President Donald Trump has unleashed a “trade war” against China. Tariffs, investment restrictions, export controls, and reduced leakage of technology are all components of this US policy. Trump has brought idiosyncratic and controversial elements to trade relations, such as the aggressive use of tariff hikes. But it’s not fully “Trump’s trade war,” as many Democratic and Republican members of Congress also believe the US should level the playing field for trade with China. The political establishments in the US and many other countries are concerned about Chinese practices on market access, industrial policy, intellectual property (IP) protection, and other issues.
The trade dispute has had a distinct dynamic during 2018 and so far this year. The centerpiece has been reciprocal tariff actions. President Trump placed tariffs on $50 billion worth of Chinese goods. Beijing responded with tariffs on the same amount of US products. Then, the US administration placed tariffs of 10% on an additional $200 billion of goods and threatened to raise the rate to 25%. China responded by hitting an additional $60 bn of US exports. Washington then threatened to place tariffs on the remainder of Chinese exports to the US. In May 2019, the US implemented the 25% rate, and China retaliated by increasing tariffs on US imports. Investment restrictions, export controls, and intellectual property actions accompanied the tariff hikes. Most recently, at the G20 summit, declared at least a temporary truce. The US committed not to raise tariffs further and to ease pressure on Chinese tech giant Huawei. Beijing in turn agreed to resume trade talks.
The trade dispute poses significant risks for the US, China, and the global economy. For the US, a prolonged trade war could lead to a significant drop in US equity markets. Investors have shown great sensitivity to trends in the trade war. The US agriculture, aircraft, and other sectors stand to lose if issues are not resolved. Also, expensive dislocations will occur for US companies whose supply chains depend on China. The Trump Administration does not want US firms, especially those involved in innovative or “critical” technologies, to be dependent on Chinese suppliers. (The US seeks “decoupling,” or separation of US and Chinese production.) As a result, many of these US firms are relocating production from China to countries with less attractive investment climates. Finally, in the context of the trade dispute, both sides risk political disputes becoming more prone to escalation. If there is an incident in the South China Sea, or Taiwan, it could be harder to contain if tensions are already high.
For China, the trade war has created uncertainty in the investment climate, which is one reason why Chinese economic growth has slowed. Because of slower growth, China’s leaders have eased efforts to reduce debt levels and gray area banking and insurance operations. That’s risky for China, as it means key reforms have slowed. More generally, the trade war could empower anti-reform members of China’s elite. Finally, if the US reimposes harsh measures against Huawei, the company could fail.
Regarding the global economy, risks also abound. Decoupling will produce slower innovation. Much innovation has occurred through collaboration between US and Chinese firms. And megaprojects such as 5G development will occur more slowly and cost more in light of decoupling. Moreover, key parts of the global economy including the innovation and national security sectors will move toward “partition.” The future will see a battle between the two nations for large third country markets, such as Brazil and Indonesia. Most nations and their firms -- in the innovation and national security sectors -- will align with either the US or China. Governments will seek reliable supply, and firms will seek to avoid producing for different standards regimes and to avoid exposure to tariff wars.
At this juncture, it’s unlikely there will be a resolution any time soon. The most likely scenario is that the current uneasy truce will remain in place through the US presidential election in 2020. Neither side is willing to make major concessions. Yet neither side is likely to take big risks. Trump will be averse to putting the US equity market at risk in the runup to the election, President Xi Jinping, meanwhile, will seek to avert further economic dislocations amidst slowing Chinese growth.
Most important, broader US-China competition will escalate regardless of whether there is a near-term trade deal. On 5G, quantum computing, AI, robotics, and other arenas, the US and China will engage in a struggle for advantage in the global economy over coming decades. That structural, and dangerous, competition will be difficult if not impossible to avoid.
Turning to the effect of the trade war on the Asia-Pacific and other regions, President Trump’s actions and negotiating style have made many nations uneasy. Trump is clearly willing to use tariff hikes often and has even threatened to backtrack on his own agreements. The US president’s trade policies have led other nations in the Asia-Pacific region to begin hedging by seeking trade relations with a wider range of partners.
Finally, there are several implications of the trade war for Russia. First, Russia will conduct foreign trade in an increasing context of geo-economic bipolarity. Moscow will have to find the best role for the country in that new context. Second, there are new downside risks to the Chinese and US economies from the trade dispute. A large correction in either market would reduce global demand and probably lead to a drop in the price of oil. Third, US unpredictability will give impetus to efforts to reduce reliance on Washington and develop methods of settling transactions without using the dollar. Finally, Russia and all nations should beware of serious tension in US-Chinese relations. Escalation of an incident in the South China Sea, for example, is in the interest of no nation.