No sweet spot for Singapore in US-China tensions

The United States and China are settling into a protracted struggle over trade, technology and geopolitics. Singapore will come under special scrutiny, as an ethnic Chinese majority society with strong ties to both.

On May 20, China's President Xi Jinping, during a tour of Jiangxi province, said: "We are now embarking on a new Long March, and we must start all over again."

Jiangxi was the start point of the best known of several retreats by the Red Army that came to be collectively known as the Long March.

Mr Xi did not explicitly mention US-China relations. But 10 days earlier, what was supposed to be the final round of trade talks ended without agreement and the Trump administration raised tariffs on Chinese exports from 10 per cent to 25 per cent. It was clear enough what Mr Xi was referring to.

A week before, an editorial in the People's Daily had described United States-China tensions as a "People's War".

This is highly charged political rhetoric, infused with deep symbolism that drew on the founding myths of the Chinese Communist Party (CCP).

Not all the symbolism may, however, have been as Mr Xi intended.

In October 1934, mistakes by its inexperienced Military Commission led the CCP's First Army to the brink of encirclement and annihilation by Kuomintang (KMT) forces. It narrowly escaped by embarking on a desperate strategic retreat. A year later, only about a tenth of the Red Army that left Jiangxi reached sanctuary in Yan'an in Shaanxi province.

CHINA'S MISREADING OF THE US

Today, Beijing has clearly misread the direction of US-China relations. It underestimated the Donald Trump administration's determination to confront China, despite the 2017 National Security Strategy and the 2018 National Defence Strategy having labelled China a "strategic competitor".

 

After the 2009 global financial crisis, China seems to have begun to believe its own propaganda about the US' inevitable decline. After the 2012 Scarborough Shoal incident, Beijing may have mistaken the Barack Obama administration's reluctance to stand up to China as a new norm of American foreign policy. China may also have been misled by the contempt for President Trump that its usual interlocutors in the American foreign policy establishment did not bother to hide.

Towards the end of the Hu Jintao administration, and far more insistently under Mr Xi, China began to pursue its economic and strategic interests with increasing assertiveness. Chinese foreign policy took on a triumphalist tone. By the time of the 19th Party Congress in 2017, Deng Xiaoping's approach of "hiding light and biding time" had clearly been abandoned.

Hubris is not an American monopoly, and these were serious mistakes. Since the trade war started, Mr Xi has been subjected to muted but nevertheless pointed criticism within China.

Among the clearest criticisms was one by Mr Deng Pufang, Deng Xiaoping's son. In a September 2018 closed-door speech that was reported by Mr Jack Ma's South China Morning Post, he said: "We must seek truth from fact, keep a sober mind and know our own place." And that: "We should neither be overbearing nor belittle ourselves... The most important thing at the moment is to properly address China's own issues."

Mr Xu Xuebing, founder of China firm Sam Wood, showing where in the United States his company imports wood from. While China is ahead in some crucial areas, such as artificial intelligence, it is behind and dependent on foreign sources - especially t
Mr Xu Xuebing, founder of China firm Sam Wood, showing where in the United States his company imports wood from. While China is ahead in some crucial areas, such as artificial intelligence, it is behind and dependent on foreign sources - especially the US - for equally crucial products. PHOTO: AGENCE FRANCE-PRESSE

Every Singapore Government I have served has had to stand up to the US, or stand up to China, and occasionally to stand up to both at the same time. Under present circumstances, what was once an occasional challenge may become the norm.

Mr Deng Pufang's criticism was all the more powerfully poignant because he was speaking at a meeting of China's Disabled Persons Federation. He himself had been crippled during the Cultural Revolution.

It was to prevent the reoccurrence of such excesses that his father had introduced the two-term limit that Mr Xi discarded.

Xi Jinping is not Mao Zedong. But the concentration of power on Mr Xi's watch, and the severe penalties for perceived disloyalty, may have reintroduced something akin to a neo-Maoist single point of failure into the Chinese system. There is good reason to wonder what is being reported upwards and how accurately.

In March 2017, I met an American friend who heads a major US corporation in New York. He is a senior member of the US-China Business Council that had just met Vice-Premier Liu He, who was on a visit to try and head off a trade war.

"What did you tell him?" I asked. The friend replied: "We told him it is all of us and not just Trump."

I was surprised. The disenchantment of American businesses with China had been building up since the George W. Bush administration. Surely, he already knew, I said. He didn't seem to, my friend replied.

China's growth was already slowing when Mr Trump raised tariffs. By the time of the annual lianghui or the "two sessions" of the National People's Congress and National Committee of the Chinese People's Political Consultative Conference in March this year, the serious pressures and uncertainties confronting China could not be concealed.

Premier Li Keqiang's report to this year's lianghui was a sober assessment of the dangers China was facing. Earlier, in January this year, Mr Xi outlined seven "major risks": politics, ideology, economy, science and technology, society, the external environment and party-building.

None of this is intended to suggest that China is going to fail. The CCP is an extremely resilient and adaptable organisation and I do not think that China will fail. Corrections have already been announced, for example to Mr Xi's signature Belt and Road Initiative. It remains to be seen how the adjustments to policy will be implemented.

But a period of serious difficulties certainly lies ahead for China.

PROLONGED STRUGGLE AHEAD

Evoking the Long March is intended to prepare the Chinese people for a prolonged struggle with the US. It was, in effect, a tacit admission of the CCP's mistakes with the consequent need for a retreat, while holding out the promise of ultimate victory.

Mr Trump and Mr Xi will meet at the G-20 Summit in Osaka next month. Will they decide to resume trade talks? Perhaps. Neither wants a complete break at this point. But it will not be easy.

 

Attitudes on both sides have hardened. The domestic political considerations on both sides are against compromise unless on their own terms. Neither side wants to appear weak. Both may believe that time is on their side.

Mr Xi, already under criticism, cannot accept any result that can be portrayed as China having buckled under foreign pressure. He may decide to outwait Mr Trump. China's system is better able to pursue long-term goals. But if this is indeed Mr Xi's intention, it would be another mistake.

There is a strong bipartisan consensus in the US for a tough approach towards China. The 2020 presidential election is Mr Trump's to lose. He will not want to be accused of having turned soft. With the American economy doing relatively well, he can afford to subsidise those hurt by tariffs and has announced a US$16 billion (S$22.2 billion) package for farmers.

Even if talks resume and some sort of deal is reached, it will probably be limited in scope and temporary in duration.

TRADE AND TECHNOLOGY

The legislative and administrative restrictions on transfer of technology set out a new paradigm for US-China relations that will remain in place even if tariffs on goods are eventually removed or reduced, and will remain in place long after the Trump era.

International attention has focused on Huawei. But the actions against the Chinese tech firm are only the first shots in an approach that will extend beyond just one Chinese company. Mr Trump's May 15 executive order restricting transfers of information and communications technology on national security grounds was very broadly phrased, banning all transactions "posing an unacceptable risk".

China is clearly ahead in some crucial areas of software, notably artificial intelligence.

But it is as clearly behind and dependent on foreign sources for equally crucial areas of hardware, particularly in the design and manufacture of high-end semiconductor chips. Without the hardware, the software cannot be put to practical use.

Last year, China consumed about US$155 billion worth of semiconductors, around 40 per cent of global consumption. But only 5 per cent to 6 per cent was produced in China. It is likely that a large percentage of what was made locally was by foreign manufacturers located in China but vulnerable to US restrictions.

Globally, high-end chip design and manufacture is dominated by just three companies: Taiwan Semiconductor, Samsung and Intel. The last is an American company. The other two are from countries highly dependent on the US for their security.

Huawei, and China generally, has signalled the intention to become more self-sufficient in chip design and manufacture. I do not underestimate Chinese inventiveness, but this is easier said than done.

It is basically impossible to design chips without Electronic Design Automation (EDA) tools. The EDA market is dominated by just three firms: Cadence and Synopsys, both US companies, and Siemens, a German company.

The first two firms have already announced that they will stop supplying Huawei. Germany is hesitant. But the Germans - and Europe generally - cannot deal with a resurgent Russia without American support and will sooner or later fall into line. Post-Brexit Britain will probably be more dependent on the Chinese market and has also been ambivalent about restricting Huawei. But ARM Holdings, a British chip designer owned by Japan's Softbank, has announced it will stop licensing its technology to Huawei.

China is such a big consumer of chips, so restricting exports to the country will hurt suppliers as well. It is not without other means to retaliate. But they are limited.

Since China runs a trade surplus with the US, there is limited scope to impose tariffs on American exports. Some have suggested that Beijing may dump its holdings of US Treasury bonds. But it cannot do so without tanking the value of its own reserves. And what can replace US Treasuries as an international store of value?

During his Jiangxi tour, Mr Xi, with Mr Liu by his side, pointedly visited a rare earth factory. China dominates rare earth production and about 80 per cent of US supplies come from China. But cutting off the US will only pose a temporary problem. Rare earths are actually not all that rare, only highly polluting to extract, which is why so much global production is in China. By some estimates, alternative sources could be up and producing in little more than a year.

BROADER GEOPOLITICAL CONTEST

Trade and technology restrictions are only the instruments of a broader geopolitical contest. The time frames and cost-benefit calculations of a geopolitical competition are fundamentally different from the time frames and cost-benefit calculations of a purely economic or commercial competition.

A Trump administration that has a narrower and more transactional notion of relationships will not give much weight to the cost to friends and allies in its geopolitical calculations.

Since the technology restrictions will hurt China, at least through the intermediate term, there is little incentive for the Trump administration to relent on technology unless China entirely capitulates on trade or undertakes structural reforms that will fundamentally change its communist system. That is not going to happen.

If the US goal is to "decouple" China from itself and its friends and allies, it is not likely to succeed, at least not in entirety. China is as vital a node in the world economy as the US, and the Chinese and American economies are entangled and interdependent in a way that is historically unprecedented between rival major powers.

If China aspires to create an alternative system of hardware and software centred around itself, it too is unlikely to succeed in entirety. Technology does not respect political boundaries. Attempting to create a separate system will make both systems sub-optimal, with implications for future growth in both.

But neither will give up easily. War by design is improbable. Both sides have too much to lose. But the geopolitical tensions and complications are likely to be prolonged, without a clear denouement.

IMPACT ON SINGAPORE

What does this mean for Singapore?

Slower growth in China and eventually the US, and disruptions to global supply chains, will obviously create more uncertainties for the world economy. Singaporeans are understandably concerned about what this means for their jobs and future. Those with business links to China will be particularly concerned.

On the upside, some investments that might have otherwise gone to China, and some investments that would have remained there, may come to Singapore and other Asean countries, creating opportunities. But this will also bring more intense American scrutiny to ensure that "back doors" for Chinese exports do not open up and demands for strict safeguards to ensure that technology from foreign direct investment, arms purchases and from our own research and development efforts, do not leak to China.

All countries will face similar issues. But there are some challenges that may be uniquely acute for Singapore.

 
 
 
 

The Chinese have long memories. Despite our constant denials, they still consider Singapore a "Chinese country" and may feel entitled to our support and will not quickly forget if we are regarded as insufficiently helpful in their time of need.

Some in the Trump administration also seem inclined to view the issue in racial terms. As the only ethnic Chinese-origin majority sovereign state outside greater China, we may be subject to special scrutiny.

Our universities and other research institutions seem to be staffed by many People's Republic of China (PRC) citizens or new immigrants from China. Technology is the future; we need these people. But if the geopolitical contest begins to boil over, the Americans may present an ultimatum: "You want F-35s? Then follow me." We cannot do without advanced American defence technology either.

What Singaporeans need to understand better is that, under present circumstances, there may be no sweet spot we can occupy that will keep both the Chinese and the Americans simultaneously happy. There is no silver bullet, and it is a fool's errand to look for one.

Neither can we just lie low and hope for the best. You may not look for trouble but trouble may come looking for you. And trouble is all the more likely to seek you out if either side thinks you are, or can be, intimidated.

We must have the courage to pursue our own national interests. Sometimes our national interests may lead us to tilt one way, sometimes the other. But it must always be our national interest that guides us and nothing else.

Both the Chinese and Americans may not be too happy with us for pursuing our own interests. But Singapore does not exist to give joy to American or Chinese hearts. So long as neither side is so unhappy that it dismisses us as unredeemable, we can live with their unhappiness and manage it.

Every Singapore Government I have served has had to stand up to the US, or stand up to China, and occasionally to stand up to both at the same time. Under present circumstances, what was once an occasional challenge may become the norm.

Our more complex domestic politics is a complication. I see still faint but distinct signs that some section of our population - how large, I do not know - either for transactional economic reasons, or unthinking ethnic sympathies, or sheer chauvinism, is beginning to look at the current US-China tensions through a racial lens.

As US-China competition heats up, this tendency may be accentuated. This is the greatest danger to Singapore in this new phase of US-China competition. It is still at a nascent stage and must be checked, if necessary by the prophylactic exercise of the coercive powers that are the legitimate monopoly of the state, before external and internal forces act and react with each other in a vicious spiral downwards.

If we hold together, we can manage the external complications. If we do not, and the social compact which is the foundation on which modern Singapore was built is strained or broken, these internal stresses may make the external complications unmanageable.

Since this period of US-China tensions will be prolonged, this is not a challenge that lends itself to definitive solutions. Managing it requires continual vigilance and periodic decisive action. It is our own Long March.

Bilahari Kausikan, a retired diplomat, is a former permanent secretary of the Ministry of Foreign Affairs.

 
A version of this article appeared in the print edition of The Straits Times on May 30, 2019, with the headline 'No sweet spot for S'pore in US-China tensions'. Print Edition | Subscribe