There are no winners in trade wars
On the surface, President Donald Trump’s assertion, “When you are down, you can’t lose!” seems like a simple and reasonable idea. The tangled web of global trade, however, is not so straightforward.
Over the years, the United States has enjoyed affordable goods flowing from China, allowing the Chinese economy to expand at a rapid pace. This relationship, unfortunately, has largely been a one-way street. While China has reaped the considerable benefits of a growing economy and middle class, the US hasn’t seen comparable profits from the trade arrangement.
The trade deficit between the two nations has reached a staggering $337 billion. The causes of the deficit can be attributed to two primary reasons: (1) A lower standard of living in China, which allows China to pay lower wages to its workers than the United States; and (2) An exchange rate that is based on the US dollar.
Regardless of why, the US has established a new goal: to cut the trade deficit by $200 billion. As part of this effort, the Trump administration is threatening additional tariffs, $26 billion of which will be leveled against electronic goods.
One goal of the United States is to eliminate China’s trade-distorting practices, which include halting China’s Made in China 2025 strategy. The strategic plan has been described by the Center For Strategic and International Studies as an “initiative to comprehensively upgrade Chinese industry.” In other words, China is looking to expand its high tech electronic industry by introducing artificial intelligence and automation. If successful, according to the Council on Foreign Relations, it could be a “real existential threat to US technological leadership.” It is not that the US is seeking to stop technological advancements, but rather that they want to operate on a fair playing field in such a crucial industry of the the global economy.
But Trump is confronting the issue as a solo nation . Although the international community seeks the same open and fair markets and protection of intellectual property that the United States desires, Trump is opting to challenge China independently of US allies. In the past, the US, European Union, and Japan had agreed to work together on this issue, but these historic alliances are also being challenged by the US administration. Moreover, Trump’s unilateral action may be challenged by or through the World Trade Organization.
The potential trade war is two sided, though—China is concerned about consumer confidence and is fighting to maintain it. They’ve taken extensive steps, including limiting the reporting on the pending trade war. News outlets are reporting that Chinese media is being instructed to downplay the trade war and not to link the trade dispute with the stock market. Though China did retaliate against the Trump administration’s first wave of tariffs, Chinese state media is attempting to de-escalate the crisis and avoid personal attacks against Donald Trump. Their concerns are well founded, as loss of confidence in the Chinese market could certainly weaken China’s negotiating power in the trade dispute.
Some economists fear that if China fails to control the narrative, a worst-case scenario could create panic, sending the Chinese economy and global markets into a tailspin. Headline statistics and reporting in the US, however, tend to exaggerate China’s weaknesses and downplay that of the US. If China can maintain strong economic growth, then the trade war could be an opportunity for China to place greater emphasis on its domestic economic strengths.
Analysts argue that the US should reach out to Chinese reformers to help influence change. The US, they suggest, should not tell China to cancel its Made in China 2025 plan, since China has the right to develop its technology industry. Instead, the US could demand that China eliminate the strategy’s unfair business practices, such as forced technology transfer. The Trump administration, on the other hand, is skeptical that reformers will succeed at changing the Chinese economic model. In fact, the Trump administration has decided that China needs to suffer some economic harm before it will be compelled to change. Therefore, Trump is raising tariffs to get China’s attention and discourage their poor business practices.
Another powerful strategy China can use is to run down the clock. Trump will not be able to negotiate from a position of strength next year if voters elect a Democratic Congress. With midterm elections coming up in November, the Republicans are facing a moment of particular political vulnerability. China is capitalizing on that by targeting products such as soybeans, which are mostly produced in Midwestern states that tend to support the President. It is no coincidence that China also plans to retaliate against US whiskey exports, which come primarily from Kentucky, the home state of Senate Majority Leader Mitch McConnell. If US voters become disfranchised, fed up, or nervous, they could vote Trump out of office in 2020, completely reversing US-China relations. Unlike the United States with its frequent election cycles, China’s policies don’t rely on any re-election, providing China an upper hand in terms of consistency during a trade war.
Lastly, the Chinese government can absorb the political costs of a trade war much better than the US administration can. The US experiences immediate responses from the economy when anyone lashes out at China—the US stock markets, decline, for example. Every time the market drops, there is a feeling that consumers need reassurance a negotiated solution is being sought to the trade conflict, a move that undercuts the US administration’s leverage.
China is probably a more patient and more resilient adversary than the US expected. The US administration should not ignore or underestimate Chinese capabilities and the Chinese government should not underestimate the determination of the Trump administration.
There are no winners in trade wars. Trade-distorting practices can only be effectively and fairly dealt with by and through the WTO.
Vijay Eswaran is an entrepreneur, speaker, and philanthropist. He is the Founder and Executive Chairman of the QI Group of Companies, a multi-business conglomerate with headquarters in Hong Kong, offices in more than 25 countries, and customers in over 100 countries. Eswaran’s new book Two Minutes From the Abyss is now available on Amazon.