No country gains in US’ reckless trade war
“When the elephants fight,” goes the old African proverb, “it is the grass that gets trampled.” That is one way to look at the intensifying trade war between the world’s two largest trade powers, the US and China: a lose-lose proposition not only for both nations, but also the world trade system. IMF Chief Christine Lagarde has warned that the impact of tariff wars on the economies of the US and China could come as a “shock” to emerging market economies.
As is the case with much of President Donald Trump’s foreign policy, the US has an inflated sense of its leverage with regard to trade issues and has hit not just China, but all major trading partners with substantial tariffs. Trump officials argued that China’s economy was weak and vulnerable and that Beijing would not retaliate. But since when is 6.7 percent growth the sign of a weak economy?
As many predicted, China retaliated to Trump’s tariffs on $50 billion in exports, and will no doubt do the same when Trump is reportedly to announce new tariffs on about $200 billion on Chinese imports as early as Monday, or if Trump actually goes ahead and imposes tariff on an additional $267 billion, which would extend tariffs to all Chinese exports to the US.
The question behind all this is what is Trump’s goal? Trump’s National Security Strategy document defined China as a “strategic competitor.” Many in China see the trade war as part of a larger US “strategic containment” of China.
That is overly simplistic and fails to appreciate the large and complex Sino-US relationship in which there remain many areas of cooperation and overlapping interests. But the US and China together account for over 40 percent of global trade and the outcome of the trade confrontation has already taken a toll on their economies and will have a major impact on the future of both Asian regional and global trade architecture.
There is confusion and divergent views and priorities among Trump’s top advisors. There are essentially three baskets of intersecting issues: the trade deficit and US demands that China purchase more US goods; Washington seeking Chinese market openings in sectors in which foreign direct investment (FDI) is prohibited or limited; and technology and intellectual property issues involving China’s industrial policies and practices.
Trump’s biggest grievance has been the large trade deficit, which totaled $375 billion in 2017. But for US Trade Representative Robert Lighthizer, the top priority is market access with an emphasis on unfair practices on tech issues – US allegations of IPR theft, coerced tech transfer, state subsidies for Made in China 2025 (MIC2025) targeted technologies, limiting US firms from competing in key sectors, and digital protectionism.
China has already offered to increase US imports by $70 billion, and with growing US agricultural products, services, oil and gas, exports would likely grow. But Trump rejected the offer. As pledged in his Boao Forum speech in April, Chinese President Xi Jinping has already begun to open some sectors, particularly finance and insurance, to FDI. That has stalled due to tariff wars.
But the most difficult issue for economic rebalancing is the tech sector, where there is fierce competition between the world’s two tech leaders. Contrary to speculation, it is not necessarily the case that the US demands China abandon MIC2025. Most nations – including the US – have industrial policies. In fact, MIC2025 was modeled to some extent on Germany’s Industry 4.0 plan.
The problem is not China seeking to move up the value chain. The issue is methods: pursuing its goals consistent with current rules and norms. The US focus is on massive state subsidies to firms in targeted tech sectors, informal pressure on US firms for tech transfer, and blocking foreign competition in key tech sectors.
There is a strong case that the explosion of venture capital since 2010 in a China that has fast become a tech innovator, now not far behind Silicon Valley, would be more likely to achieve most of its goals of globally competitive tech industries with, as Xi has promised, the market being “decisive factor.” To most Chinese firms or startups with any chance of success, there is available venture capital. Hi-tech firms successful with less subsidies would likely be more competitive.
While difficult to achieve, I can envision a deal based on reciprocal market access to trade and investment where Beijing rethinks some of its policies. But is any deal with China acceptable to President Trump?
For the logic behind Trump’s aggressive trade policies is not really about trade, but about trying to break global supply chains and pushing investment back into US industry. Some have argued that the intent is less about more equitable trade than economic disengagement.
Trump disdains globalism and fails to understand the economic forces driving globalization. Tariffs are raising costs, disrupting supply chains and reducing exports. The 25 percent tariffs on auto exports, for example, are raising costs and reducing exports of US automakers in China as well as US and foreign automakers in the US. Projections say that continued tariff wars will shrink US GDP by 1 percent and China’s by 0.6 percent.
But can a disengagement strategy work? Trump’s efforts to break up the North American supply chains by killing North American Free Trade Agreement (NAFTA) appear to have failed, and a new NAFTA deal is imminent.
But in the process, the “grass” of the US, Chinese and global economies is getting trampled. And seeking to separate rather than build new synergies between the world’s two largest economies is unlikely to benefit world economic growth.