View from Washington: Can Trump win a trade war with China?
The odds are against him.
“And here we… go.”
Comparing US President Donald Trump to Heath Ledger’s Joker might seem unfair. The Joker did seem to follow logic, albeit twisted logic. Viewing both as agents of chaos does find echoes in the US President’s decision to go ahead and impose the first $34bn (£26bn) in a potential $50bn package of trade tariffs on China - with the threat of more to come.
Even before the tariffs became a reality, the affair had become personal. China had warned that its response would target US exports such as soyabeans and corn that are mainly produced in Trump-voting states. The US is explicitly targeting the Made in China 2025 (MIC25) programme, a cornerstone of Chinese President Xi Jinping’s economic policy (I will now stop short of suggesting that Xi has an analogue in Batman).
Trump’s gambit has little support among economists. US business representation in China is also officially opposed, despite concerns over IP theft and an increasingly difficult working environment.
Meanwhile back home, some US manufacturers have noted that while Trump claims to be on their side, many of his tariffs apply to equipment they import from China (e.g. machinery for making products in glass, paper, plastic and rubber; ball bearings; lifting equipment and industrial magnets), threatening to inflate factory-gate prices.
There is the further irony here that Trump wants US manufacturing to increase output to replace China sources, but will also often only be capable of doing that by, erm, buying manufacturing equipment from China.
However, the first wave of US tariffs has sought to avoid consumer products, so the voters will not see an immediate effect unless they want an imported car or one of Google’s Nest thermostats.
However, the greater and broader concerns are about what happens next. What is the risk of escalation? And who might blink first? Let’s take China first, because its position is the least understood.
Its response has been swift and backed up by some typically bellicose rhetoric. Trump, the Chinese Commerce Ministry declared, “has launched the largest trade war to date in economic history.” More important than the words are China’s decision to immediately impose reciprocal tariffs (a soyabean shipment was dashing to port there as I wrote this) and the country’s well-articulated belief that it has the better weapons.
First, China’s dependency on exports to the US is declining as its economy grows. Some forecasts state that domestic consumption could be three times greater than exports to the US in dollar value within five years. With that in mind, the official line from Beijing is that the initial Trump tariffs represent just a 0.2 per cent hit to GDP – not nice but, if you believe that, manageable.
Then, China believes it has other ways to hurt US business without enacting new tariffs. These range from supply-chain disruption in markets where it is a global lynchpin (regardless of whether the products involved are covered) to asking its population to boycott the many high-profile US brands and retailers operating in the Middle Kingdom – mobile phones may not yet be one of Trump’s tariff categories, but Apple still has cause for concern.
Third, China believes that Trump’s ultimate threat – the imposition of tariffs across all $500bn of its exports to the US – is a paper tiger. The critical point is that China itself accounts for only about a half to two-thirds of that number according to various analyses. The rest is made up of goods it imports to add to finished or semi-finished goods (semiconductors are a good example, with China importing $50bn-worth from Taiwan alone every year). Complex global supply chains, you know.
By this measure, Beijing reckons that Trump will come under huge pressure not to trigger a domino effect across South East Asia. Even if he does go the whole hog, the damage to Taiwan’s economy specifically could give China the opportunity to offer a ‘rescue package’ that brings the prospect of reunification much closer. Every cloud and all that.
Finally, though, there is the targeting of MIC25.
Trump wants to hurt China’s ambitious drive for technological independence to force the country into line. The problem with that is China may just swallow having to pay more for what underpins the programme, provided that desired independence can be achieved in short order.
Let’s take another example from semiconductors. China currently has more than 25 fabs of various sizes undergoing expansion, upgrades or greenfield construction. Taking the ‘traditional’ view, this looks insane. How can the chip market sustain such an expansion in capacity, even allowing for growing Chinese consumption? Well, it almost certainly can’t.
Now look at it this way. MIC25 is largely about China developing national IP. For chip design, its universities are investing massively in local variations on the open-source RISC-V architecture, a direct rival to ARM, x86, MIPS and others. The government wants the resulting silicon to be manufactured at home (an important extra element here is that the government and military are expected to be major consumers, so security issues also apply). China wants to build a critical mass of chip-manufacturing expertise so that it can no longer be told to wait for access to the latest processes but can create its own.
I don’t offer this example to suggest that China’s fab plan will be successful. The local sector has a rocky history and this does look a lot like a sling-it-and-see-what-sticks exercise. What it does illustrate is intent and a willingness to support that with massive capital investment. “Another 20-odd per cent, you say. Who do I make the cheque out to?”
So what about Washington?
Right now, Trump’s arsenal looks much weaker by comparison, though he is not entirely without some big guns. The biggest come from questions swirling around the true state of the Chinese economy.
GDP growth has slowed and there are also worries about the economy’s exposure to both shadow banking and a serious housing bubble that is seeing the price of Beijing and Shanghai apartments match those in San Francisco and New York.
A number of Trump’s advisors look back to how President Ronald Reagan effectively bankrupted the Soviet Union into submission in the 1980s. They don’t want to go as far with China, but they do argue that the Beijing government still faces underlying economic problems that could force an early capitulation.
A second factor is that Trump has more supporters here in US industry than may be assumed. The President’s policies on immigration and science anger many in Silicon Valley and beyond, but his move to beard China is seen as long-overdue.
Chinese companies’ theft of intellectual property been a running sore for far too many years, but more recently US inward investors have been forced to accept terms for Chinese joint ventures that both force them to expose more of that IP and accept official Communist Party representation within their operations.
If Trump can force China to give ground on IP – and its theft has been a frequent theme in his speeches about the tariffs – even many of those companies that count China as fundamental to either their supply chains or their sales may be willing to trade some pain today for jam tomorrow.
Ultimately, though, there is little evidence that those countries that trigger trade wars achieve their goals. In 1930, the US erected protectionist barriers that were intended to put ‘America first’ and thereby end the Great Recession. The Smoot-Hawley Act actually prolonged it. Other countries reciprocated, US exports slumped and yet more factories closed.
Trump’s greater problem today, though, may simply be that the US is no longer the only game in town. Moreover, as the recent G8 Summit fiasco illustrated, he has been alienating countries that might have made natural allies over accusations against China of dumping and IP theft. Rather, he has been assembling tariff packages for them, too.
Brexit notwithstanding, the world is seeing either the economic rise of populous nations such as China or India and/or a consolidation into large trading blocs such as the EU and the Trans-Pacific Partnership in Asia. China’s One Belt One Road initiative may be nebulous, but also reflects the country’s drive to establish economic ties that specifically exclude the US.
Those considerations may lead Trump’s advisors and much of US industry to ultimately seek to stay the progress of the tariffs. The two questions that then arise are: “At what point?” and “Will he listen anyway?” Another quote from The Dark Knight sums up what many fear could happen, given Trump’s strategic track record.
“Some people aren’t looking for anything logical. They can’t be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.”