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. (The au­thor is a se­nior fel­low of the Brent Scowcroft Cen­ter for In­ter­na­tional Se­cu­rity at the At­lantic Coun­cil and its Fore­sight, Strat­egy and Risks Ini­tia­tive. Fol­low him on Twit­ter @Rman­ning4. opin­ion@ glob­al­

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