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Trade war

Trump's China trade war threatens world economy

Risks grow of dangerous economic divorce despite Beijing's efforts to stop it

U.S. President Donald Trump may escalate his trade war despite China's apparent wish to limit it.

Judging by the plunge in the global stock markets, the opening salvo of the trade war between the U.S. and China may seem a devastating blow to their bilateral commercial relations and potentially the global economy. However, by any objective measurements, both Washington and Beijing appear to be conserving their ammunition. U.S. President Donald Trump's administration imposed 25% tariffs on $60 billion worth of imports from China, which represented roughly 12% of total U.S. imports from China. Beijing retaliated by levying extra tariffs on $3 billion, or 2.3%, of American imports.

Given the wide latitude the Trump administration enjoys in deciding on punitive tariffs justified by findings of alleged Chinese violations of American intellectual property rights, Washington could have targeted more Chinese imports. It must be a huge relief to Beijing that Trump, the impulsive decision-maker, opted to double the initially proposed amount of $30 billion, instead of quadrupling it. Similarly, Beijing calibrated its response carefully. Instead of a powerful counter punch, China's pin-prick response indicated that it had no desire to escalate, at least for now, even though it possesses more potent weapons (such as targeting American soybeans and Boeing aircraft).

In an ideal world, we should expect that the opening salvo of the U.S.-China trade war would be its last shot. Rational economic calculations should convince everybody that both sides would lose (although Trump may feel that he still wins if the U.S. loses less than China). Even with extra tariffs and a decline in Chinese exports to the U.S., labor-intensive manufacturing jobs will not return to the U.S.

Unfortunately, a titanic clash between the world's largest and second-largest economies may not be preventable despite Chinese efforts to avoid one.

The first reason is Trump. He is unlikely to be satisfied with the outcome of his initial attack on the commercial ties between the U.S. and China. In signing the punitive tariffs last week, Trump promised that this was only "the first of many" trade actions against China. Worse still, China's muted response, instead of calming down Trump's protectionist fever, may only embolden him to escalate further because he may interpret Chinese reaction as a sign of weakness.

The second reason to worry is the dramatically changed strategic dynamics in U.S.-China relations. Unlike previous trade fights between the two great powers, the unfolding U.S.-China trade war is taking place when their overall relationship has turned away from strategic engagement toward confrontation. Over the last five years, Beijing's assertive foreign policy abroad and worsening political repression at home have upended the fundamental assumptions of America engagement policy toward China. Gone is the idea that engagement could shape China into a model follower of Western-designed global rules. Consequently, advocates for a hardline China strategy have prevailed. Even though the specifics of a strategy similar to containment have yet to be formulated, an overall consensus that the U.S. will need to deploy its resources to counter China's growing strengths has emerged.

In this changed context, one particular line of real politik argument is gaining sway in Washington. Advocates holding this perspective believe that the most potent weapon in the U.S. arsenal is economic, not military. Borrowing a page from the Cold War playbook, these advocates insist that the U.S. will not be able to prevail against China in this strategic competition unless it starves its adversary of the resources that will be used to bolster its capabilities. In the Chinese case, the conclusion of this compelling logic can only mean one thing -- a U.S.-China economic disengagement.

The combination of a protectionist in the White House and the growing pressure for a robust strategy to counter China's rise will likely facilitate the formation of a powerful coalition between trade protectionists and security hawks in the U.S. They will also receive support from groups bitterly disillusioned by China's turn toward hard authoritarianism. There are tentative signs that such a coalition probably has already emerged. Look at the unanimous congressinal vote in the recent passage of the Taiwan Travel Act, which authorizes high-level U.S.-Taiwan official meetings. It has effectively upgraded U.S.-Taiwan official relations and is seen as a slap in China's face.

In the months and years ahead, if economic disengagement becomes part of America's overall China strategy, the damage to the Chinese and American economies would be incalculable. One can imagine a nightmarish scenario in which their bilateral trade would shrink dramatically, cultural and educational exchanges get significantly curtailed (a proposal to cut down visas for Chinese students is being considered in Washington), and technology transfers cease altogether. Indeed, in the technology sector, where the U.S. fears that rapid Chinese catch-up will erode its competitive edge, it would not be an exaggeration to say that a strategy of technological containment is being implemented. Trump has announced new measures to curb Chinese investments in the U.S. tech sectors. Washington has recently blocked Singapore-based Broadcom's proposed takeover of Qualcomm, a leading U.S. chipmaker, out of fear that the takeover could indirectly advantage China's telecom equipment giant Huawei in the race to develop the next generation of mobile technology known as 5G.

The collateral damage of a gradual economic disengagement between the U.S. and China could also be disastrous for the global economy and institutions, especially the World Trade Organization. As the center of the global manufacturing supply chain, China's trade with the U.S. is, in effect, the heart of global trade (roughly a third of China's $2 trillion exports in 2017 was processing trade that involved importing components and exporting assembled products).

Should the U.S.-China trade war escalate further, the global supply chain will have to be significantly rerouted because the cost savings from assembling in China for exporting to the U.S., the largest consumer market in the world, will be wiped out by higher American tariffs. In the short-term, the rerouting of the supply chain will be disruptive and costly since nearly all the countries that can replace China as a manufacturing hub lack the scale, required infrastructure, labor force and producers of local components. The knock-on effects would be be magnified if companies supplying the European market follow suit and exit China. Some may have little commercial choice, as disentangling U.S.-bound production from goods headed for the EU and elsewhere could be impossibly costly. Also, one could easily imagine Washington pressuring Brussels to encourage EU companies to fall into line.

The odd industrial park in Vietnam or Thailand may benefit from some production displaced from China. But, in the long term, the trade between China and its Asian neighbors, especially between China and its industrialized neighbors such as Japan, Korea and Taiwan, will likely fall significantly because they are the main producers of components for processing exports.

The global economy will not be the only collateral victim of a full-blown U.S.-China strategic competition. At the global institutional level, there could be an unraveling of WTO (which the Trump administration ignored when imposing trade sanctions against China).

The biggest question is whether economic disengagement will help the U.S. win its strategic competition against China. Those convinced of the potency of such a strategy would point to the outcome of the Cold War. The rest of the world, unfortunately, will have to wait to find out.

Minxin Pei is a professor of government at Claremont McKenna College and author of "China's Crony Capitalism" (2016).

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