivious to the trade war.


But for the directly affected export-intensive parts of the country, they estimated that the tariffs led to a 2.5% contraction in GDP per person.


Another approach by economists including Xu Mingzhi of Peking University was to look at data from 51job.com, a Chinese job platform.


Firms more exposed to American tariffs posted roughly 3% less ads in the six months following tariff increases, and reduced salary offers by 0.5% on average.


Chinese officials like to talk about bilateral co-operation as “win-win”.


The trade war has been constructive in one respect, however.


America’s imports from China are fractionally lower than before it implemented tariffs.


By contrast, its imports from Vietnam have doubled, and those from Mexico have risen by 20%.


Viewed narrowly, this may be a sign that trade is being diverted from more efficient producers in China to slightly less efficient ones.


But as a matter of business strategy, this looks sensible.


One of the lessons of the supply-chain snarls of the past year is the danger of over-reliance on a single source.


American firms can thank the trade war for getting them started on the messy business of rethinking their supply chains.


The trajectory of Sino-American relations suggests they have every reason to hasten the shift.


China | Chaguan
China and America are barely speaking, though crises loom
A comfortless calm reigns, but a storm is coming

During Donald Trump’s four years in the White House, tempests buffeted relations between America and China.


There was a trade war, backed by presidential tweets “hereby” ordering American businesses to leave China.


There was also mutual finger-pointing over the origins of covid-19, including conspiracy theories, promoted by Chinese diplomats, that the virus began in an American military laboratory.


In 2020 Mr Trump’s secretary of state, Mike Pompeo, urged his country to see clearly its differences with the “bankrupt, totalitarian” ideology of the Communist Party, and to empower the Chinese people to “induce China to change”.


That speech is not forgotten in Beijing, where party leaders heard a call for their overthrow.


Today, a chilly, comfortless calm reigns.


The powers resemble rival battle-fleets, navigating seas filled with icebergs and other half-understood dangers.


Fresh ice was sighted during the Communist Party congress which ended on October 22nd.


A day later Xi Jinping was crowned as party chief for a third term, and possibly for life.


Mr Xi’s report to the congress catalogued threats to national security, including attempts by unnamed forces (meaning America, above all) to sabotage, subvert and contain China’s rise.


He stressed the need for China to show a fighting spirit and achieve greater self-reliance, especially in core technologies.


Mr Xi’s bleak survey was months in the drafting.


But it sounded like an echo of one delivered days earlier in Washington.


President Joe Biden’s administration published a National Security Strategy that accuses China of intending to reshape the international order.


The strategy’s unveiling was preceded by the announcement of stringent controls on exports of advanced American semiconductors and chip-making technologies.


The rules aim to stop China from using American products and know-how to build supercomputers and artificial intelligence (AI) systems that could help the People’s Liberation Army to create world-beating weapons, or China’s police state to perfect surveillance systems.


Staying ahead of strategic competitors is no longer enough, Biden administration officials explained.


From now on, America must maintain as large a technological lead as possible.


To date, China has unveiled no countermeasures to these export controls, though domestic chip-making companies have been summoned to Beijing for emergency meetings.


The new controls land in a sea of bilateral troubles.


Since August, when Nancy Pelosi, the speaker of the House of Representatives, angered leaders in Beijing by visiting the island of Taiwan (which China claims for its own) Chinese officials have suspended talks with America about everything from drug-smuggling to avoiding collisions involving warplanes and naval ships.


When American diplomats in China are summoned for meetings, rote talking points dominate and Chinese officials demand that America atone for its mistakes.


Though COP27, a big climate-change conference, is days away, China is not letting its climate envoy, Xie Zhenhua, talk to his American counterpart, John Kerry.


China has blocked UN resolutions condemning North Korean missile tests.


Once Chinese envoys joined America in approving UN sanctions on North Korea.


Now they blame sanctions for provoking tensions, and hint that co-operation over Korean security is conditional on better relations between China and America.


Attempts to keep relations from a free-fall can be glimpsed.


Officials from both sides are working on a possible meeting between Mr Biden and Mr Xi at the g20 summit of world leaders in Bali in mid-November.


In Washington, there is talk of avoiding misperceptions and ensuring that competition with China does not descend into conflict.


Efforts are under way to ensure that, as Mr Xi welcomes such foreign visitors as the German chancellor, Olaf Scholz, to Beijing for a post-congress victory lap, he hears consistent messages from Western leaders, notably about Vladimir Putin’s war in Ukraine, and Russian threats of escalation there.


In Beijing scholars suggest that things could be worse, noting that though the party congress heard a grim report about the international situation, there were no major changes in foreign and security policies, for instance over Taiwan.


Da Wei, director of the Centre for International Security and Strategy at Tsinghua University, sees this moment as a “pause for reflection”, as China absorbs a “blunt and hostile” National Security Strategy.


In Professor Da’s telling, the mainstream Chinese view is that America’s high-tech controls are a selfish plan to control a lucrative industry.


“From China’s perspective, the United States is trying to strangle China’s economy, or at least some sectors,” he charges.


America’s aim is not to defend human rights or its national security, but “to strengthen its position in the global supply chain.


”
For their part, American officials deny that export controls are a bid to contain China.


Their denials refer to specific, cold-war definitions of containment, recalling George Kennan’s strategy of countering all forms of Soviet influence worldwide.


In reality, America has come to see domination of high-end semiconductor manufacturing as vital to national security, says Gregory Allen, a former Pentagon official specialising in AI, now at the Centre for Strategic and International Studies, a think-tank in Washington.


America aims to slow China’s technological progress not wreck its economy, he says.


But an unspoken goal is “to preserve our ability to destroy their economy at a later time, should we need that tool.


”
Should China come to the same view of America’s plans, the current glacial calm cannot last.


Mr Biden’s team is more disciplined than Mr Trump’s band of hawks and ideologues, who lurched from one noisy clash with China to another.


But, like an iceberg, America’s ambitions are larger and more disruptive than they at first appear.


Nor will American allies escape being dragged into a contest that weaponises supply chains.


Leaders | America v China
Why the China-US contest is entering a new and more dangerous phase
Chinese officials rage at what they see as American bullying

You may have hoped that when China reopened and face-to-face contact resumed between politicians, diplomats and businesspeople, Sino-American tensions would ease in a flurry of dinners, summits and small talk.


But the atmosphere in Beijing just now reveals that the world’s most important relationship has become more embittered and hostile than ever.


In the halls of government Communist Party officials denounce what they see as America’s bullying.


They say it is intent on beating China to death.


Western diplomats describe an atmosphere laced with intimidation and paranoia.


In the Diaoyutai State Guesthouse, multinational executives attending the China Development Forum worried what a deeper decoupling would mean for their businesses.


The only thing both sides agree on is that the best case is decades of estrangement—and that the worst, of a war, is growing ever more likely.


Each side is following its own inexorable logic.


America has adopted a policy of containment, although it declines to use that term.


It sees an authoritarian China that has shifted from one-party to one-man rule.


President Xi Jinping is likely to be in power for years and is hostile to the West, which he believes is in decline.


At home he pursues a policy of repression that defies liberal values.


He has broken promises to show restraint when projecting power outward, from Hong Kong to the Himalayas.


His meeting with Vladimir Putin this month confirmed that his goal is to build an alternative world order that is friendlier to autocrats.


Faced with this, America is understandably accelerating its military containment of China in Asia, rejuvenating old alliances and creating new ones, such as the aukus pact with Australia and Britain.


In commerce and technology America is enacting a tough and widening embargo on semiconductors and other goods.


The goal is to slow Chinese innovation in order that the West can maintain its technological supremacy: why should America let its inventions be used to make a hostile regime more dangerous?


To China’s leaders, this amounts to a scheme to cripple it.


America, in their eyes, thinks it is exceptional.


It will never accept that any country can be as powerful as itself, regardless of whether it is communist or a democracy.


America will tolerate China only if it is submissive, a “fat cat, not a tiger”.


America’s Asian military alliances mean that China feels it is being encircled within its own natural sphere of influence.


Red lines agreed on in the 1970s, when the two countries re-established relations, such as those on Taiwan, are being trampled by ignorant and reckless American politicians.


China’s rulers think it only prudent to raise military spending.


In commerce, they view American containment as unfair.


Why should a country whose gdp per head is 83% lower than America’s be deprived of vital technologies?


Officials and businesspeople were appalled by the spectacle of TikTok, the subsidiary of a Chinese firm, being roasted in an American congressional hearing this month.


Although some Chinese liberals dream of emigrating, even worldly, Western-educated technocrats now loyally condemn shows of wealth, promote self-reliance and explain why globalisation must serve Mr Xi’s political priorities.


Given two such entrenched and contradictory world-views, it is naive to think that more diplomacy alone can guarantee peace.


A meeting in Bali between President Joe Biden and Mr Xi in November eased tensions, but the deeper logic of confrontation soon reasserted itself.


The spy-balloon crisis (Chinese officials mock America for downing what they call a stray “naughty balloon”) showed how both leaders must appear tough at home.


America wants China to adopt guardrails to control the rivalry, including hotlines and protocols on nuclear weapons, but China sees itself as the weaker party: why tie yourself down with rules set by your bully?


Nothing suggests the hostilities will ease.


America’s election in 2024 will show that China-bashing is a bipartisan sport.


Mr Xi faces a slowing economy and has tied his legitimacy to a vision of a muscular and “rejuvenated” nation.


Faced with such an opponent, America and other open societies should adhere to three principles.