China could yet win Trump’s trade war

If you want to know why Donald Trump shouldn't expect to win a trade war against China, look no further than Alibaba, the country's giant e-commerce version of Amazon. Last month, I had two in-depth conversations with Ming Zeng, the e-commerce giant's head of strategic planning and among the smartest minds in business and finance in China. Ming made it clear that China has little real need for America any more – not US products, but especially not US ideas. When thwarted, China has shown it can think up its own.

At the same time, the Trump administration seems to be doing its level best to run a competition calculated from the starting gate to lose the race, or the war, whichever it turns out to be. The US president's latest effort was to threaten a rise in tariffs on $200 billion worth of Chinese goods – from 10 percent to 25 percent. Within 24 hours, China quickly reciprocated with a list of 5,207 American products, worth $60 billion, on which it pledged to exact new tariffs ranging from 5 to 25 percent if Trump implements his threats. And there we'll have a full-blown trade war.

Fortunately, Trump has extended a comment period before implementation until September. Meanwhile, markets on both sides of the Pacific continue unsettled – at times balancing on the edge of panic.

While the Chinese stock market has taken more of a beating than the American, Trump seems to think that the United States can stand the pain longer than China and that tightening the screws will bring Beijing to the negotiating table. But that reflects little understanding of either the Chinese mindset or the underlying strength of the Chinese economy which, though weaker than a year ago, is still growing nearly twice as fast as the American.

And this by no means reflects how bad it could get as individuals with little understanding of either the stakes or the mechanisms plunge into this pending maelstrom.

Last week, Secretary of State Mike Pompeo unveiled with some fanfare another way of dealing with, even isolating China, that approaches the ridiculous in its scale and futility. Dubbed the "Indo Pacific Economic Vision Program" it was widely viewed as a counter to China's long-standing Belt and Road development initiative that has ensnared nations across Asia and onward to Europe. But a decidedly skinflint counter. Trump has committed a derisory $113 million to his program – a rounding error compared with the $900 billion estimated for Beijing's Belt and Road, which China bankrolled at $82 billion three years ago. This hardly even seems to be a competition. Yet as the South China Morning Post put it, the US initiative is "likely to fuel suspicions from Beijing… and could in turn worsen relations that are already fraught with trade tensions."

Moreover, China seems prepared to do all it can to keep control of its global trading strategy, offering Britain talks leading to a post-Brexit free trade deal on Monday, while continuing to hold the United States at bay.

For Washington to win any trade war with China – or even arrive at some mutually satisfactory conclusion, the most desirable outcome in the long run – there must be an understanding of the forces it will be facing. My takeaway from my interviews with Ming, which ran in full in Forbes Asia, is that large swaths of China's rapidly advancing economy, especially the domestically-focused areas, are either largely immune from any trade imbroglios or will manage to circumvent them.

In January, the United States barred a takeover by Alibaba's Ant Financial of Moneygram, the money transfer agency. So Alibaba created a different, in many respects more innovative, product using blockchain-based technology. "Any new business, while growing up, always encounters obstacles. We understand that. It is part of the cost of doing business," Ming said. "So we might be frustrated. But because the value we create is so overwhelming, we will find some way to overcome that barrier."

That doesn't mean that many Chinese companies and state-run enterprises in China aren't still poised to appropriate innovations from Silicon Valley. But the more America tries to block them, the more likely the Chinese are to come up with their own solutions.

Another example: Last year, the US Committee on Foreign Investment failed to approve an effort by Navinfo, the Chinese provider of digital maps for autos, to buy a stake in HERE, an Amsterdam-based mapping company that operates in the United States and is 15 percent owned by US chipmaker Intel. So Navinfo, ranked by Forbes as of the world's top 100 innovative growth companies, simply withdrew its offer and continued its expanding cooperation with HERE and its German-owned car company partners, BMW, Daimler and Volkswagen.

To be sure, while China may have a leadership role in markets like the auto market and appliances such as refrigerators and washing machines, it does still lag in fields like artificial intelligence. But, as Ming suggests, "it's not about our size, it's about our innovation experience and our understanding of where the future goes."

It is this profound understanding and acceptance of the long game that may ultimately leave China the winner in any trade war.

The Chinese, and especially its leadership, have quite a strong and evolved sense of self. Their ability to withstand external forces dates back not just to Mao Zedong and the communist revolution that brought them to power after World War Two. It's more useful to look back to the Zhou dynasty a thousand years before Christ, which based the legitimacy of its emperor on whether he was sufficiently virtuous to rule – and receive the Mandate from Heaven to do so. A people with such an evolved sense of destiny and self-worth is unlikely to see a secular leader like Donald Trump as a major obstacle.

In China, losing face is the ultimate failure. While the best, and most lasting, trade agreements must be at least perceived as a win-win, Trump now seems to have dug himself so deeply into his America First corner that it allows little room for the Chinese leadership to manoeuvre without losing that face. Trump must brace for a long and bruising conflict. But if he is not persuaded to give up, it is all Americans who must prepare to pay for his trade crusade.