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On China, Trump picked the right battle but the wrong strategy
Composite: The Guardian/Getty ImagesView image in fullscreen Composite: The Guardian/Getty ImagesUS economyAnalysisOn China, Trump picked the right battle but the wrong strategyEduardo PorterA long trade war looms. Trump’s scattershot protectionism, chaotic tariffs and belligerence against our natural allies guarantees that US trade policy will remain a hot mess
In the months since “Liberation Day” last year, when Donald Trump let loose a volley of tariffs against imports from everywhere, countries have rushed to build new relationships in the hope of maybe circumventing the US to protect the global trading system.
The European Union hurried to sign a trade agreement with South America’s Mercosur bloc that had been sitting on ice for years. China and south-east Asian nations deepened their trade agreement. The Canadian prime minister, Mark Carney, travelled to Beijing hoping to build closer ties.
Hopes of rebuilding the open trade architecture are probably futile. Global trade will be shaped by an emerging new imperative, to stop China’s export juggernaut and end its lock on the supply of strategic inputs – from pharmaceutical components to critical minerals to essential chips that are vital for industries around the world.
The United States will remain China’s main opponent. But other countries, in Europe and elsewhere, are also rummaging through their policy kits to evaluate their options, from tariffs and domestic subsidies to export controls.
The war will come at a cost to economic wellbeing. Prices of consumer goods will rise as countries block imports from China. Manufacturers will have to cope with pricier Chinese inputs. Chinese exporters will have a harder time finding markets to place their stuff. And exporters in the US and elsewhere may be locked out of China’s market.
The risk that looms high over all others is that China will, as it has done before, leverage its dominance in the critical commodities and products over which it has a near monopoly, cutting off supplies to retaliate against countries that block its products or seek to shake its dominance.
Trump, of course, will not manage this well. His scattershot protectionism, raising tariffs across the board with no discernible strategy, and his belligerence against countries that would be natural allies in the brewing conflict, guarantee that American trade policy will remain a hot mess until the end of his term. Hopefully, the next administration will bring strategic thinking to the fight.
It is perplexing how the global economy arrived at this spot. China accounts for about a third of the world’s manufacturing output, from only about 5% in 1995. Its share of global manufacturing exports rose from 3% to 20% over the period. It accounts for over 50% of the global exports of hundreds of manufacturing products. Even Germany, with its robust industrial pedigree, is worried that its industry may not survive the Chinese competition. China’s swelling current account surplus – officially 3.8% of its gross domestic product but up to 5% according to some analysts – has become a global threat.
Economists observe there is a peaceful path out of this conundrum. Jason Furman, who chaired the US Council of Economic Advisers under president Obama, points out that as a means to improve the welfare of the Chinese, Beijing’s approach looks like a mistake. Getting the Chinese to save less and consume more – say, by building a more generous social safety net – would improve their wellbeing and bolster China’s sluggish economy without flooding the rest of the world with stuff.
And yet, Furman also observes that Beijing may be aiming for a different objective: “maximizing your geopolitical dominance; not the economic welfare of your citizens”.
Governments well beyond Washington believe this to be the case: China, the story goes, is not merely turbocharging exports to prop up growth. It is building an arsenal for a trade war. Beijing is doing nothing to dispel this fear. In a 2020 speech, President Xi Jinping argued that “we must tighten international production chains’ dependence on China, forming a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply.”
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