Trump going it alone against China could cost the US dearly
The tit-for-tat is ramping up in scale. The US trade department, having already slapped average tariffs of 10pc on $34bn (£26bn) worth of Chinese goods, is now looking into fresh tariffs of around 25pc on $200bn of Chinese products. Beijing has responded with its own threat to impose tariffs of 5pc-25pc on $60bn of US exports to China.
In other words, the trade skirmishes are getting riskier and more expensive. What’s most frustrating, however, about Donald Trump’s trade war is not just his willingness to use tariffs, but his desire to do so in such a wasteful and uncoordinated way.
The US has a litany of grievances against China, some justified and others less so. China has certainly failed to fulfil many of the promises it made when it joined the WTO – and won’t even disclose to what degree it has done so, because it does not comply with transparency rules that require disclosure of state support and subsidies. There is no firm line between state and private in the Chinese economy, as the rolling bailouts of its banks makes clear. Beijing has not opened its market to foreign investors to the degree it should and, for too long, Chinese authorities have turned a blind eye to theft of foreign intellectual property by its companies.
What’s notable about these grievances is that they are shared not just by Trump and his colleagues, but by many of China’s other large trading partners. And if Trump had acted strategically, he might well have built a powerful alliance between them.
In 2016, the US market absorbed 19pc of Chinese exports, according to the MIT Observatory of Economic Complexity. Hong Kong bought another 11pc, followed by Japan at 6.6pc, Germany at 4.4pc and South Korea at 2.8pc. In all, North America bought 25pc of all Chinese exports, while Europe bought 21pc. The US, in other words, accounts for a hefty chunk of China’s trade – but imagine the impact for negotiators if it banded together with other trading partners comprising the market for 55pc or 60pc of Beijing’s exports.
Unfortunately, banding together isn’t Trump’s style. He prefers to go it alone, abandoning Barack Obama’s strategic Trans-pacific Partnership, a trade deal that would have united 12 Pacific countries, despite sharing its central aim – to contain China. The result is that his firepower has been significantly reduced.
This means Trump’s trade war will be more painful for the US than it otherwise might have been. Take the example of soya beans. As a result of his fights with China, nearly two thirds of US soya bean exports will be hit by extra tariffs. Europe might also buy some American soya beans, but it can’t possibly make up for the loss of the enormous Chinese market.
In response to retaliatory agricultural tariffs, Washington has begun announcing extra subsidies for its farmers, to compensate them for their trade losses. So far, these subsidies amount to $12bn. That’s an awful lot of federal pocket change to spend on the very first stages of a trade war – and even then, it’s not clear it will make up for the losses. These sorts of payments are going to be very expensive very fast if Trump carries on in the same vein.
Meanwhile, the US president has probably underestimated China’s ability and willingness to marshal its population against a foreign trade aggressor, despite the hardships of a trade war. Beijing monitors and controls its media and its population’s activities online. Trump’s aggressive rhetoric and his decision to shun would-be allies across the world are a gift for China’s skilled propagandists.
The English-language editions of its state-run newspapers have stepped up the rhetoric. A weekend editorial in Global Times didn’t mince its words: “Washington has lost its mind on trade while China retains its rationality. The US is trying to conclude the trade disputes swiftly, but China is prepared for a protracted war.”
China obviously isn’t as strong as its propagandists suggest. Its crackdown on dissent and protests – most recently the suppression of protests against losses on peer-to-peer investment platforms – are signs of weakness, not strength. But for decades it has been defying naysayers who said its authoritarian regime would collapse. And Trump is an ideal cartoon villain against whom to rally the population if tariffs do start to bite into its growth.
US politics, meanwhile, revolve around short electoral cycles. As tariffs start raising the cost of living, Trump will find it hard to convince his Chinese negotiating counterparts that he is in it for the long haul.
The US’S temporary truce on fresh tariffs with the EU is at least a welcome break from Trump’s apparent desire to fight a trade war on all sides. But it has not been matched by any overtures regarding a coordinated position on China’s trade violations. The White House is allergic to cooperation and confused about who its friends are.
The one saving grace of the growing trade war is that we are not about to return to the Thirties, in which two thirds of global trade vanished in four years. There is little talk about imposing capital controls in order to defend currencies pegged to the gold standard, a factor that was arguably more important than tariffs in the Depression-era trade contraction.
The direction of travel is clear. We are heading into a more protectionist environment and the costs are only just starting to mount up. The pity of it all is that Trump is causing more damage to the US than he needs to for less gain than he should be able to achieve.
Theodore Roosevelt’s foreign policy adage was to “speak softly and carry a big stick”. Trump’s, alas, is to shout loudly while carrying a wooden spoon.
‘Trump is an ideal cartoon villain against whom to rally the population if tariffs start to bite into its growth’