U.S. President Donald Trump is determined to fight and win his trade war with China. China is equally ready to stand up to the president, and now believes that far more is at stake than the balance of trade. Positions are becoming entrenched and ego, as much as national interests, are engaged. A trade war between the world’s two largest economies will be titanic, with spillover effects no matter how it is resolved. Japan, like many other countries, cannot sit out this struggle, and must be prepared for pressure from both sides, no matter who prevails.
Trump has held few steady beliefs throughout his life, but one of them is the certainty that its trade partners exploit relationships with the United States and exact a damaging toll on the country as a result. He pledged to transform those relationships and better protect U.S. jobs and businesses. He is convinced that American companies and foreign businesses should invest in the U.S. rather than elsewhere — in blissful disregard for the meaning and significance of comparative advantage — and he is using every tool in the presidential toolbox to achieve that objective. (And it is precisely because the president’s power to impose tariffs is relatively unchecked and is something that he personally can do that Trump is so enamored of the tactic.)
Since Trump took office, his administration has imposed tariffs on a wide array of products with nearly no distinction made toward, or deference given to, allies. This indiscriminate approach threatens to undercut Trump’s objective: The real problem, which even bitter opponents of Trump and avowed free traders concede, is China’s predatory policies and a U.S. policy that lumps all countries together as “unfair traders” prevents the formation of a broad-based “free and fair trade coalition” that is the only hope for forcing Beijing to change course. Instead, China’s leaders paint Trump as the threat to the global trade order and seek to enlist other governments to their side in these trade fights.
A series of tit-for-tat measures has enfolded between Washington and Beijing throughout the year. With the imposition of additional tariffs this week on $200 billion worth of Chinese goods to try to remedy the U.S. trade deficit with that country, which reached $375 billion in 2017, roughly half the Chinese imports to the U.S. are now being sanctioned. China has retaliated, but Trump is undaunted. Since China imports much less from the U.S., it cannot match Washington’s tariffs. Thus, Trump tweeted that “We are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing.”
While there is near unanimity among experts, officials and businesses working in China that the business environment there is not level and that domestic companies enjoy unfair advantage, there is a growing belief in China that more than trade policy is at stake. Chinese are convinced that the U.S. seeks to contain their country, to slow or stop its growth and prevent them from assuming their rightful place in Asia and the world. As China Daily commented, “The United States’ intention to disrupt China’s development process has been thoroughly exposed.” China’s Ministry of Commerce noted that the latest U.S. tariffs were “threatening China’s economic interests and security.”
Japan is being affected by many of these forces and will find itself whipsawed however this works out. Japanese businesses, like those in the U.S., are damaged by Chinese policies that provide domestic companies a leg up in the home market. They fear the forced expropriation of intellectual property and subsequent losses in third-country markets. At the same time, Tokyo is as troubled as Beijing by Trump’s preference for unilateral action, his disdain for multilateral trade mechanisms and its resort to bilateral trade negotiations that focus more on outcomes than principles and equality of opportunity.
Tokyo is fearful that win or lose this fight with China, it is next in Trump’s sights. He has long complained about Japanese trade practices, and politicians here worry that a victory will encourage Trump to try to repeat his success with Japan — or that a stalemate would push him to challenge Tokyo in compensation.
There are geopolitical calculations as well. Prime Minister Shinzo Abe cannot afford to antagonize his chief security and diplomatic partner at a time of extraordinary regional turmoil, and the need for Tokyo and Washington to stay aligned is more pressing than ever. But Abe is also reaching out to Beijing and he plans to go to Beijing later this year for top-level talks; he does not want to pick a trade fight with a major trading partner and one whose interests in a global trade order at times are the same as Japan’s. And as trade between the U.S. and China slows, Japanese companies that produce in China or sell in the U.S. will be severely impacted. It is a recipe for a slow-motion catastrophe, one that we hope can be contained. At this moment, the outlook is bleak.