US-China trade war

What is a trade war? This is when countries attack each other’s trade by imposing higher tariffs and mandating quotas. The main objective is to hurt the economy of the other country. 

The ongoing trade war between China and the United States is continuing to escalate. Trump has just announced he will impose tariffs on $200 billion of Chinese goods. China immediately retaliated by imposing new taxes on $60 billion of American imports. China’s trade sanctions is less than the American sanctions because Beijing is running out of American products to impose tariffs. This is one reason why Trump believes that the United States can easily win a trade war with China.

While China has less leverage on trade, there are other ways that China can retaliate. Unfortunately for the world, these other means – if China decides to use them – can lead to a new Cold War. According to Professor Charles Hankla, there are four possible ways that China could respond to the increase of American tariffs.

Economic pain. China can escalate the confrontation by using its substantial economic leverage outside of trade. China could retaliate by reducing its purchases of American Treasuries or by selling some of the $1.18 trillion in its possession. China owns almost a fifth of the US national debt currently held by foreign countries.

If China reduces its holdings of American treasuries, this would drive up the cost of many goods Americans buy. This would also lead to a weakening of the dollar. China can also target companies operating in China with more regulations and interference.

Geopolitical games. China could undermine US efforts to disarm North Korea by not enforcing US sanctions. China could also confront the United States in the South China Sea. An escalation of the trade war could lead to China becoming more belligerent. Other options include attempting to isolate Taiwan, deepening ties with Russia as a counterbalance to the US and accelerating its military buildup. 

Hegemony on steroids. China could take America’s aggressive approach on trade as a reason to speed up its efforts to establish greater hegemony in the Asia Pacific region and strive for greater economic independence. China could speed up its “Belt and Road” initiative, expand its influence in Africa, and pump more cash into its alternative to the World Bank, the Asian Infrastructure Development Bank. 

Cooler heads. The fourth alternative is for China to de-escalate the confrontation by negotiating some resolution with Trump. However, at this point, Trump’s terms for ending the trade war remains unclear.

China could limit the fight to the trade arena and wait for the results of the American midterm or the 2020 presidential elections and hope that a new administration will change American policy. 

Before this confrontation started, Trump said “...trade wars are easy to win.” He mistakenly assumed that Beijing would capitulate quickly. What does the United States hope to accomplish assuming they win the trade war? According to Professor David Lake: “Trump has said his aims are to open the Chinese market, reduce the trade deficit and save American jobs especially in the traditional manufacturing sector. His strategy is to bludgeon China with tariffs on its goods and then hit them with more tariffs when they retaliate. The idea is to take advantage of the unequal trade between the two countries to hurt China more than it can hurt the United States and thereby win the war. ... The real economic competition between the United States and China is in the industries of the future – robotics, artificial intelligence, biotech and more. The Trump administration appears to believe that the trade war will prompt Beijing to abandon the Made in China 2025 initiative – aimed at upgrading its technology to compete with the United States. The opposite is more likely. Losing access to the US market and US technology, China will aim to build out its own technological base even more rapidly, and will then start subsidizing and selling its products to markets the United States previously dominated.”

Trump may see this as simply a trade war; but, Beijing thinks this is the US trying to contain China and counter its rise as a superpower. If Beijing takes this view seriously, then this trade war could escalate into a Cold War. 

In the meantime, the US-China trade war  is creating some winners in Southeast Asia. According to Bloomberg: ”The region is capitalizing on a rush of new orders and production moves as firms reconsider their business in US and China amid a deepening trade war. About one-third of more than 430 American companies in China  have or are considering moving production sites abroad amid the tensions, according to survey results released September 13 by the American Chamber-China and the American Chamber-Shanghai.  Southeast Asia was their top destination.”

In the same article, three countries – Vietnam, Thailand, Malaysia, were reported as having benefited the most. Businessmen from these three countries reported increased demand from American and Chinese buyers. Global manufacturers are now actively looking for alternative sites for their all-important supply chains. In one article, it says that Vietnam is setting the example to the rest of Southeast Asia in attracting these investors. However, it adds: “Sadly, the Philippines with its clapped out infrastructure, expensive energy and notorious bureaucracy remains the outlier.”

The Philippines cannot afford to miss participating in this major wave of industrial relocations from an increasingly expensive China. 

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