A high-intensity trade war lies ahead

President Trump’s desire to be tough on China may harm the US’ strategic interests

By Claude Smadja

President Trump has now dropped the other shoe and there might even be one more to come: With the announcement on Monday that the US was slapping tariffs on additional $ 200 billions of Chinese goods, there is no illusion left about the fact that we are entering into a protracted high-intensity trade war between the world’s two most important economies — with huge negative implications for the global economy. Almost no significant economic player – whether a corporate or a national one – will be able to dismiss the risk of becoming a collateral casualty of this war.

Coming in addition to the US tariffs already imposed on $50 billion of Chinese exports, the US new tariffs now affect, by some estimates, about 2.5 per cent of global international trade. If the US president moved ahead with his threat of additional new tariffs on the rest of Chinese exports to the US (about $ 267 billion) if China retaliated to his latest move – which it did – the damage will be around 4.5 to 5 per cent of total trade.

After having considered that Donald Trump was bluffing and would limit himself to some “for show” measures, the Chinese leaders have now taken the full measure of the threat that the US President’s policies represent for them. This is even more so as they increasingly consider that – beyond trade – the White House has now set in motion a full containment policy against their countrywhich is seen as a strategic competitor whose advances are putting into question America’s economic and technological supremacy.

A key question now isHow will Beijing react to the new moves from Washington? The first reaction has been the imposition of tariffs on an additional $60billion of US goods. However, except for a sudden lessening of tensions, it is doubtful that they would just act on new tariffs on US exports to the mainland. 

According to the US Commerce Secretary Wilbur Ross, “China is running out of bullets” because it cannot match the White House’s $200 billion move since America exports only $130 billion of goods to China. And Beijing tariffs now affect $110 billions of goods. In the same way, the view in the Trump administration is that it is a good time to move on China because the American economy is in full swing while the Chinese economy is registering a slowdown, partly due to the measures taken by Beijing to reduce financial risks created by the wild shadow banking activities. So, the Chinese leadership would supposedly be in a weakened position and would be more amenable to bend to American pressures.

This, however, is likely to be wishful thinking and reflects the simplistic way the Trump administration approaches most international issues and relations. As President Xi Jinping and his Politburo get convinced that they are facing a full-fledged containment policyand not just a trade conflict, it seems unlikely that they will consider counter-measures limited just to the trade domain. Here, they have a very broad array of tools in their hands in addition to new tariffs on American goods, such as  allowing the value of the yuan to go down, increasing obstacles and irritants for American companies doing business in China and giving preference to European or Japanese companies for some deals (this is happening already), restricting or delaying exports of goods and components crucial to  American companies supply chains, stopping to buy US Treasury bonds. These are just a few examples in the economic domain. 

In the geopolitical one, Beijing has also some good margin for manoeuvre to thwart the Trump administration’s efforts to achieve progress with North Korea; it can — as it is already doing — accelerate and reinforce its diplomatic and security rapprochement with Russia as we have seen with the unprecedented involvement of the Chinese military in Vostok 2018, which ended a few days ago and was the biggest war-game organised by Moscow in the last 40 years. Although any strategic alliance between Russia and China has its limits, as the two countries are, for instance, competing for influence in central Asia, the two countries joining forces could create some serious obstacles for American diplomatic goals in many parts of the world. 

While China’s response might be initially measured, there is no underestimating the determination of the leadership not to budge on some of the demands of the Trump administration that they see as a direct threat to their grip on power — and the legitimacy basis — of the Communist Party. Containment policy worked with the Soviet Union as it was economically insignificant and the Western world was united against what it saw as a mortal threat to its system and its values. We are today in a radically different context as, with China, we are talking of a country which represents 19 per cent of the world’s GDP, on its way to becoming the world’s number one economy, which is gathering technological and military strength and is expanding its global footprint.

The American business community has, of course, its grievances against Beijing’s economic and trade practices and would certainly welcome significant improvements of the  conditions under which it is operating in China. However, it might be more keenly aware than the Trump administration of the critical interdependences created by more than 30 years of business and economic interaction between the US and China as it keeps warning the White House of the negative impact that its measures will have on US businesses prospects and interests.

As the European Union, Japan and Australia have their lot of grievances against Beijing’s policies, it would be a game-changer if the Trump administration were able to enrol these countries in its containment or, to put it more politely, a ”push back” policy against China’s rise. However, there are a lot of misgivings in Tokyo, Brussels and Canberra about the way Mr Trump looks at trade and the US relationship with its allies. They don’t  share, or at least not in the same way, the US priority of thwarting the rise of a strategic competitor for the world’s prominence. And, quite importantly, they just don’t trust Mr Trump. So, while putting pressure on China to improve the framework of their business relationship, they will not engage in a kind of “holy alliance” against China. In fact, Japan-China relations have improved significantly in the last period as a result of President Trump’s actions.   

With his new measures against China, the US President obviously had the mid-term elections in his mind and the need to score points with his electoral base by showing that, contrary to his predecessors, he delivers on his promise of being “tough on China”. This might well prove to be one more example of him putting partisan interests above the strategic interest of his country. 

The writer is President of Smadja & Smadja, a Strategic Advisory Firm   

@ClaudeSmadja