True to his campaign promise, U.S. President Donald Trump has unleashed what looks like an all-out trade war against China. This month saw the U.S. slapping new tariffs on $200 billion in Chinese imports, with additional duties expected to reach to 25% next year. This comes on top of an earlier round of tariffs on $50 billion of Chinese products.
China has responded in kind, raising its own retaliatory tariffs (between 5 and 10%) on a total of $110 billion of American products. As a result, the world’s two largest economies have imposed new restrictions on close to $400 billion of bilateral trade, sending shockwaves across the global economy.
Though trade diversion has benefited some Asian nations, much of the region, so far, has greeted the Sino-American trade war with trepidation. There is increasing worry about the unintended consequences not only for regional trade linkages, where China plays a pivotal role, but also the decades-long cold peace in Asia, which is looking increasingly fragile.
Triumph of “America First” Policy
Almost four decades since the formal restoration of bilateral diplomatic relations, Washington has once again identified Beijing as a strategic competitor. In fact, the Trump administration’s National Security Strategy (NSS) openly describes China as a “revisionist” power, which seeks to “challenge American power, influence, and interests” around the world, particularly in the Indo-Pacific, in an attempt “to erode American security and prosperity.”
For some in the Trump administration, China is nothing short of an existential threat, given its unique combination of economic dynamism, burgeoning military might, and demographic weight – strengths the Soviet Union could only dream of at the height of the Cold War.
Within his first year in office, Trump assessed the prospect of activating various legislation, namely Section 232 of the Trade Expansion Act of 1962 as well as Section 301 of the Trade Act of 1974, to aggressively reconfigure America’s external trade relations.
In its second year, Trump administration’s trade policy has been increasingly dominated by the protectionist “iron triangle,” composed of White House chief trade adviser Peter Navarro, U.S. Trade Representative Robert Lighthizer, and Commerce Secretary Wilbur Ross, who view America’s trade deficit as a national security concern. Through ramped up tariffs and punishment of China’s alleged intellectual property theft, the Trump administration hopes to restore America’s manufacturing power.
So far, Washington seems to have gained the upper hand. For a starter, the U.S. can double the scope of its tariffs, given the sheer of volume of its Chinese imports. Trump has threatened to extend punitive tariffs to an additional $267 billion of Chinese imports. This gives Washington a lot of leverage.
By contrast, China may soon run out of American products to target and is beginning to show signs of serious vulnerability: Chinese stock markets have been hit hard, among the worst performing in Asia, while the yuan lost 8% of its value against the dollar between April and August this year. Though China is the world’s biggest exporter, it suffered, for the first time in 20 years, a current-account deficit in the first half of 2018. Trump’s tax cuts have, meanwhile, powered American financial markets, with GDP growth and unemployment rates reaching their best levels in recent years.
It was precisely in recognition of this asymmetry that the Xi administration initially adopted a conciliatory approach, offering to buy more American natural gas, agricultural produce, aircraft, and even go so far as to make adjustments to its Made in China 2025 strategic program, which aims to make China a technological leader in the coming decade. As leading Chinese trade expert He Weiwen told The New York Times, “The red line is China’s right to develop, not the concrete industrial policies and measures regarding Made in China 2025.” The stakes couldn’t be any higher.
For now, Southeast Asian countries such as Vietnam and Cambodia have been benefiting from the relocation of light industries from China amid the ongoing trade war. There will be winners in any war, but down the road, there are four key concerns for the region.
First of all, other Asian economies are worried about being next in Trump’s crossfire. After all, an emboldened Washington has already targeted India, while major Southeast Asian countries like Indonesia, Thailand, the Philippines, and Vietnam are also worried about Trump’s response to their trade surpluses with America.
Second, increased tariffs on Beijing will have ripple effects, given the integrated nature of the East Asian production network, with China at the center. Many “Made in China” products have significant value-added input from other regional economies, including Taiwan, South Korea, and Japan, thus tariffs will target all the regional co-producers. Shifting production from China to other regional states also carries its own costs, since it would entail shifting entire supply chains, which could be both expensive and risky. This could mean an increased burden on consumers as production costs increase.
Third, an escalated trade war could severely hurt China’s economy, with adverse effects for a region which is increasingly dependent on Chinese markets, capital, tourists, and cheap technology imports. In a scenario of an all-out global trade war, the world could suffer from up to a 70% contraction in international trade, which, in turn, could cause a global depression, with a 2-3% contraction in the global Gross Domestic Product (GDP).
Lastly, and most worryingly, the trade war is going hand in hand with a dramatic deterioration in Sino-American diplomatic and strategic ties. What initially looked like a Trump-style ‘Art of the Deal’ bargaining strategy for measured adjustment of the American trade deficit has now turned into a full-blown Cold War, with China viewing the trade war as part of a containment strategy, if not a larger existential struggle. A furious China has indefinitely suspended trade negotiations as well as the upcoming bilateral strategic dialogue, while Trump has gone as far as to accuse the Asian powerhouse of interfering in domestic American politics to undermine his trade policy. Meanwhile, geopolitical tensions in the South China Sea have intensified just as defense and strategic diplomatic channels have atrophied. If left unchecked, the ongoing escalation could effectively end seven decades of relative peace and unprecedented prosperity in Asia.