Foreign trade plays a very important role in supporting China’s economic growth. Last year, the country’s trade surplus contributed 2 percentage points to a strongly rebounding GDP at an annual rate of 8.1%.

This year, a 10.4% increase in China’s foreign trade during the first seven months will also help to reverse the slowing economic growth caused by pandemic lockdowns.

So far, China’s trade numbers look good.

Beijing’s trade surplus with the E.U. in the first half of this year soared 93.4% from the year earlier on a 43% increase in Chinese exports to the trade bloc and stagnant European sales to China. Over the same period, China’s exports to the U.S. rose 20% to mark another record-high trade surplus running at an annual rate of $400 billion.

A cause to celebrate? Not quite. As I warned in an earlier report (“China Will Have to Review Its Economic Policies,” March 21, 2022), the dark clouds of increasing security tensions have already begun to polarize the global flows of trade and finance.

In the case of China, the long brewing hostilities with the United States are now spilling over into Beijing’s relations with Japan, the E.U., and South Korea – approximately in that order of importance and intensity. Those countries represent an estimated $2.2 trillion of China’s total foreign trade, and about $1.5 trillion of its export sales.

China keeps warning

After many years of China’s pleading for a “win-win cooperation,” and a world order based on the U.N. charter, it is now clear that the West is firmly determined to defend its

Pax Americana against what it calls autocracies and illiberal democracies. That is the centerpiece of the U.S. “Pivot to East Asia” of 2012, with a sharp focus on China’s economic, political and military power projections.

It is surprising that it took ten years for U.S.-China relations to come to the point of no return – even though the key red lines have been established as far back as 1972, when the two countries signed their first carefully negotiated document (The Shanghai Communiqué), followed by the Joint Communiqué on the Establishment of Diplomatic Relations in 1979.

Things have finally hit the wall. China states that the U.S. is violating its sovereignty and territorial integrity by reneging on one-China policy by maintaining official relations with its province of Taiwan. In response to all that, Beijing is conducting air and naval operations in the Taiwan Straits and rehearsing the possibility of taking over its wayward island.

The next major event that could lead to open warfare is the U.S.-Taiwan trade and investment agreement that could be finalized next fall. About 40% of Taiwan’s foreign trade is done with China and Hong Kong. Taiwan wants to get away from that, and it also intends to use the U.S. trade deal to open the way to other international free trade areas. 

China has warned the U.S. and Taipei that such a trade agreement is unacceptable.

Joining the fray, Japan seems eager to pile up pressure on China. Having occupied Taiwan from 1895 to 1945, Japan now wants to send its own parliamentary delegation to Taipei. It is unlikely that Tokyo will do that, but a mere thought of such a provocative gesture is dangerously raising tensions in an already increasingly hostile relationship.

Taiwan is a game changer

The new South Korean government is also creating security problems for China by accepting to participate in a U.S.-led missile defense system. That’s a major reversal of Seoul’s earlier position that it would not allow additional missile defense deployments, and that it would not take part in a trilateral military alliance with the U.S. and Japan.

To round it all off, the E.U. is now signaling intentions to distance itself from further trade and investment engagements on Chinese markets. German media have been airing such views for some time, warning its business community against excessive reliance on China trades, while the top E.U. diplomats were complaining they could not “agree on anything” during political consultations with China.

Beijing’s economic and political tensions with the U.S., Japan, E.U. and South Korea are nothing new. They have been going through ebbs and flows for decades without interrupting a steady upward trend of goods and service trades. For China, trade with those countries now represents 13% of its GDP.

The new event that changes everything is a return of Taiwan to China. There are no workarounds here. Old diplomatic fudges and “strategic ambiguities” won’t do anymore. China is confronted with core issues of its sovereignty and territorial integrity. Any attempts to challenge those basic attributes of statehood are taken as blatant casus belli. That’s what is going on right now in the Taiwan Straits and in the rest of the South China Sea.

China can easily offset those $2.2 trillion of trade losses in above mentioned markets through diversification of its flows of commerce and expansion of its household consumption and business investments.

But that pales into insignificance compared to questions of war and peace.