Will Trump succeed in flattening China’s uneven trade policies?
Western companies complain that business always seems to be on China’s terms, and call out raids on their intellectual property. But they remain powerless in the face of its single-minded onslaught
The cost of The Donald’s policy of imposing heavy import tariffs on steel and aluminium continues to rise, with the resignation of Wall Street favourite, Gary Cohn, his top economic adviser.
The whole idea was barking mad anyway – missing its target by miles.
Steel and aluminium are poor targets for an American trade war. True, they fit in with US President Donald Trump’s old-economy, blue-collar support, but they miss the fundamental issue of seeking to rebalance trade with China.
Targeting steel allies would hammer Canada, the European Union (EU) and South Korea, who export something like 13 times more steel to the US than China. Even if, as some think, Mexico’s imports into the US are China re-exports, the numbers are minuscule.
Global trading is based on the Law of Comparative Advantage, which rules that with fair and open trade everybody wins.
If one side feels trade is unfair they will retaliate in a schoolboyish fashion. The EU Commission’s feeble president Jean-Claude Junkers threatened retaliation against Levi’s, Bourbon and Harley Davisons. If he’d added country music he could have saved us a lot of pain.
But Trump is not there by accident. Every reaction has an opposite and equal reaction, and events have a way of happening when they must. One key American national trait is the concept of “fairness” and the trade numbers show why the US is irked at the trade imbalance with China – a massive US$375 billion. That is three times bigger than US exports to China, of US$130 billion.
As a comparison, the country with the next biggest positive trade gap is Mexico (at US$71 billion in 2017), Japan ($69b) and Germany ($64b). It is not China’s exports to the US that is the issue – it is the fact that imports are so low.
This could be put down to the fact that Americans are not very good at exporting – if only China was not the US’ third biggest export market. You might expect much bigger exports for the US as, by some margin, the two largest trading partners in the world.
Or perhaps it is because China has used every weapon available to protect its domestic markets and inhibit US imports.
China is a state-sponsored economy and subsidises state-owned companies in a comprehensive manner. It has created and protects leading companies in aviation, technology and energy, which the Economist calculates is 40 per cent of its industry.
Even today, the state is busy acquiring private conglomerate Anbang Insurance and pressurising China Dalian Wanda, Fosun and HNA to sell or release assets to other state-owned entities.
Western companies complain that business always seems to be on China’s terms, and call out raids on their intellectual property. But they remain powerless in the face of the single-minded onslaught.
It is just not possible for free market commercial organisations to compete with the raw competitive power of a state.
You cannot blame the central government for wanting to “make China great”. A developing economy looks to benefit from trade, cheap labour and hard work. In the past, developed economies have been more than happy to allow these imbalances to help both sides become rich.
But Trump has no historical context, and sees China as a full equal geopolitical rival – not a poor developing economy, but as a rich, developed nation. And a partner who abuses the global trading system, holding out the carrot of limited entry to the huge Chinese market, while taking full advantage of the openness of the US economy.
Trump sees China as having its cake and eating every single crumb, while reaching behind to grab another piece, having stuffed its pockets full. The price of equality is that equality will be demanded.
So we should not be surprised if America demands equal access to markets, equal access to currencies, to banking and industry, to (non-military) government contracts, to lending and investment, to universities and equal access to technology sharing.
And if it is not forthcoming, then access to US markets will be denied, despite the wails of democratic pressure groups losing out on the China trade.
We know China will not back down. Indeed it increasingly regards its political and economic system as a rival to liberal democracy and a role model to other countries.
We can also see that Trump has the boneheadedness to instigate a trade war without worrying about the consequential detail.
The next trade battle the US seeks to fight will be smarter, more directional and more intentional.
We will then find out how important trade wars are, and whether they are as “easy to win” as Trump has predicted.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness