Whoever wins the war, less trade between China and the US means both nations are losers
Chi Wang says the tariff storm ignited by US President Donald Trump will hurt both economies without addressing the real causes of their trade imbalance. Worse, by reducing trade, it will exacerbate tensions in other areas of the bilateral relationship
Which country – the US or China – will win the trade war? This is the question on everyone's minds. I believe it is far too early to know. At this point, either, or even both, could be beaten.
The US is at a disadvantage because it isn’t addressing the causes of the trade imbalance. However, China has many other issues affecting its people's confidence in its economy, which could be more dangerous than the fiscal effect of tariffs.
Despite US President Donald Trump and Chinese President Xi Jinping’s congenial start in Mar-a-Lago, the US-China relationship has deteriorated considerably over the past year. The trade dialogue set in place after their first meeting achieved very little, very slowly – nothing like the sweeping changes Trump wanted to see. He became impatient with the inability to negotiate changes and ordered his administration to start looking elsewhere.
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In February, the Trump administration began its ill-advised efforts to unilaterally “fix” the unbalanced relationship, enacting tariffs on washing machines and solar panels in an effort to stem Chinese imports. This particular action, though it did affect China, was not targeted specifically at the nation.
The next imports to be taxed were aluminium and steel, setting off the fury of many, as again this was not a targeted action. Finally, in May, the Trump administration stopped beating around the bush and announced tariffs on US$50 billion of Chinese imports, the last US$16 billion of which will come into effect on Thursday.
The tariffs have snowballed from that point, and now the world’s two largest economic forces are facing off while the rest of the world watches nervously and speculates on the outcome.
The two biggest issues in the US-China trade relationship are access and intellectual property. For years, business leaders in the US and abroad have been asking Beijing to reduce barriers to foreign investment in China. Even if a company manages to gain access to the Chinese market, it is often forced to transfer valuable technology and intellectual property over to its Chinese counterparts.
Not only that, but it must then compete against Chinese companies that, more often than not, have been heavily subsidised by the government. China's economy is thriving in large part because the companies have been underwritten by the government and have been given an edge with Western technology. Tariffs do nothing to address these issues.
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Levying tariffs on Chinese imports is a mistakenly attractive option to leaders because the US seems to have more leverage. The US imports about US$500 billion of products from China, but exports only about US$130 billion to it, and therefore has the upper hand if the war is waged through tit-for-tat tariffs. Unfortunately, this may not be as true as US leaders hope.
One of the reasons the trade deficit between the US and China is so large is because many of the goods China exports to the US are end-stage manufactured products. A commonly used example is the iPhone. The most expensive components in an iPhone are manufactured in South Korea and Japan.
The value China adds to the iPhone before exporting it to the US is minuscule in comparison, but it gets credit for the whole product. Levying taxes on imported Chinese goods will do little to affect the economy, but prices have already begun to rise in the US, with the additional expense passed on to the American consumer.
China could win this trade war because of its “unfair” business tactics, the unflinching support of the government and because – in the end – these tariffs will affect the American public much more than the average Chinese citizen.
China has no reason to change the way it runs its economy, and since this is the true cause of the trade imbalance with the US, it is unlikely to do so any time soon. If China continues to develop its technology sectors, with the “Made in China 2025” initiative, before long, it will have no need for American technology or innovation.
Tariffs themselves may have little effect on the Chinese economy, but there are also larger struggles at play within China. The scandals surrounding defective vaccines, failures in peer-to-peer investment platforms and a precarious housing market have many in China feeling wary.
Others believe the trade war is a result of Chinese leaders being too assertive with the US, leading the Communist Party to tone down rhetoric surrounding the Belt and Road Initiative and Made in China 2025 programme. While the trade war itself may not damage the Chinese economy, the effects of the Chinese people’s continued loss of confidence in their economy and leaders could be disastrous.
Since February, Trump has been focused on reducing the trade deficit by enacting tariffs. This may actually reduce the imbalance of trade, but only by choking it off to a trickle. It is difficult to have a trade imbalance if two countries simply do not trade with each other. This outcome, seemingly more and more inevitable, will not benefit either country.
At present, it seems futile to hope that the two countries' leaders will sit down and come to a reasonable solution.
This bilateral relationship, initiated as a cold war necessity, was distant and underdeveloped until the early 2000s when trade ties between the two countries began strengthening. The breakdown in the trade relationship will only serve to exacerbate other disagreements, of which there are many. If this conflict expands beyond the realm of trade, there may be no true winner.
Chi Wang, a former head of the Chinese section of the US Library of Congress and former university librarian at the Chinese University of Hong Kong, is president of the US-China Policy Foundation