That misconception of how trade works has him convinced that because China exports more goods to the US (nearly $US440 billion last year) than America exports to China (about $US144 billion), China has more to lose in the trade war than the US.
“They’re playing with a pair of twos,” Trump has said.
Trade, of course, doesn’t work in that simplistic fashion. It delivers mutual benefit.
China gets the jobs and economic activity that its exports generate, while US companies and consumers get access to cheaper goods and equipment that the US doesn’t make or could only manufacture at prohibitive cost.
Americans enjoy a higher standard of living than they would if trade were balanced. If Trump’s tariffs halt the flow of cheap Chinese goods to the US, Americans will suffer reduced living standards, reduced growth and – because of the damage on importing companies and those US manufacturers reliant on imported components – reduced economic activity and employment.
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So, yes, if the trade war persists, China will lose export income, jobs and inevitably factories. Its economy will shrink to some degree. The US, however, will paradoxically suffer more, because of the size of its deficit and the extent to which Americans consume more and save less than the Chinese.
Last week’s International Monetary Fund revisions of its forecasts for growth, for instance, saw America’s GDP growth for this year revised down by 90 basis points, from the 2.7 per cent it was expecting in January to 1.8 per cent. China’s GDP growth was reduced by 60 basis points, from 4.6 per cent to 4 per cent.
It is easier for China to respond to slower growth by lifting consumption (which it needed to do anyway to stave of deflation) than it is for the US to replace the Chinese goods and equipment that it doesn’t have the capacity to manufacture itself.
Another way of looking at is to say that China will experience something of a demand shock because its access to a major market has been cut off. The US will experience – indeed, is already experiencing – a supply shock. The world saw how damaging a supply shock can be in the aftermath of the COVID pandemic.
It’s within Beijing’s control to stimulate domestic demand to offset the loss of external demand. There’s not much the US can do in the near to medium term to replace the supply lost from a country that accounts for almost a third of global manufacturing output.
If the US truly wanted to cut off imports from China and others, it should have spent some years building up its domestic manufacturing base, and its access to the critical minerals and other inputs needed, before launching an assault on global trade.
Chaotic and inept
Given how chaotic and inept the introduction of the tariffs has been, with changes being made on a daily basis as consequences for US industries that should have been obvious long before “Liberation Day” emerge, it is apparent that little intelligent thought was given to the practical effects on the US of a trade war on everyone before it was launched.
China will be hurt by the trade war. The consensus among investment banks seems to be that it could lose between about 10 million and 16 million jobs and its GDP growth could, in the worst case, be halved.
The US, however, could be plunged into a self-induced recession, trashing what was a healthy economy. Its worst case is a stagflationary recession: a sharp decline in growth that coincides with a rise in inflation caused by the shortages and higher prices of goods.
Trump’s “America First” isolationism, his axing of US financial and humanitarian aid to developing countries, his aversion to multilateralism and his trade war on allies, friends and foes alike have changed, possibly forever, the rest of the world’s view of America. He’s undermined trust in brand America.
China sees that as a generational opportunity. China has held trade talks with Japan and South Korea – two of America’s closest military and trade allies – about a trilateral approach to trade, has made overtures to the European Union (and Australia), and Xi himself has recently visited Vietnam, Malaysia and Cambodia, seeking to strengthen trade relations.
It’s not just an opportunity to diversify the markets for its exports which, after Trump’s 2018-19 trade war, it was doing anyway to reduce its dependence on the US.
With the US withdrawing from the rest of the world and the multilateral institutions that have supported global trade and American global hegemony, Trump has given China a unique window of opportunity to reduce America’s global influence and build relationships with countries that were America’s close allies, until they were hit by Trump’s tariffs.
Lots of bluff
China is trying to edge closer towards filling the global leadership vacuum caused by America’s abrupt retreat from globalisation and multilateralism.
There’s a lot of bluff in what Trump is trying to do, whether he understands that, or not.
He’s trying to coerce countries into one-sided trade deals. No doubt there will be some who fold, either because they believe the benefits of maintaining, or gaining, access to the US market outweigh the costs, or they are afraid of the implications for their broader relationship with America if they refuse to concede.
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Xi isn’t going to be bluffed or intimidated. He’d like to de-escalate and resume trading as normal, but doesn’t want to lose face by being seen to beg Trump for a ceasefire.
He wants the Trump administration, which has conceded that tariffs and retaliatory tariffs of the current magnitude can’t be sustained, to make the first move.
Xi isn’t dependent on elections and populism. He heads an authoritarian state and one in which trade war has ignited a nationalistic fervour of anti-Americanism, as it has done in Canada and elsewhere.
Trump, with his poll numbers diving as America’s vulnerabilities to the trade wars are starting to be exposed, and with the prospect of the midterm elections next year – at which he could lose control of the House – on the horizon, has the weaker hand to play.
Xi appears happy to wait for Trump’s bluff to be called by the increasing damage Trump’s tariffs will cause to the US economy and his administration’s standing. Time is on his side.
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