Trade Deal? The Chinese may not fold yet

The Fourth of May is commonly known in modern day pop culture as ‘Star Wars Day’.

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It is a catchphrase among Star Wars fans and geeks, and they greet each other with the longer phrase ‘May the Fourth be with you‘, using ‘Fourth’ as a pun for ‘the Force’, which is the name of the metaphysical power in the Star Wars universe.

To many of us then, the Fourth of May may be a fun and light-hearted day, but not to the Chinese policy-maker.

About a century ago in May 1919, massive protests broke out in China’s capital of Peking (now Beijing). Students and reformed-minded citizens took to the streets to protest against the Republican government. This event would later be chronicled as the ‘May Fourth Movement’ (五四運動 in Mandarin).

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This event seemed insignificant to the West back then as the tragic First World War just ended with the signing of the Treaty of Versailles in Paris in June 1919. In Europe, everyone was finally glad that the tragic and horrendous ‘Great War’ was finally over. Economies and businesses had to be rebuilt, and normalcy restored, and few had the bandwidth or interest to pay attention to the revolutionary changes sweeping across Republican China.

But it wasn’t like this in the Middle Kingdom.

The May Fourth Movement spurred an interest for radical ideas that would attract the brightest minds and thousands of intellectuals across the vast country. It would also lead to another bloody revolution that would end three decades later.

Why did the protests happen?

When World War One broke out in Europe, the entire world was split between the two main camps (the Allies and the Central Powers). Because the European countries had large colonial empires across the world, only two countries were not involved in the war after it erupted in 1914: China and the United States. They only got involved towards the later part of the conflict in 1917:

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The United States was isolationist under the Woodrow Wilson Administration when the war erupted, and Americans refused to join in in what they thought was an archaic battle among imperialist powers as they desire to be different from European empires like Britain and France.

And as for China; after experiencing a chaotic revolution that saw the end of its imperial age, the country was in a tumultuous state of civil war and experiencing sweeping political and social changes.

However, by 1917, the United States was drawn into the conflict on the European continent, and the Woodrow Wilson Administration, via minister Paul S. Reinsch, managed to secure China’s entry into the Great War as well.

In return of providing one hundred thousand troops for the Allied war effort, Reinsch agreed to the Peking government that China will have participation in any peace conference and financial assistance (prospects for agricultural, railroad and ports development). Both sides did not deliver fully on their pledges.

The Beautiful Country & the Middle Kingdom‘ has this to say about this period of time:

On January 8, 1918, President Woodrow Wilson addressed a joint session of Congress about the European conflagration known as the Great War. With an Allied victory imminent, Wilson promised his audience a new world order. No longer would secret treaties and backdoor deals decide the fate of nations. Trade would be free, along with navigation on the seas. Wilson even seemed to vow that colonial peoples would win the right of self-determination. And he put his weight behind the creation of a League of Nations to guarantee independence for all countries, large and small. Around the world, Wilson’s Fourteen Points were greeted with wishful anticipation. “A Messiah,” was how the novelist H. G. Wells described the American president. The Chinese agreed.

Chen Duxiu, dean of letters at government-run Peking University and the future founder of the Chinese Communist Party, wrote that Wilson was poised to transform international affairs. He was, Chen raved, “the number one good man in the world.” Chen translated America’s national anthem for the readers of his magazine, New Youth.

Liang Qichao dropped his skepticism about America and declared that the imminent Allied victory augured a “new age.” A datong, or Great Harmony, straight out of Confucian philosophy, was coming, and America was the spark. Despite decades of disappointment, China was putting its trust in America again.

Although China never dispatched any troops, it contributed more than two hundred thousand laborers to the Allied cause. In Beijing in 1918, President Xu Shichang, the third president to lead China after Yuan Shikai died in 1916, called on his countrymen to “help realize the consummation of President Wilson’s scheme for world peace.” Now that it was on America’s side, China had high hopes that it would win a fair deal.

World War I proved to be a windfall for the Chinese economy. Consumed by war, the European powers could no longer supply China’s markets with consumer goods, so Chinese industrialists began making things themselves. China’s textile industry boomed. The number of factories in China increased tenfold. Overseas, the demand for Chinese raw materials rose. Americans once again became transfixed by the potential of the China market. US businesses lobbied Washington to exempt them from federal income taxes on their China profits. That demand was codified in the China Trade Act of 1922.

For America, the war marked its emergence as a world power. The United States joined the war well into its third year and, after nineteen months and mobilizing four million men, Germany sued for peace.

After the Armistice went into effect on November 11, 1918, the US Committee on Public Information, a wartime propaganda agency, collected all of Wilson’s wartime speeches into one volume and translated it into Chinese. It was a hit. By the time peace talks began in 1919, many Chinese students could recite Wilson’s Fourteen Points by heart. A Shanghai daily reprinted one Wilson speech and appended a simple comment: the president’s words were “a beacon of light for the world’s people.” Another paper, echoing the late Qing dynasty scholar Xu Jiyu, noted that in three thousand years of Chinese history, not once had a Chinese visionary come up with an idea for permanent peace. Leave that to the Americans, it said.

Wilson’s ideals even induced China’s warlords to lay down their arms. Talks between the Nationalists who ran the south and a group of military leaders from the north were scheduled in Shanghai. The Chinese had pinned their hopes on Wilson and his envoys to not only erase decades of foreign humiliation but to end their civil war. Reinsch was asked to moderate. On Armistice Day, the government in Beijing declared a three-day holiday, and sixty thousand people marched in a victory parade. “Make the world safe for democracy” read the signs as students thronged outside the US legation near Qianmen Street, chanting “Long Live President Wilson!” As he listened to the happy uproar, Reinsch felt uneasy. Wilson’s principles had “found a deep response throughout China” and “entered deeply and directly into the hearts of the Chinese people,” he wrote to his president. Should those hopes be dashed, he warned, the consequences would be dire. “Instead of looking across the Pacific towards a Chinese Nation sympathetic to our ideals,” he predicted, the United States would one day “be confronted with a vast materialistic military organization under ruthless control.”

On November 26, 1918, two weeks after the armistice, Wellington Koo, now China’s thirty-one-year-old minister to Washington, called on President Wilson. Wilson said that he was delighted that Koo, too, was going to Paris for the peace talks, and that he wanted Koo to keep in close touch with the American team. Koo told Wilson that China and its people loved him and that he “had given expression to the ideals of the world.” Koo left the meeting feeling that America was on China’s side.

The Chinese team arrived in Paris with an ambitious agenda, challenging the full gamut of unequal treaties that had been imposed since the end of the Opium War in 1842. They wanted extraterritoriality abolished. They wanted the freedom to impose their own tariffs and to use the revenue as they saw fit. And they sought the return of Shandong province, which the Japanese had seized from the Germans during the war.

Disappointments set in early. At the preliminary discussions in January 1919, Japan was awarded five votes; China got two. And while the Japanese delegation took its seats near the front of the Hall of Mirrors in the Palace of Versailles, the Chinese were shunted to the back, squeezed between Ecuador and Bolivia.

On January 28, 1919, when the Shandong case came before the council, Koo requested a restoration of Chinese control over the province, the birthplace of Confucius and the “cradle of Chinese civilization.” Koo affirmed China’s desire for a new world order free of secret treaties and the belief that “might makes right.” The whiz-kid diplomat wowed the assembly. Koo “spoke in perfect English, and in a cool, lucid and logical argument which carried the members of the Council right along with him,” wrote Edward T. Williams, a State Department expert on East Asian affairs attached to the US peace commission. In contrast, Koo’s Japanese opponent “stumbled” in his presentation, Williams wrote.

Americans and Chinese mingled throughout the conference. Ray Stannard Baker, Wilson’s press secretary at Versailles, found the Chinese “much more open, outright, and frank than the Japanese.” American officials advised Chinese delegates on their speeches and petitions. Secretary of State Robert Lansing, generally no friend of the idea of self- determination, assured Koo of American support on strategic grounds. The Japanese imperial juggernaut was worrisome, and it needed to be stopped. Wilson seemed to share that conviction, too.

The Chinese may have had right on their side, but Japan had might. At Versailles, Tokyo revealed the existence of confidential agreements between Japan and the government of Duan Qirui, a Chinese warlord, who had promised to cede Shandong to Japan in exchange for a loan. Britain and France also acknowledged that they had agreed to back Japan’s postwar occupation of Shandong province in order to get Japan into the war.

Meeting privately in April 1919, the Big Three—the United States, Britain, and France—decided that Shandong would go to the Japanese in return for an oral assurance that Japan would one day hand it back to China. “Thus,” Edward T. Williams told his diary that night, “China was betrayed in the house of her friends.”

Wilson’s decision was based on his desire to save his beloved League of Nations. If Japan had lost Shandong, he feared, it would have walked out of the conference. But Wilson’s move was also part of something larger—an often confusing and inconsistent pattern of American responses to a beleaguered China. American rhetoric perennially championing the underdog led the Chinese to expect real American support, but that support never materialized. The one thing Americans agreed on with regard to China was that China was not worth a drop of Yankee blood.

Still, most of the American delegation was shocked by Wilson’s decision. General Tasker Bliss, chief military liaison to the Allies during the war, sent the president a terse note, declaring, “It can’t be right to do wrong even to make peace,” and threatened to resign. “I am ashamed to look a Chinese in the face,” wrote Edward T. Williams. “My one desire is to get away from here just as soon and just as fast and just as far as I can.” Within two weeks, Williams had left the State Department.

News of the Shandong decision reached China on May 2. Writing from Beijing, Reinsch reported that commoners and officials alike felt “utterly helpless.” He predicted the rise of “a violent anti-Foreign movement.” What was left for China, he asked, but “cynical hostility to Western civilization?” What’s more, the failure in Versailles threatened negotiations aimed at ending China’s civil war.

A day later, students in Beijing held a mass meeting. They deluged the delegation in Paris with telegrams, urging it to walk away from the treaty. They declared a Day of National Humiliation. On Sunday, May 4, three thousand students from thirteen colleges in the capital gathered in front of the Gate of Heavenly Peace in the heart of the city to protest China’s betrayal. At two o’clock, they marched toward the nearby diplomatic quarter with signs demanding “Give Us Back Shandong!” From that day on, Tiananmen Square would be the locus of the nation’s political consciousness.

Student representatives were dispatched to the US legation, but Reinsch was not there. The students left a petition: Wilson was a liar, it read; his promise was an illusion. Protests spread across the country. In Paris, Chinese students heckled American speakers. Stephan Bonsal, Wilson’s interpreter, feared that someone could try to kill the president.

The fury sparked by Versailles kindled the May Fourth Movement, a mobilization of Chinese students and intellectuals aimed at a wholesale transformation of Chinese politics, society, and culture. The movement would also profoundly change China’s view of America. Historians have debated whether the United States “lost” China at the end of World War II, but it clearly lost a part of China in 1919. “Throughout the world like the voice of a prophet has gone the word of Woodrow Wilson strengthening the weak and giving courage to the struggling,” read a pamphlet by the Shanghai Student Union. The Chinese, it said, “looked for the dawn of this new Messiah, but no sun rose for China. Even the cradle of the nation was stolen.”

The hope that Wilson’s principles would serve as a bridge between China and the rest of the world vanished. And as Reinsch had predicted, Versailles caused “a revulsion of feeling against America” for the very reason that “the Chinese had entertained a deeper belief in our power, influence and loyalty to principle.” Reinsch quit his post in disgust.

As Reinsch had feared, the crisis also delivered a fatal blow to American efforts to end China’s civil war. Betrayal in Versailles discredited the Beijing government of President Xu Shichang. The Nationalist regime in the south pulled out of talks. For the next eight years, political confusion reigned. In the Hall of Mirrors in the Palace of Versailles, the only two empty seats at the end of the talks were China’s. It was the only participating country that did not sign the treaty.

In the long history of Chinese disappointment with the United States, America’s failure to stand up for China at Versailles occupies a central place. The Chinese had applauded Wilson’s promise of self-determination and equality among nations. But when Wilson broke that promise, he sent the Chinese on a quest for alternative ideologies. The Soviet Union was quick to respond. On July 25, 1919, the Soviet government renounced all special privileges that had been won by the czarist regime. Although many of the Soviet promises were never fulfilled, the Karakhan Manifesto, promising equality between Moscow and Beijing, led many Chinese to Marx and Lenin. In a poll taken at Peking University in 1923, asking who the greatest man in the world was, Lenin won with 227 out of 497 votes. Wilson limped into second place with 51. As Li Dazhao, one of the founders of the Chinese Communist Party, declared, in China, World War I was won “by Lenin, Trotsky and Marx rather than by Woodrow Wilson.”

Nothing demonstrates the truth of his statement better than the career of Mao Zedong. In 1919, Mao was a twenty-five-year-old teacher living in the Hunanese capital of Changsha, raptly following the Versailles negotiations. He had studied Benjamin Franklin’s contributions to science. He was a fan of George Washington, admired Theodore Roosevelt, and, starting in 1915, read a little English each morning, a habit he would retain until late in life. In a letter to a friend in 1916, Mao had predicted that China and America would one day join forces to counter Japan. “We attack the Japanese army. The US attacks the Japanese navy,” he wrote. “Then Japan would be defeated in no time.” Like many of his countrymen, he had been inspired by Wilson and had placed his hopes in the United States. In the weeks following China’s betrayal, Mao founded a student association, organized a student strike, and established a journal, the Xiang River Review. In it, he poured scorn on the Western powers, including America, calling them “a bunch of robbers” who “cynically championed self-determination.”

By the fall of 1920, Mao had fastened onto another Western remedy for China’s ills. He called it the “Russian extremist party.” In September, he formed the Russia Studies Society, followed by a Communist study group. In December, he wrote to a friend declaring his faith in Marxism and violent revolution. In June 1921, Mao went to Shanghai to attend the first national congress of the Chinese Communist Party.

Japanese services in China were boycotted, goods burned, and businesses were shunned as a form of retaliation. This event also further reinforced the impression that Japan was out to dismember and conquer China, which culminated in the enmity between both sides that led to the Second World War in Asia.

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This event is all but forgotten in the West these days. But to anyone in power in China, the May Fourth Movement in 1919 has forever haunted and left a deep impression upon the ruling elite.

It epitomises the fear of giving in to foreign countries, and for not upholding the general hopes and wishes of the masses. This is a common cause of the collapse of imperial dynasties throughout the Middle Kingdom’s long history.

Even as recent as thirty years ago (seventy years after the 1919 May Fourth Movement), Communist China faced its own ‘May Fourth’ movement with  student protests in Beijing’s Tiananmen Square in May 1989 after returning back to the world after a quarter of a century in self-imposed exile.

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The Chinese have a deep sense of history, and events over the past two centuries have a strong place in their collective and national consciousness. 

President Donald Trump’s tweet during the weekend of 4 and 5 May a few weeks ago may have spooked financial markets, but it also triggered a sense of discomfort within the chambers of the Great Hall of the People in Beijing. Was it just a coincidence that it’s the centennial anniversary of the May Fourth Movement? 

Given this context of a politically-sensitive year, I think Beijing finds itself in an awkward quandary.

On one hand, the Chinese government has to be wary of being seen as giving in to ‘unfair demands and concessions’ that will bring to mind the numerous treaties forced upon China over the past two centuries and risk a blow to their legitimacy and the claiming of the Mandate of Heaven.

On the other hand, continuing the current ‘war’ against the United States’ complicates policy-makers’ plans to reform the economy and their efforts in industrial upgrading.

The graphic below from the Bank of International Settlements illustrates the global value chains (GVC) and how deeply entrenched China is across the global network. The breadth and depth of supply chains in China would be affected as global and local businesses readjust to the tariff situation on both sides of the Pacific.

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In fact, there are already effects on the Chinese middle class, as they feel they have much to lose if the economy slows and business and jobs’ prospects dwindle. A strategy of attrition requires a high degree of mental strength that is usually easier to conduct when people have less to lose, because of the tremendous amount of sacrifice needed for victory (think of North Vietnam’s desperate conflict against American forces during the Vietnam War).

Fanning the fires of Nationalism is a double-edged sword strategy, which could rear its ugly head if results are not delivered if the population lashes out at their own government in full revolt.

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With this in mind, my base case is that Beijing will not make a deal with the United States that could be perceived as ‘giving in’ and it would not be immediate given the context of a politically-sensitive year. Simultaneously, they will have to roll out various measures to ensure that the general livelihood of the populace will not drastically deteriorate and economic growth doesn’t fall off a cliff.

One of these contradictions will have to tip the scales before we know what outcomes are likely (whether a deal is possible). A truly challenging predicament…

I was inspired to write this post after receiving encouraging feedback about my first post on Sino-US trade tensions via the lens of the Opium Wars, and after a conversation with Walter Cavinaw (@wcavinaw), a fellow macro junkie like myself.

What do you think? I’m interested to know your thoughts – feel free to comment below or write to me!


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