U.S. President Donald Trump, right, and Xi Jinping, China’s president. (Photographer: Qilai Shen/Bloomberg)

China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

(Bloomberg) -- Perhaps nowhere outside America’s heartland is Donald Trump given more credit than in Beijing.

In government offices and think tanks, universities and state-run newsrooms, there is an urgent debate underway about what many here see as the hidden motive for Washington’s escalating trade war against President Xi Jinping’s government: A grand strategy, devised and led by Trump, to thwart China’s rise as a global power.

“The Trump administration has made it clear that containing China’s development is a deeper reason behind the tariff actions,” said He Weiwen, a former commerce ministry official and now a senior fellow at the Center for China and Globalization, an independent research group filled with former bureaucrats.

China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

These sentiments were echoed by many of the more than two dozen current and former government officials, business executives, state-affiliated researchers, diplomats and state-run media editors interviewed for this article. Most requested anonymity to speak their minds about sensitive matters.

A common suspicion ran through the conversations -- that the tariffs are just a small part of Trump’s plan to prevent China from overtaking the U.S. as the world’s largest economy. Several people expressed concern that the two nations may be heading into a long struggle for global dominance that recalls the last century’s rivalry between the U.S. and Soviet Union.

“The trade war has prompted thinking in China on whether a new cold war has begun,” said An Gang, a senior research fellow at the Pangoal Institution, an independent research group in Beijing whose experts include former government officials. The dispute, he says, “now has military and strategic implications” -- reflecting concern among some in Beijing that tensions could spill over into Taiwan, the South China Sea and North Korea.

The general pessimism is a major shift among China’s elite, many of whom had initially welcomed the rise of a U.S. president viewed as a transactional pragmatist who would cut a deal to narrow a $375 billion trade deficit for the right price. Now, with tariffs on $34 billion of goods already in effect and duties on another $216 billion in the pipeline, a majority saw no quick fix to a problem that is starting to rattle the country’s top leaders.

‘Smart Negotiator’

The turning point came a few months ago, when Trump put a stop to a deal for China to buy more energy and agricultural goods to narrow the trade deficit. Not only did that insult Xi, China’s all-powerful leader who had sent a personal emissary to Washington for the negotiations, but it crystallized a view in Beijing that Trump won’t quit until he thwarts China’s rise once and for all.

“Donald Trump is a smart negotiator who has accumulated abundant experience in doing business for many years -- and also from the show ‘The Apprentice,’” said Wang Huiyao, an adviser to China’s cabinet and founder of the Center for China and Globalization, whose advisory council is stacked with former lawmakers. While “China is open to negotiations,” he said, Trump’s pressure tactics “will only arouse Chinese nationalism, which will be counterproductive.”

The ramifications of that are now rippling through a society that has embraced America’s consumer culture -- Big Macs, Bentley cars and Chanel handbags are ubiquitous in Beijing -- even as it retains a one-party political system that champions large state enterprises and has little tolerance for dissent.

China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

The trade war is leading to some soul searching in Beijing. Discussions quickly turn to the sustainability of China’s state-centered economy and the leadership of Xi, who can rule the country indefinitely after he led a successful effort earlier this year to repeal presidential term limits.

Xi Criticism

The hushed debate centers over the wisdom of Xi’s goals for rapid growth and his decision to announce China’s ambitions to the world. This was a dramatic shift from former leader Deng Xiaoping’s famous dictum, “Hide your strength, bide your time.’’ Critics of Xi say policies like Made in China 2025 (a plan to dominate industries such as aircraft, new energy vehicles and biotechnology) and the Belt and Road Initiative (a mechanism to finance infrastructure investments around the globe) raised alarm in the West, and prompted the U.S. to target China before it could build critical technologies.

This was seen by how swiftly Trump could bring down ZTE Corp., China’s second-largest telecommunications equipment maker. In April, his administration prohibited the company from buying essential components from American suppliers after it violated laws banning the sale of U.S. technology to Iran. The move prompted ZTE to cease major operating activities until Trump came to the rescue and helped engineer a settlement.

Although ZTE is now back up and running, the episode showed China just how dependent the nation is on the U.S. for high-end know-how. It has also highlighted wider efforts to block Chinese firms from acquiring tech companies by the Committee on Foreign Investment in the United States, which reviews deals on national security grounds. All in all it amounts to “high-tech containment” of China, said Shi Yinhong, a foreign affairs adviser to the State Council and director of Renmin University’s Center on American Studies in Beijing.

The U.S., of course, sees things differently. Officials have repeatedly said they don’t want to prevent China from growing, they just want to stop it from breaking the rules and stealing intellectual property -- allegations that officials in Beijing repeatedly deny.

‘Off-The-Books Nonsense’

The Pentagon recently named China and Russia as two U.S. rivals actively seeking to “co-opt or replace the free and open order that has enabled global security and prosperity since World War II.” Last month, U.S. Secretary of State Michael Pompeo obliquely criticized China for wooing developing countries with cheap financing for infrastructure projects, saying the U.S. believes in “strategic partnerships, not strategic dependency.”

“With American companies, citizens around the world know that what you see is what you get: honest contracts, honest terms and no need for off-the-books nonsense,” Pompeo said in a speech before he attended a regional security forum in Singapore. Another advantage of the U.S., he said, is that “we will help them keep their people free from coercion or great power domination.”

Across the political spectrum in China, from reformers to nationalists, there’s a growing consensus that the nation needs to open up more to foreign business, better protect intellectual property and create a more level playing field. The confrontation with the U.S. was “due in large part to China doing nothing for many years” to reduce the surplus, widen market access and ease state control, according to Shi from Renmin University. “China faces a new, uncertain situation and needs to undergo review and adjustment,” he said. “We didn’t consider other nations’ feelings in our strategic great leap forward.”

Yet sentiments like these are tempered by a reluctance to be seen as bending to Trump’s demands. Several people said that at first they viewed the U.S. tariffs as not all bad if they prompted the government to make long overdue adjustments in China’s approach to doing business with the West. But as the trade war, and the war of words, has escalated, many of these same people are now digging in against the U.S., saying China won’t be bullied.

China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

Apart from some criticism from academics and grumbling from unnamed officials, so far there’s little visible sign from China’s opaque government that the trade war has impacted Xi’s ability to control the levers of money and power. If Xi and his ministers are themselves suffering any doubts, it’s not reflected in the official press. The People’s Daily newspaper -- the main mouthpiece of the Communist Party -- recently confronted critics who say it was a mistake for China to be so public with its global goals.

“Such a heavyweight cannot be hidden by taking a ‘low key’ approach,” the paper said in a commentary last week, “just like an elephant cannot conceal its body behind a small tree.”

Beijing has signaled a willingness to strike a deal that narrows the trade deficit. But policy advisers see little room to budge on some of Trump’s other demands, including an end to subsidies for strategic industries, a stop to forced technology transfer and more competition for state-owned enterprises. Those stipulations -- shared widely by both Republicans and Democrats alike -- are seen as posing an existential threat to the Communist Party, whose legitimacy to rule hinges on its ability to improve livelihoods.

Trump has tried to portray China as an adversary on the ropes, with a falling stock market, sliding currency and slowing economy. It’s certainly true that the U.S. economy is far stronger than China’s. But in Beijing, there is general confidence that in a test of wills between the two presidents, it’s Xi -- who doesn’t have to worry about elections or the wrath of special interest groups -- who can endure more pain.

China has also hinted there are ways to turn up the pressure on Trump, if necessary. Tariffs on automobiles, semiconductors and Boeing airplanes aren’t off the table, according to Wei Jianguo, a former vice commerce minister and now vice director of China Center for International Economic Exchanges, a group with a mission to “improve China’s soft power.” While China is dependent on U.S. chips to make high-performance mobile devices and can’t completely cut ties with Boeing, it served as the second-largest market for American-made cars after Canada.

“If you want to hit Trump hard, give him a right hook so he remembers the pain,” Wei said.

The instinct to fight back comes naturally to China. The “Century of Humiliation’’ that followed the Opium Wars in the mid-1800s -- in which foreign powers forced China to open its markets and provide access to strategic ports -- is etched on the national psyche and used in Communist Party propaganda to spur nationalism.

‘Most Dangerous Period’

Nearly everyone interviewed in Beijing was looking ahead to the mid-term elections in the U.S. to see where things go next. While Standard Bank predicted on Aug. 15 that Trump would look to cut a deal before then to ride a stock-market surge to victory, the consensus in China saw a higher chance of a deal if the Republicans get walloped, as polls predict. China announced on Thursday that lower-level talks were set to resume later this month.

“We’re talking to China, they very much want to talk,” Trump said Thursday at a cabinet meeting at the White House. “They just are not able to give us an agreement that is acceptable, so we’re not going to do any deal until we get one that’s fair to our country."

Next to nobody is betting on a quick resolution. While Trump could tactically shift course at any time -- similar to what he’s done with Nafta, the European Union and North Korea -- with China he’s persistently ignored opportunities to lower tensions.

“The U.S. and China are now in the most dangerous period in the past 40 years,” said Lu Xiang, an expert in relations between the countries at the government-run Chinese Academy of Social Sciences. “Mr. Trump put a knife on our neck. We will never surrender.”

China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net;Dandan Li in Beijing at dli395@bloomberg.net

©2018 Bloomberg L.P.

With assistance from Editorial Board