ATLANTA, Georgia: Donald Trump’s aggressive approach to China has helped create a trade war more virulent than any seen in decades.
Donald Trump has long railed against the deeply entrenched trade deficit between the two countries, amounting in 2017 to more than US$375 billion worth of goods. For Trump and his supporters – who hold a mercantilist, zero-sum view of trade – this deficit proves that China is taking advantage of the United States.
And, perhaps more ominously for the administration, China’s massive treasury holdings mean that its leaders could crash the value of the dollar by precipitously selling off their assets.
In truth, if China were to take such an extreme action, it would also devastate its own economy. This reality gets to the basic fact about the US-China relationship: The two countries are deeply interdependent.
More than that, for the United States, China – with its 1.4 billion people and its decades of phenomenal growth – represents both great peril and tremendous opportunity.
AMERICAN TRADE POLICY BEFORE TRUMP
For the last several decades, the primary response of American policy-makers to this complex reality has been to manage and channel China’s growing influence through existing institutions like the World Trade Organization (WTO) and its predecessor.
America couldn’t halt China’s rise, and in many ways was profiting from it, so Washington sought to contain Beijing within the postwar international system.
But in Trump’s view, his predecessors were duped by the duplicitous regime in Beijing. China’s leaders manipulated their currency to boost exports, use their non-market economy status at the WTO to engage in unfair industrial policies, and – worst of all – repeatedly violate American intellectual property rights.
For newly elected President Trump, the time had come for a more aggressive approach.
MAJOR MOVES AGAINST CHINA
Trump’s first major trade actions against China came in January 2018, when he slapped tariffs on washing machines and solar panels. Hard on the heels of this action, in March, came 25 per cent tariffs on steel and 10 per cent on aluminum, both justified as necessary for national security.
Although neither of these actions were specifically targeted at China, that country was clearly foremost in President Trump’s mind.
And when Beijing pushed back with 25 per cent tariffs of its own on a wide variety of American goods, the US began targeting Chinese products in earnest.
The US-China trade war entered its first reciprocal phase between April and December 2018, as Washington and Beijing began a series of tit-for-tat exchanges. A détente came in December, when both countries agreed to suspend new tariffs and begin talks.
This respite was not to last. In May 2019, after Xi backtracked on the newly negotiated agreement, Trump raised US tariffs to 25 per cent on US$200 billion of Chinese goods.
New efforts at a compromise began again almost immediately, but sputtered out quickly, leading to yet more US tariffs, this time 10 per cent on US$300 billion of goods (though some of these were suspended).
The United States also – related or not to the trade war – launched sanctions on Huawei and other Chinese companies associated with Beijing’s repression of the Uyghurs.
China, for its part, retaliated with more tariffs on US$75 billion worth of American products and additional sanctions on agricultural products.
READ: Commentary: The US-China tech rivalry is fracturing the world and affecting trade, firms and jobs
WHO WINS OR LOSES IN THIS WAR?
By the end of this tit-for-tat action, America’s inherent and perhaps ironic advantage in this dispute had become clear. Because of the deep trade deficit, Washington could continue to penalise Chinese trade long after Beijing had run out of targets.
At the height of the trade war, the US had placed tariffs on US$550 billion of Chinese goods, while Beijing had targeted a paltry US$185 billion.
The announcement of a “Phase One” deal came in October, with the agreement ultimately signed in January of this year. In the months since, COVID-19 has come to dominate the US-China relationship while both countries have – for the most part – started to back away slowly from their retaliatory tariffs.
Does all of this mean that Trump has won the trade war?
Trump is right that China has often not played fair in trade. And he has indeed managed to extract concessions from China where other US presidents have failed.
The Phase One deal obligates China to purchase US$200 billion additional US goods and services, many in agriculture, within the next two years. It also contains new Chinese commitments in the areas of intellectual property protection and access to financial services.
This undoubted success has led many commentators to praise the president’s aggressive approach as the only way to make progress.
MODEST GAINS AND HIGH PRICES
The problem is that these gains are shaping up to be rather modest and short-lived.
America’s trade deficit with China rose nearly US$75 billion between during Trump’s second year in office, though it did moderate in 2019.
The China deficit will likely be modestly lower in 2020, but at the same time America’s global trade deficit has jumped to nearly unprecedented levels. And China is already falling behind on its purchasing obligations from the Phase One agreement.
So, there is little evidence that Trump’s trade war has brought lasting change. Sadly, however, the costs of the conflict are likely to prove more enduring.
Workers in import-competing industries directly protected by the tariffs have probably benefited from Trump’s trade policies. But by collecting huge new tariffs on Chinese imports, the administration has driven higher prices for many goods.
For example, a rigorous study of the washing machine tariffs shows a price rise of about 12 per cent, and another study finds that the total loss to US importers from tariffs in 2018 alone was US$23.8 billion.
Chinese retaliation has also hit some American producers quite hard, particularly in the agricultural sector. As a result, the US government has spent billions in tax dollars to keep American growers afloat.
Most recently, Trump’s aggressive policies towards Beijing have led to a ruling against the United States in the World Trade Organization (WTO), where a dispute settlement panel found that US tariffs on US$234 billion of Chinese goods violated international trade law.
THE INTERNATIONAL SYSTEM UNDER STRAIN
But these issues are of short-term importance compared to the potential damage done to the international economic system.
The problem is that its norms and institutions – including the WTO, World Bank, and International Monetary Fund (IMF) – were created during a period of American hegemony, after World War II. More than that, they were, in many way, created in America’s image.
China, however, could surpass the United States as the world’s largest economy in just 10 years, the first time since the late nineteenth century that America will not have held that spot.
This coming change in the distribution of power means that Beijing wants to put its own stamp on how the world economy is governed.
The structural conditions are ripe, not only for short-term confrontations over trade, but also for fights over the governing principles of the world economy.
These problems obviously predate Trump and are not directly under his control. But adapting and preserving the international system will require subtle and wise American leadership that we have yet to seem from his administration.
Without cooperation from America’s allies, and without a global trading system based on rules, the US will be in a much weaker position to channel China’s growth towards a world of increased stability and prosperity.
“America First,” then, threatens to mean “America Alone".
Time is running out. Continuing on such a unilateralist, or even isolationist, path, will lead to a further decline of US influence in the world.
Charles R Hankla is an Associate Professor of Political Science at Georgia State University in Atlanta.