Earlier this week the Chinese government aggressively devalued its currency — the clearest sign yet that it is hunkering down for a protracted fight with the United States over trade.
Currency devaluation is the mother of all retaliations. The move, designed to help offset the Trump administration’s tariffs against China, could goad America into a currency war, and that would rattle the global economy more than any trade war. It also carries significant risks for China, including capital flight and inflation.
Yet the Chinese government seems confident that it can weather these side effects. Why? Because its entrenched position has won over the Chinese public. It has managed the public relations feat of casting the trade war with America as a war not on China, but on China’s people. President Trump’s maximum-pressure tactics has stiffened the resolve of the Chinese government and made it harder to win concessions from it.
When his administration first imposed tariffs on Chinese goods in March 2018, reactions in China were muted. Some Chinese liberals even viewed Mr. Trump as something of a savior, who might force China to open up and reform its economy.
But many people’s tune changed in late 2018 after the United States imposed sanctions on the company Huawei, a Chinese tech giant, and the Canadian authorities, acting at America’s request, arrested Meng Wanzhou, Huawei’s chief financial officer and a daughter of the company’s founder. The origins of the United States’ Huawei investigation predate the Trump administration: Career officials at the Justice Department were exploring cases against Huawei as early as 2010, under President Barack Obama. But it was Mr. Trump who escalated the Huawei affair, turning a discrete legal case into the showpiece of his broader trade war.
And yet, much as there was a bipartisan consensus in the United States about getting tough on China, there now seems to be a consensus among both liberals and ultranationalists in China that America is trying to undermine the welfare of the Chinese nation itself. To this perception, Chinese consumers have responded by buying Huawei’s phones in huge quantities — even though Ren Zhengfei, the company’s founder, himself has discouraged consumers from thinking that buying its products is a patriotic act.
Huawei’s sales increased by 23 percent in the first six months of this year compared with the same period in 2018, despite an economic slowdown in China and sanctions from the United States. According to the research firm Canalys, the number of mobile phones that Huawei shipped in China increased by 31 percent in the second quarter of this year compared with the second quarter of last year.
But this rally is a show of support for Huawei specifically. Other Chinese companies have fared badly in China. The shipments of Oppo, a domestic rival of Huawei’s, declined by 18 percent over the same period; those of Vivo, another Huawei competitor, by 19 percent; and those of Xiaomi, also a competitor, by 20 percent. (In comparison, Apple’s shipments declined by only 14 percent.) Chinese consumers, in other words, appear to have rallied around the one Chinese company that America has pointedly targeted rather than around Chinese companies in general.
Americans may think of Huawei as a pawn or willing partner of the Chinese government, but in the eyes of many Chinese people the company symbolizes high-tech and entrepreneurship — and success in the face of political adversity.
Huawei was never a darling of the Chinese government’s industrial policy, and plenty of state-owned companies that were, like Great Dragon and Shenzhen Electronic Group, haven’t made it onto Mr. Trump’s blacklist. It is Huawei, not those other companies, that pioneered 5-G technology, the next generation of wireless networks that the United States sees as a national security risk.
Huawei succeeded despite, not because of, the Chinese government’s industrial policies. It is a genuinely private company, owned by its employees. In the 1990s, when the authorities strictly regulated and restricted population mobility, Huawei had trouble obtaining residency permits for staff members in Shenzhen.
Huawei went to Europe to get away from China’s skewed business environment, and it has become China’s top technology firm because it learned to thrive in brutally competitive international markets. No Chinese company can operate without government support, of course, and in 2004 Huawei received credit from the China Development Bank to expand into developing countries. But it earned recognition from the Chinese government only after passing the market test.
Going hard on Huawei was the wrong way for the United States to confront China over its grievances — even if many of them are entirely valid.
Huawei did commit intellectual property theft, but it is also investing heavily in research and development. According to the European Union’s Industrial R&D Investment Scoreboard, in 2019 Huawei ranks fifth in the world in R&D spending, ahead of Apple (which is seventh). Some 45 percent of its employees are working on R&D. By Chinese standards, the company is collaborative: While it has developed its own operating system, it has also kept using Google’s, Android. Its supply contracts with American companies amount to some $11 billion a year. It counts many foreign citizens on its staff, including at senior levels. And so — supreme irony — the Chinese who celebrate Huawei seem to do so precisely because it stands for values that should resonate with Americans, too: a can-do attitude, independent outlook and openness to the world.
One early misstep of the Trump administration concerns ZTE, another Chinese telecom company. In the spring of 2018, the United States Commerce Department prohibited American companies from selling critical chips to ZTE. But the Trump administration later reversed that decision — bringing ZTE back from the brink of bankruptcy.
Unlike Huawei, ZTE is a state-owned company subsidized by the Chinese government and, apparently, garners little love from the Chinese public. It also is a weaker company than Huawei and, therefore, more vulnerable to being derailed. Targeting ZTE first would have also allowed the United States to keep bolder measures in reserve and escalate matters by confronting Huawei later if that proved necessary.
Instead, the Trump administration has endorsed going all-out against Huawei — threatening to blacklist the company, seeking the extradition of Ms. Meng. On Wednesday, it issued a rule limiting business between United States government agencies and Huawei, as well as other Chinese companies (this time, including ZTE).
Yet such maximum-pressure tactics have delivered no meaningful results — other than undermining the good will of the Chinese public and its liberals toward America. The United States should de-escalate tensions and help China come back to the negotiating table by decoupling the Huawei issue from its broader trade concerns.
A trade war — which now risks spiraling into a currency war — is no easy thing to win. And it requires a more grounded understanding of Chinese reality than Mr. Trump has displayed so far.