Editorials

A U.S-China trade war is just the start

There are two lenses through which to view the announcement last week by the United States that it is imposing tariffs on $50 billion in Chinese imports. The first is that it is another shot in an escalating trade war between the world’s largest and second-largest economies. The second is that it marks the beginning of a geopolitical competition between the two countries that is much more than a purely economic contest. The former interpretation is likely to prevail in most analysis, although the latter is a more accurate assessment of what is actually transpiring.

U.S. President Donald Trump has an affinity for trade sanctions. They are simple remedies for complex problems, he can take credit for their application, they are (relatively) easy to apply — subject to routine procedures and executive discretion — and (he believes) that the U.S. is relatively impervious to retaliation. After all, the president has tweeted that “trade wars are good and easy to win.”

In January, the U.S. president put tariffs on imports of solar panels and washing machines, and then in June slapped sanctions on steel and aluminum exports to the U.S. Those two moves did not target any particular country but sought to aid American manufactures in industries in which they alleged to be disadvantaged by unfair trade practices.

For Trump, no country takes as much advantage of the U.S as does China, at least according to his logic, which reasons that trade balances are proxies for trade practices. Since the U.S. had a trade deficit of $376 billion with China in 2017 — it imported $505 billion in goods and exported about $130 billion — it therefore is the biggest unfair trader and that must be remedied.

In March, Trump announced that he would impose tariffs of $50 billion on Chinese exports to the U.S. in retaliation for “unfair trade practices” and the theft of intellectual property. That prompted Beijing to put tariffs on 128 U.S. products, which inspired the U.S. the following day to publish a list of over 1,300 categories of goods it would sanction. The very next day the Chinese government responded with yet more tariffs on some of the biggest U.S. exports to China (autos, airplanes and soybeans), and Trump concluded a week of tit-for-tat actions by saying he was prepared to consider another $100 billion in sanctions.

By May, officials in both countries were talking openly of a trade war but they had commenced talks to end the hostility. For the most part, however, bilateral tensions were sublimated to geopolitical concerns: Trump said he was prepared to go easy on Beijing if it maintained pressure on North Korea and helped force Pyongyang to negotiate over its nuclear program. But tensions persisted as Trump rejected deals and argued ever more forcefully for unilateral action.

Failing to reach agreement, the U.S. last week announced it would proceed with $50 billion in tariffs. China promised to retaliate with tariffs of “equal scale, equal intensity” on U.S. exports from the U.S. and rescinded all its previous trade commitments. U.S. Trade Representative Robert Lighthizer said that in two weeks his office will announce restrictions on Chinese investments in the U.S., a move that is intended to spur negotiations and the opening of the Chinese market.

A close look at the targets of the U.S. tariffs reveals that they focus on industries related to China’s Made In 2025 plan, a national economic strategy to dominate the high-technology industries of the future. The Trump administration believes that Chinese theft of intellectual property is intended to advance that effort and U.S. officials acknowledge that the U.S. is seeking structural changes in China’s economy.

Japan has experience with such broad ambitions. At the height of trade tensions with the U.S. in the 1980s and 1990s, the two countries launched the Structural Impediments Initiative (SII) talks to better balance the bilateral economic relationship. Those talks had limited effect and problems were ultimately addressed in other ways, primarily the slowing of Japan’s economy.

There is unlikely to be any easy solution in this case. A slowing economy will increase pressure on Chinese decision-makers to fight the U.S. rather than acquiesce. More significantly, Made in 2025 is considered essential to Chinese growth and international ambitions. The program is a blueprint for national economic development and dominance in the critical industries of the post-industrial economy: cloud computing, artificial intelligence, robotics, 5G communications and the like. Pre-eminence in those industries is a step toward supplanting U.S. leadership in key economic and technological areas, and facilitate the expansion of Chinese influence and power. Those are the real stakes as Washington and Beijing square off over trade.