Trump is right about China, but President Xi holds most of the cards

In early July, Donald Trump imposed tariffs on Chinese exports to the US worth about $34bn (£26bn). Beijing immediately retaliated with trade levies on a similar value of American exports to China. In late August there was a second round of tit-for-tat restrictions, taking punitive tariffs on each other’s exports to $50bn.

So far, this dispute between the world’s two largest economies has provoked little comment beyond nerdy trade specialists.

Financial markets have, for the most part, remained sanguine.

Last week, though, the US president upped the ante, announcing further measures to hinder the sale of Chinese goods in the US. New tariffs on an additional $200bn of imports from the People’s Republic, due to bite in days, mark a considerable escalation in this trade spat.

Protectionist levies will now apply to half of China’s US exports.

“Trade wars are good, and easy to win,” declared Trump last March, in a much-derided tweet. “The Donald”, though, isn’t alone in addressing concerns across the US rust-belt that the onslaught of foreign-made goods – not least from China – explains the loss of millions of previously well-paid skilled and semi-skilled “blue collar” manufacturing jobs.

In mid-2016, President Obama imposed duties of 500pc-plus on Chinese “dumped cold-rolled steel”. By then it was too late – Trump’s protectionist rhetoric meant he was on course to win the White House.

The US trade deficit with China has ballooned from $50bn in 1997 to more than $350bn last year – not least as China now accounts for half of all global steel production. Trump says he’ll eventually impose high tariffs on all Chinese goods unless Beijing agrees to major changes in its intellectual property practices and industrial subsidy programmes.

Beijing, for its part, denies accusations about the unfair transfer of US technology, insisting it adheres to World Trade Organisation rules. Most experts disagree. Through a combination of belligerent rhetoric and protectionist pressure, Trump wants to force China further to open its vast market, while reining in exporter subsidies and controlling patent violation.

This highly transactional president knows an economically ambitious China, which still heavily restricts capital inflows and outflows, must eventually allow the outside world to sell far more goods and services within its borders. Trump wants to claim credit for making that happen, while securing access for US exporters – using protectionist threats to secure freer trade. At least, that’s the theory.

This isn’t the early 1930s. Back then, America’s wide-ranging and highly restrictive Smoot-Hawley tariffs caused global trade to plunge by no less than two thirds in dollar terms. The resulting Great Depression helped spark the rise of Nazism, Fascism and, ultimately, the Second World War. Recent US-China tariffs so far affect little more than two per cent of world trade. And even if Trump acted on his threats, less than five per cent of world trade would be hit.

Yet the stakes are very high. The spiralling of tensions between the dominant power of the last century and the putative hegemon of this is having an impact. The rise in the dollar, and resulting shift in money away from the emerging markets, reflects a broader “flight to safety” driven in part by concerns about rising trade conflict.

My view, and that of a broad swathe of America’s business community, is that Trump’s analysis is broadly right. When it comes to IP infringements, currency manipulation and anticompetitive subsidies, Beijing has a case to answer. Given that China is exporting like billy-o, while seriously restricting import access, such questions must be addressed.

Having said that, Trump has been wrong and rash to go it alone, imposing tariffs unilaterally. He should, instead, be using America’s enormous commercial clout to build a diplomatic coalition, forcing China to act by invoking WTO rules.

Keen to play to his domestic audience, Trump has backed his Chinese counterpart into a corner. Such tactics rarely work when doing business in Asia. The reality is that President Xi holds most of the cards.

Many of the 200,000 US steel and aluminium workers no doubt welcomed higher tariffs on imports from their more cost-effective Chinese competitors. But what of the seven million Americans with jobs in heavy steel-using industries, their end products becoming more expensive and vulnerable to global competition with their firms now paying more for imported Chinese-made steel?

On top of that, anti-China tariffs will result in higher US consumer prices – not only for Chinese-made products, but domestic manufactured goods – as US wage growth lags behind inflation.

For now, the US economy looks strong, growing 4.1 per cent during the second quarter, up from 2.3 per cent during the first three months. But the effects of a firmer dollar, a fading fiscal stimulus and higher interest rates – the Federal Reserve has hiked seven times since late 2015 – will take a toll.

Meanwhile, despite signs of slowing credit expansion, China could yet again see seven per cent growth this year. It has the fiscal and monetary policy scope to keep the economy booming. It can handle an economic war of attrition. With America’s national debt now well over 100 per cent of GDP, and China soaking up vast amounts of US Treasury bills, the truth is that Beijing has huge leverage.

For all his bravado, Trump gets this. After lobbying by US businesses, he lowered rates on the new tariffs from 25 per cent to 10 per cent, while excluding certain items such as smartphones. And China will no doubt evoke counter-measures on employment-heavy US sectors such as aerospace and autos. Washington can push Beijing only so far.

For now, Trump will keep playing rough. Ahead of next month’s Congressional Mid-Term elections, his approval ratings are low – and many heartland American voters like a fighter. An alarming trade row with China could also give the Fed an excuse to delay further rate rises – which Trump sees as a threat to the continued economic buoyancy he needs to win a second term.

‘Trump should be using America’s enormous commercial clout to build a diplomatic coalition’