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Economy

The Logic and Impact of America’s Trade War against China

Jun 15 , 2018
  • Yang Wenjing

    Chief of US Foreign Policy, Institute of Contemporary International Relations
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America’s trade war against China is underpinned by deep-rooted thinking based on Donald Trump’s “America first” foreign policy. However, these ideological trends of protectionism and isolationism are not the creation of Trump, but the product of a search for solutions to a host of structural problems that have been continuously intensifying: the hollowing out of the US economy, the flow of manufacturing overseas, an ever-increasing gap in society between rich and poor, and an inability to break the habit of using government debt to increase fiscal spending are just some examples. Trump’s answer to these problems is to withdraw from the Trans-Pacific Partnership which “hurts the interests of the American people”, renegotiate NAFTA and the US-Korea Free Trade Agreement and sign bilateral trade agreements with all countries that are willing to develop trade relations with the US “on the basis of fairness and reciprocity”. He has railed against the WTO and other multilateral institutions, which he claims hurt American interests, and has abandoned WTO conflict resolution mechanisms, choosing instead to use national security as a pretense for imposing sanctions and other coercive measures against supposed unfair market practices that hurt US interests.

The logic behind this is that, by using various coercive economic measures, other countries can be forced to actively reduce their trade surplus with the US. This is especially the case for countries with large surpluses like Germany, China, Japan and South Korea. In this way, greater market space for US agriculture, energy and automobiles can be created and the trade deficit neutralized. By stressing rules of origin, capitalizing on the raising of environmental and labor standards in other countries, and handing out tax cuts to America companies, Trump seeks to boost the international competitiveness of American manufacturing and workers and to attract more companies to set up in, or return to, the US, thereby fulfilling his election promise of more jobs for Americans.

It could be said that these goals are the dominant considerations in the trade war with China. First, China is second only to Germany in having the largest balance of payments surplus with the US; this is one of the areas where the US wants change. This also explains why Trumps dislikes Germany, is opposed to the EU, and has fallen out with American allies such as Japan, South Korea, Canada, and Mexico. Second, China is the primary national security concern for America. The Trump administration’s national security strategy has already made this much perfectly clear. That is to say, a trade war with China is not merely about the economy, but about dealing with what the US perceives as its greatest threat in the 21st century. It is not just about realizing a balance in trade, but, more importantly, about pointing out and criticizing problems with China relating to international economic rules, such as its so called subsidizing of state-owned enterprises, forced technology transfers and practice of predatory economics through the Belt and Road Initiative. In reality, the trade war is a reflection of the US’ worry of China leading the international economy while its own ability to lead is weakening. Third, Trump’s character traits as a risk-taker and dealmaker, seen in his threats to impose high costs on those who don’t submit to his demands and his conflation of economic and security issues, mean that he is more willing to use hardline measures such as trade war to squeeze out economic benefits for the US. Such measures have not just been used on China, but have also targeted American allies, despite a recognized need on both sides for cooperation when it comes to China. In Trump’s eyes, “America first” takes precedent over all other countries, including US allies.

All of this makes it patently clear that while America’s trade war with China is underpinned by inherent structural reasons, it also influenced by the values and personality traits of President Trump. Already, America is making noises that it is not satisfied with the interim agreement it has reached with China on trade. The reasons for this dissatisfaction are firstly because America’s domestic production capacity is limited, which will make it hard to meet China’s wish to reduce the trade deficit solely through the purchase of American goods. Secondly, America is more concerned about issues like SOEs, technology transfers, state-driven innovation, and the Belt and Road Initiative, which is viewed as a vehicle for exporting production capacity and debt—these are issues which have yet to be touched on, much less solved. The Belt and Road in particular is really a core issue in terms of competition and national strength between the sides over the long term.

For China, the areas where it can afford to make concessions at present center mainly on the purchase of American goods and energy. The US action taken against ZTE constitutes merely a first step for America in expressing its dissatisfaction with China’s SOEs and in attempting to regulate and mold their operations. Going forward, not only will Trump want China to keep on buying American, he will also employ both hard and soft tactics to force it to make concessions and changes in terms of its economic system.

From China’s perspective, it is firstly important to clearly identify the essence of Trump’s foreign economic policy and to recognize the limits of that policy and the likelihood of a backlash from the international community. In a bid to achieve radical change on the international stage, Trump has started by targeting the international industrial chain created through globalization. These actions affect the interests of the whole world, so a strong response from US allies such as the EU, Japan, and Canada can be expected. Secondly, trying to solve the structural problems in Chinese-American trade by buying more US goods is not going to be enough to satisfy the Americans. In the future, China is probably going to face increased pressure to make structural changes, and ultimately a resolution will likely be only achievable by undertaking thoroughgoing reform and opening up. Finally, China needs to strike a balance between its economic and strategic interests, in order to prevent an excessive strategic response to the Belt and Road Initiative from the US.

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