DiligenceChina

A full-blown trade war between US and China is not a foregone conclusion. Tensions and quality issues are natural, and bureaucrats on both sides seem to be making all the right moves to guide the emerging trade relationship in the right direction. Just today there was a positive-sounding announcement about mid-level governmental consultations. People’s Daily: China, US to Consult on Food Safety

So has the whole thing blown over? Are we out of the woods yet? Well, maybe.

If a China-US trade dispute moves beyond the low-level punditry stage, you can bet its origins will be more farce than calculated strategy — but that doesn’t mean that the outcome will be any less tragic or damaging. The most dangerous advice you can follow right now comes from people telling you to ignore the possibility of a protracted trade war because it would be terrible for both sides. People are ALWAYS doing things that are bad for everyone involved – and that is particularly true of nations and governments.

Good news
China and the US aren’t natural enemies – or even competitors – from a bottom-up point perspective. US pundits, protectionists and dimwit media hacks will continue taking wild swings with their eyes closed, but they’ve been trying for decades and have had a hard time connecting. The Carter administration crapped out with Human Rights (boring, hypocritical, unappreciated), the Freedom of Religion thing faltered when it turned out the Falun Gong really were crack-pots with a nasty agenda, and the whole “evil system” theme lost steam as the quality of life in the big cities improved over the last 15 years.

More recent efforts to whip up anti-Chinese sentiment on economic grounds have been equally lame. Sure, lost jobs is always a hot-button issue in the US, but unemployment is low by historical standards and most of the jobs that Chinese factory workers take are coming from places like Mexico and Indonesia, not Detroit or Allentown. The US economy has been doing well during China’s recent rise which undercuts one of the anti-China lobby’s most potent weapons.

Some right-wingers have been trying to take a page from the anti-Japan playbook, but the China-US relationship is a fundamentally different story. Americans have traditionally viewed Japan through the lens of Pearl Harbor, and their rise in the 1980s came as our economy was going through some painful dislocations. What’s more, Japan Inc was a jerk about its rise to power – insulting, arrogant and condescending. The Chinese have been the opposite – embarrassingly devoted fans. They’re not trying to buy our landmarks and icons – they want to buy our companies so they can learn to do business our way. We love their food (though they think that our Chinese food is awful) Yao Ming has been great, and the Chinese are shaping up to be a natural ally in some areas of international politics (at least as far as North Korea goes).

Protectionists trying to play the Wal-Mart card against China are going to be disappointed. I’ve been to Wal-Mart. The people who shop there and work there know what they’re doing. They can read a price tag. One of the benefits to globalization is lower prices on mass-produced goods, and trying to blame buyers or producers is simply bucking a macro-trend. Rewriting history is difficult but possible – re-writing the future is not.

Bad News
So what can go wrong? China and the US have something in common that makes the situation more dangerous than it seems. Both have middle classes that can be pretty thin-skinned and emotional at times - and that’s what has the potential to get us into trouble.

Middle class grumbles in NY and Shanghai will have far-reaching echoes, but regular people don’t know it. Both populations are used to be ignored, but this is one issue where they have the ability to start a very small snowball rolling down a very high mountaintop.

The ball has already started rolling.
It started with the dangerous imports. Lawyers, politicians and media all have great reasons for painting China as the cartoon villain. Lawyers will make money on class-action suits, politicians will get elected by passing popular laws, and media make advertising dollars by selling papers or attracting viewers. So making regular folks a little scared and angry is good for business. So far, nothing too unusual. Happens every day.

The problem is that China will feel victimized and persecuted. National pride and status vis-à-vis the west are sore spots for the Chinese middle class, and the official media and the blogger hobbyists will spin the story for maximum impact. China can be a little bi-polar at times. They seem to feel they are the most sophisticated culture on the planet, but can also suffer from a serious persecution complex in multi-cultural situations. Attacks on Chinese seafood and manufactured toys quickly turn into attacks on Chinese pride and history. Bureaucrats have already started responding with tit-for-tat trade regulations (which is normal in almost every international relationship – be it trade, customs, visas, etc). But it has the potential to send that snowball hurtling faster down the slope. Americans don’t like the idea of our goods being turned back at foreign ports – and the media have been giving some pretty routine customs issues front page attention. US politicians will try to get more play out of the currency or balance of trade issues – fanning the flames in Beijing and giving the Xinhua editorial team plenty of new material.

If the mood on the Chinese street turns more hostile, expect some limited demonstrations or protests. They may be directed at a US government office, but are more likely to focus on the real symbols of America in China – Starbucks and McDonalds. If even one of them gets out of hand (remember the anti-Japan demonstrations of 2005?), look for MSNBC and CNN to give it round-the-clock coverage. If there is even a mention of travel advisories ahead of the Beijing Olympics, it will touch off a firestorm of hostility and nationalism among regular Chinese. A little internet hacking thrown in for good measure and the whole situation could easily escalate to the next level – moving away from middle-class sneering and entering the arena of policy-makers.

In the US, the Democrats will pick up on their constituents’ nervousness about China and will roll out their big guns – passing a new bill on currency or trade. The Republicans – not wanting to be outflanked – may go back to one of THEIR traditional hot-button issues, which include Taiwan defense, freedom of religion or maybe even something on human rights. (Yeah, I know that it’s all pointless, hypocritical and hot-air, but this is the US Congress we’re talking about.) China may strike back at the US’ big concern – which could very well involve Iran, Somalia or other unilateral treaties with people we consider enemies.

Once we hit that level of conflict, the middle-classes will be out of the equation and we have entered a very ugly phase of international relations. It will probably never get to this level, and there are signs that tensions are already cooling.

Everyone loses but the Lawyers and the Bureaucrats
US-Sino trade relations are still positive but a bit more fragile than the numbers indicate. You should be looking for signs of middle-class discontent first. At this phase, the politicians will be conciliatory and optimistic. Any trade issues will start from the ground up, but have the potential to escalate quickly.

In China, we look at the blogs and the SMS-inspired “spontaneous” demonstrations. On the US side, watch how much time people like Lou Dobbs are devoting to their anti-Chinese rants. Also, view the anti Wal-Mart lobby as a proxy for China-oriented protectionism. If tensions start on the China Street, they’re going to spill into the office and the factory floor quickly. Look for slowdowns, QC problems, bureaucratic and approval problems, and IT security issues. Anyone selling Chinese made goods into the US might want to diversify a bit to give yourself some PR cover in case things get nasty. And if you don’t have a product-testing process in place by now, you are very exposed to lawsuits and legal action. Boycotts shouldn’t be a big issue in either country – they don’t ever seem to work.

If this does turn ugly, your exposure will be in US courtrooms and Chinese ministries.