Cold War II: US / China Trade Hostilities Intensify

  • After a breakdown in talks in May, America imposed tariffs on another $200 billion worth of Chinese goods.
  • Economic leaders have warned of the worsening detrimental impact on the global economy, as China retaliated with a $60 billion tariff on American exports. 
  • Now Trump says he will raise tariffs further (on another $300 billion worth of goods) if his Chinese counterpart fails to join him at the G20 later this month.

The US government’s weaponization of its role as an economic superpower is a dramatic deviation from prior administrations’ approach to trade. Where before America sought out multilateral trade deals with allies and open engagement with competing economies (like China’s), today Trumponomics comprises a pursuit of bilateral trade deals with allies and a confrontational approach to nations it deems adversarial.

America’s levying of tariffs and its decision to instigate a trade conflict with China is intended to serve a dual purpose – to stimulate domestic manufacturing by making it financially preferable to produce at home what otherwise would have been imported from China, and to coerce Chinese leaders into adopting fairer trade and business practices. The first ambition appears to be making at least some headway, with a recent Bank of America report suggesting that American manufacturing firms are beginning to shift their supply chains away from China and increasingly localising. The second has seen no results – after months of trade talks between the two nations, throughout which many observers grew optimistic, diplomacy collapsed, and each side walked away having gained zero concessions. The conflict quickly escalated, with America slapping a further $200 billion worth of tariffs on Chinese imports, China retaliating in kind, and the global market reeling.

The result thus far has been that, according to The US China Business Council and the US-China Investment Project, US exports to China declined by 7% and Chinese investment in the US tumbled by 60% in 2018. The figures for 2019 are set to paint an even grimmer picture with the escalation of the trade struggle.

The former Treasury Secretary and Goldman Sachs CEO Henry Paulson is gloomy about the precedents set by Trump’s America First policy, warning of a looming “Economic Iron Curtain”, one that “throws up new walls on each side and un-makes the global economy, as we have known it.” He suggests that the intensifying clash between the US and China extends beyond trade and the ratcheting up of tariffs, and that even if a deal is achieved their relationship will remain invariably tense. As set out by The Economist in The Trade War and Big Tech, “The trade war between America and China has already spread from tariffs to encompass legal extradition, venture capital and the global dollar-payments system.”

The most compelling case to be made for this is the American government’s all-out warfare on the Chinese telecommunications giant Huawei. On May 15th the American Commerce Department announced that domestic firms would need a special licence to do business with Huawei, and the government has attempted to shut the firm out of its technological infrastructure while imploring its allies to do likewise. America also seeks the extradition of Huawei’s CFO in order to prosecute her for eluding sanctions on Iran. The US administration argues from a national security standpoint – that such is the effort to prevent the Chinese government from exploiting Huawei devices to spy on US citizens. Huawei have responded publicly, stating that they are not obligated to do what the Communist Party tells them. Trump said last weekend that his administration’s endeavour to ban Huawei from America’s digital network could end as part of a trade negotiation with China, which appears to contradict his prior stance that the company threatens national security.

Trump’s approach to trade may be overly aggressive and economically destabilising given its erratic implementation and unpredictability, but it is important to note that many of his concerns are justified. China and its businesses are accused by the West of shirking the World Trade Organisation’s economic rules (of which China has been a member since 2001). Its system of state capitalism means Chinese firms are often impelled to engage in theft of technology at the behest of the Communist Party, and when American and other western businesses wish to enter the Chinese market, they are pressured to hand over intellectual property in exchange for permission to do business there. This is due to China’s restrictive business laws which obligate foreign companies to form joint ventures with domestic Chinese companies when they set up shop, and these enforced partnerships involve a so-called “technology transfer”. Calls for action transcend party lines in American politics – Republicans and Democrats agree that China ought to be confronted.

But many fear the current government uses tariffs less as a tool for bettering economic relationships, and more as a cudgel for wresting concessions from trade partners. America is weaponizing its role as an economic superpower not only to hurt its adversaries’ economies, but also to compel its allies into acquiescing to its demands – which sometimes are not even related to trade. On May 30th, Trump threatened Mexico with a 5% tariff on all its exports to America, rising by 5% every month to 25% by October if immigration flows do not fall. This would have disastrous repercussions for the Mexican economy – according to Citibank 25% tariffs would crush the peso’s value by 59%, stating with optimism that “the consequences of this policy could be so extreme we see it as unlikely to happen”. Even so, Trump’s use of the threat of tariffs as retaliation for something that is not related to trade (immigration levels) is unprecedented.

The US president will meet Xi Jinping later this month at the G20 summit, and the hope is that a meeting of the minds will revivify trade negotiations. Trump’s threat to raise tariffs by a further $300 billion if Jinping fails to appear isn’t exactly damning, given that there has been no indication that the Chinese president plans to boycott the summit. The US president appeared to acknowledge the emptiness of the threat, stating: “I would be surprised if he didn’t go. I think he’s going. I haven’t heard that he’s not. We’re expected to meet and if we don’t that’s fine and if we do that’s fine.” In the meantime, trade between the two nations will continue to plummet, and the global economy will bear the burden.

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