Valdai Club

Increasingly, one can hear that the 45th President of the United States, Donald Trump, who has made a name for himself for both his extravagance and his decisive action, has a propensity for trampling on all established legal means of international interaction. Under his rule, Washington withdrew from the Iranian nuclear deal (JSPOA) and the Intermediate-Range Nuclear Forces Treaty (INF). He also announced his withdrawal from the Paris Agreement on climate change and the UN Arms Trade Treaty (ATT), and is still considering the need to extend US participation in the agreement on strategic offensive weaponry (New START), which expires in 2021. Moreover, America has begun to raise import tariffs on certain goods from its trade partners, including Mexico, Canada, Japan and the EU, and in general to carry out a policy of protectionism resembling that introduced during the presidency of William McKinley.

With these bold steps, Donald Trump attempted to fulfil the promise stated in his election slogan: “make America great again”. A special emphasis in achieving this would be placed on enhancing the economic power of the country and providing US citizens with jobs. According to statistics, the US has a trade deficit. Specifically, in 2017 this figure increased 12.1% and amounted to 566 billion dollars (exports of 2.3 trillion dollars of goods, lagged imports, worth 2.9 trillion dollars).

Globalization, which had previously been considered one of the principle tenets promoted through American Leadership is about, is beginning to play against the United States and contribute to the growth of other centres of power. Of course, Washington finds this unacceptable.

In an effort to reverse this unfavourable trend, America, led by Donald Trump, has launched a policy which has been dubbed Trumponomics. It is based on an exclusive subordination of foreign policy to the national interests of the country, protectionism, as well as a set of economic measures aimed at returning national capital and production to the United States. In addition, there is an emphasis on accelerating GDP growth in accordance with a new fiscal policy and through investments in the country's infrastructure.

The United States’ largest trading partner is China. At the same time, it also became the biggest challenge to American economic leadership. In 2018, the country’s trade deficit with China amounted to 419 billion dollars: America imported $540 billion in goods from China yet exported only $121 billion. The main imports were computers, mobile phones and clothing, while aircraft, soybeans and vehicles were its principle exports.

China has a huge trade surplus with the United States. Beijing uses these profits to purchase US Treasury bonds, writes Valdai Club expert David Lane, Fellow of the Academy of Social Sciences (UK), Emeritus Fellow at Emmanuel College at Cambridge University, and vice president of the European Sociological Association. “China <…> has used its dollar surplus to buy US Treasury notes – thereby maintaining the value of the dollar, and concurrently making China its largest foreign lender,” he notes.

By the beginning of 2019, America’s debt to China had reached 1.12 trillion dollars. “This was facilitated by lower prices for Chinese goods,” David Lane says. On the one hand, “American consumers have benefitted from lower priced goods, and American companies, with subsidiaries or suppliers in China as well as retailers in the USA, have profited. On the other hand, the flight of production to China and other Asian countries has led to significant loss of jobs – the number of employees in US manufacturing industry has fallen by 34 per cent between 1998 and 2010. Financially, Chinese ownership of US debt gives potential influence over US financial policy, as a blanket sale of Treasury notes would weaken the dollar and possibly lead to a rise of US interest rates making lending more expensive.”

To preserve its superiority, America can no longer manage by “soft power” alone and has begins to use “hard power” with elements of military and economic pressure to slow down the geo-economic processes that are losing controllability, as well as globalization, which strengthens China’s position.

The new tariff policy was chosen as the main instrument for restraining the expansion of the Middle Kingdom, and in 2018 push came to shove. President Trump imposed new import duties on $50 billion in Chinese goods. China responded by mirroring the move, introducing its own duties on US goods worth the same amount. Then the Trump administration introduced an additional 10% duty on $200 billion in imports of certain goods and threatened to raise the rate to 25% in the future. China responded by imposing duties on imports from the United States another $50 billion. Following this, Washington announced plans to impose duties on all imports from China. In May 2019, the United States imposed a 25% duty. China responded by also raising duties on US imports. Beijing and Washington have conducted 11 rounds of consultations on the resolution of trade contradictions, but it still hasn’t been possible to find a way out of the impasse.

High hopes were pinned on the meeting between US President and the Chinese President during the G20 summit in Osaka, Japan on June 29. At the summit, Donald Trump promised that he would not introduce any new duties on Chinese goods yet, and expressed confidence that Washington and Beijing had a good chance of concluding a trade deal. Xi also stressed the need to overcome the difficulties encountered that did not correspond to the interests of both sides.

Upon returning to the White House, Trump announced that the US-China negotiations had already resumed. However, according to the president, China had enjoyed a “big advantage in trade with the United States for ‘many years.’ So obviously you can’t make a 50-50 deal,” Trump said. “It has to be a deal that is somewhat tilted to our advantage.” But will China agree to such conditions?

At the July 1 briefing, Chinese Foreign Ministry spokesman Geng Shuang said: “An important basis for the resumption of consultations is equality and mutual respect. What concerns is the way in which to resume negotiations, and that this done, <...> the trade and economic delegations of the two countries are currently discussing specific issues. ” A deal for the Americans is possible only if it is partial towards them, while China insists it will only work on equal terms.

It should be noted that the understanding of equality among the Chinese does not always coincide with the point of view of its partners. “China’s mercantilist industrial policies have drawn a similar response from much of the world: the EU, Japan, Australia and other nations,” says Valdai Club expert and senior researcher at the Scowcroft Center for Strategy and Security Robert Manning. Already there have been complaints to the WTO regarding Chinese demand for the compulsory transfer of technology and restrictions on foreign direct investment in key technology-related industries. Therefore, in his opinion, these countries could support the US position in a trade dispute.

Perhaps Trump had hoped that raising tariffs and strengthening economic threats against China would push Beijing to conduct reforms that would reduce trade imbalances and strengthen the position of American companies in the country through the abandonment of subsidies and the abolition of mandatory technology transfer and intellectual property rights. But in the context of globalization, the world has turned into a system of interconnecting vessels and an increase in tariffs caused panic in the financial markets at the end of 2018. It became obvious that it would be better for both parties to make a deal: Trump would do so to avoid a recession and the closure of the Chinese market for American farmers, which could ruin his election campaign in 2020, and Xi Jinping could maintain China’s economic growth and attractiveness for foreign investors.

Clifford Kupchan, chairman and research director for Eurasia Group, a consulting company, argues that if the dispute is not settled, the American agricultural sector, aircraft manufacturing industry and other industries will suffer losses. In addition, it promises major trouble for American companies whose supply chains are tied to China.

China, meanwhile, cannot avoid a recession. Its products will become less competitive in the US market, and access to American technology and know-how will be reduced in the country. It is also possible that, in addition to another increase in duties, Washington will begin to put pressure on its trading partners, pushing them to reduce cooperation with some Chinese companies. This mechanism of secondary sanctions has already proven its effectiveness in the case of Iran. Many of Iran’s European partners, for fear of losing access to the US market, have frozen economic ties with Iranian companies.

To minimize costs, «Chinese firms are withdrawing from supply chains that are susceptible to U.S. sanctions, seeking instead to produce inputs either domestically or within China’s sphere of influence», said Valdai expert and Hamilton College International Relations Professor Alan Cafruny. American companies have also begun to cut supplies from China, and are choosing alternative sources. “Notably, production is not generally returning to the United States: notwithstanding Trump’s campaign rhetoric the “trade war” has less to do with a promised domestic reindustrialization than the drive of U.S. corporations to expand markets and profits worldwide and retain global technological leadership,” adds the expert.

Despite all the possible difficulties, China probably will not abandon its development model, which Xi Jinping called the “new Great March.” It will not give up its claims to a new place in the global economy. This will lead to a further aggravation of the contradictions between the countries and the lowering of the “economic iron curtain”.

The protracted US-China trade conflict will send shockwaves that will sweep through the entire world economy, triggering falling prices in stock exchanges not only in the US, but throughout the world. According to IMF estimates, the damage from such a slowdown in economic growth in 2020 will reach 0.5% of world GDP and amount to $455 billion. 

How to Help, Not Hinder Global Growth Christine Lagarde
As the G-20 finance ministers and central bank governors gather this week in Fukuoka, they can take inspiration from their host city. Known as Japan’s “startup city,” Fukuoka has flourished in recent decades by embracing trade, innovation, and openness.

This exceeds, for example, the size of the South African economy. In addition, perhaps amid the conditions of an economic downturn, Trump will continue to raise trade duties for other, even more loyal partners.

At the macro-regional level, the United States policy, particularly the withdrawal from the Trans-Pacific Partnership Agreement (TPP); slapping tariffs on key allies such as the EU, Canada and Japan; and the transition to managed trade have substituted multilateralism as a means of cooperation with a series of bilateral agreements. US allies and partners in Asia and Europe have begun to make more and more serious efforts, in an attempt to protect themselves from the risks associated with uncertainty, says Robert Manning. “Japan pushed forward CPTPP without the US, the EU is frantically signing trade agreements, the EU-Japan trade pace is one important milestone of this trend toward a post-American trade system. This hedging extend to the security realm, as Trump’s denigration of allies and alliances has raised growing doubts about US reliability.”

The restructuring of the international trade system may be one of the harbingers of a future crisis. According to Russia’s Minister of Economic Development Maxim Oreshkin, who participated in the Valdai Club discussion on the eve of the G20 summit in Japan, the coming crisis will be fundamentally different from the previous one in terms of causes and consequences. The period when trade was the driver of the global economy, and created new value added through the division of labour, is coming to an end, the minister explained. Under these conditions, there is a demand for a new model of globalization.

Oreshkin cited the growth of tariffs and restrictions as well as access to technology and education as being among the current risks to the global economy. When goods move freely, and technologies are prohibited, technological monopolization starts to emerge among the individual countries.

To break the deadlock in the trade dialogue between the US and China, one needs to understand the true causes of this conflict. Chief among these was Beijing’s demand for a revision of the global geopolitical picture and China’s place in it. Beijing and Washington have different views on how states should participate, given the new rules of the game.

In order to preserve US trade advantages in the 21^st century, the Trump administration is trying to maintain a certain level of excellence in high technology industries. These primarily include the production of engines and vehicles, as well as new materials and electronics, as well as genetic engineering and pharmaceuticals.

On May 15, 2019, the US authorities banned the Chinese telecommunications giant Huawei from selling its products on the US market and imposed strict restrictions on the sale of Huawei’s products to American firms. This move further heightened tensions between the US and China.

There is every reason to believe that a technological war will serve as a continuation of the trade war. Russian President Vladimir Putin, speaking at the St. Petersburg International Economic Forum in June 2019, touched upon the situation surrounding the Chinese company Huawei and defined it as the “first technological war of the upcoming digital economy”.

The Trump administration does not want US firms, especially those that are developing innovative or “breakthrough” technology, to depend on Chinese suppliers. This entails significant threats to the entire global economy.

“Decoupling will produce slower innovation,” says Clifford Kupchan. “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’.” A division of the world according to technological standards will begin.

Global competition between Washington and Beijing will intensify regardless of progress in resolving trade issues. Communication and quantum technologies, artificial intelligence, robotics and bioengineering are areas in which the struggle for dominance in the global economy will unfold in the coming decades between the United States and China, according to Clifford Kupchan. It will be difficult, if not impossible, to avoid structural and dangerous competition.

As a result, the West will have to admit that the economic pole of the world has shifted to China and the interests of this giant cannot be ignored, since the cost of the conflict may be unacceptably high for all.

Is introducing tariffs or raising existing ones worth it? In any event, is it possible to win a trade war in the context of global peace? It has long been impossible to unequivocally say exactly which country a particular product is made in. In the context of globalization, production processes are widely branched out and may cover dozens of countries without reference to borders and distances. Building barriers to the free movement of goods and capital leads to costs for all parties. This has been proven repeatedly in history. Even the 25^th President of the United States William McKinley, originally an ardent supporter of protectionism, finally came to understand that “trade wars don’t bring profits” and that benevolence and friendly trade relations can help to avoid confrontation. After more than 100 years, his advice remains relevant and is worth listening to.