President Donald Trump made China a centerpiece of his 2016 campaign, threatening to push back against what he perceived as economic aggression from Beijing against the US. A year-long lull in the president’s actions – if not rhetoric – after he took office led many observers to believe, and hope, this might mean a US-China economic showdown could be avoided altogether. As of the fall of 2018, it appears such hopes were unfounded, as Beijing and Washington are locked into what is beginning to look like a war of economic attrition.
The United States has already imposed tariffs against China based on the WTO (household appliances and solar panels), section 232 of the Trade Expansion Act of 1962 (steel and aluminum), and section 301 of the Trade Act of 1974 (technology). The Trump administration seems intent on pursuing escalation until Beijing gives in to US demands that it fundamentally revise its state-capitalist model of development. China, for its part, has retaliated in kind with tariffs of its own, and does not seem ready to concede to Washington any time soon.
Several factors drive President Trump’s escalatory stance. First, and most important, the president firmly believes that China must reduce its subsidies to strategic sectors, or Beijing will gain an unfair advantage over US industry. Second, Trump benefits from having suffered very limited economic – and therefore political – backlash at home from his protectionist measures. Financial markets have experienced volatility, but no fundamental correction. Third, the president benefits from loyalty to the Republican party among key US business, farming, and manufacturing constituencies. Finally, Trump sees China’s equity markets and currency losing value since the trade war started, and clearly feels he is winning.
Across the ocean, China’s political leaders are growing aggravated with a US administration they worry is more interested in continued conflict than in settling their differences in good faith. Some Chinese elites believe the US is trying to contain China’s rise, under the guise of trade actions.
Beijing will therefore likely keep retaliating against the US, both in kind (with tariffs of its own) as well as through informal means. Limited-scale consumer boycotts against certain US brand names are no longer out of the question, though Beijing will make sure they do not get out of hand. Market access will be made tougher for US investors hoping to tap into the huge Chinese consumer market.
If US-China trade and investment tensions continue on this course, the global economy will suffer. The Chinese and US economies are intertwined in ways that have benefited both countries tremendously over the past two decades. As companies – both US and Chinese – begin to shy away from the risks a trade war creates, supply chains will be redrawn to disentangle these two giants. This in turn would lead to less efficient commercial production and higher prices. Financial markets could also reach a point where their short-term peaks and troughs turn into a more profound re-evaluation of asset prices that reflect lowered investor confidence. Finally, commodity producers – especially those most exposed to Beijing’s import needs – could see their fates sour if China’s economy significantly slows. Southeast Asian and Middle Eastern countries, among others, have much to lose.
Fortunately, there is room for relations between Beijing and Washington to improve next year. Both countries will eventually – most likely in mid- to late- 2019 – come to realize that their trade war punishes both parties and can spiral out of control. President Trump will increasingly have an eye to his 2020 re-election campaign and will become more risk averse regarding the US economy. Meanwhile, President Xi Jinping will want to avoid the potential loss of legitimacy that could come from allowing the Chinese economy to drop below six percent annual growth.
Equally important, Chinese leaders will come to realize that while the US may have taken a particularly brazen approach to its trade actions, Washington’s concerns with China’s economic model are shared by many of Beijing’s other economic partners – especially the Europeans. Indeed, whether it be the European Union or Russia, every nation has much to lose in a prolonged US-China economic confrontation. Oil prices could drop, global trade barriers go up, investment flows slow, and political volatility ensue. At some point in 2019 – and hopefully earlier rather than later – a bilateral dialogue will come about that addresses both China’s and the US’s concerns, and spares other nations.