The U.S. merchandise trade balance with China was $418 billion in 2018. Donald Trump had promised to reduce it as part of his election campaign to restore American manufacturing jobs, which have fallen from 40% at the end of World War II to less than 9% today, a result of technology and productivity gains, but also outsourcing to China. In line with his “America First” principle, President Trump has unleashed a trade war against China. Beijing’s response was symmetrical.
At the outset, Trump believed that the USA had the upper hand and that by enacting tariffs and threatening Beijing with further trade wars he could compel China to undertake reforms that would reduce this imbalance and, more generally, strengthen the hand of America companies in China by ending compulsory transfers of technology, subsidies, and intellectual property rights. However, the turmoil in financial markets at the end of 2018 in the wake of tariff increases has provided strong incentives to both sides to make a deal on trade—Trump in order to avoid a recession that could doom his 2020 presidential campaign and Xi Jinping to maintain China’s growth rate.
Both the USA and China would lose from a trade war. Together, the two countries account for 40% of the world economy and so Europe, whose economy is already slowing dramatically, would be caught in the crossfire, as would emerging markets and, to some extent, Russia.
If China and the United States do make a deal, which seems likely at this point, it will not bring the US-China rivalry to a halt. Even if the U.S. bilateral deficit with China shrinks, the overall trade deficit will likely remain based on a lack of U.S. savings and the chronic and growing budget deficit. At the same time, rather than promoting import substitution, it is likely that U.S. corporate production chains will move out of China into other countries in Asia. There is some evidence that decoupling is already occurring.
Rules on currency manipulation are part of the present negotiations and China appears likely to agree to these. As noted above, Trump does not appear to have the resolve to carry out a full-blown trade war in view of the potential economic costs. However, if as expected a trade deal is reached, it will certainly not end the broader U.S-China rivalry. Much depends not only on agreements made, but the mechanisms for enforcement. More generally, although Trump himself appears to have moderated his views, both corporate America and the Pentagon are moving towards a policy of containment, representing a much more fundamental challenge to China’s developmental model. China is unlikely to acquiesce to this challenge, and it is certainly not clear that the U.S. has the power to prevail.
Asia-Pacific countries and their reaction to the policy of unilateral promotion of US economic interests
The Asian market is expected to account for 50% of global economic activity by 2050, and U.S. corporations will seek to maintain their primacy within it. At the same time, of course, the U.S. military has greatly expanded its activities in what it now calls the Indo-Pacific. The U.S .has already signed a trade deal with South Korea that did not involve fundamental changes in trade relations between the two countries. The same is true for the revised NAFTA agreement (U.S., Canada, and Mexico), although this has not been ratified. Negotiations with Japan (and the EU) are set to begin soon.
Consequences for Russia
The U.S.-China rivalry plays out on a global scale, as the example of Huawei indicates. U.S.-Russian trade relations are very limited. However, trade with Europe is very significant for the Russian economy, so as noted above a global recession arising from trade wars would impact negatively on Russia. At the same time, China and Russia both have incentives for closer economic and political-military cooperation.
