News & Analysis

US/CHINA TRADE WAR: A WINNING STRATEGY?

Containers and ships sit idle at the Port of Long Beach in this file photoShips and cargo containers in Long Beach, California. Photo: Bob Riha, Jr./Reuters

With the ongoing trade war causing highly volatile relations between the United States and China, new evidence is emerging that the PRC (People’s Republic of China) is reevaluating its position in the face of hardening American opposition.

Despite much bipartisan criticism of President Trump’s imposition of tariffs under Section 232, which allows the president to implement trade restrictions in the name of national security, the PRC appears to have been backed into a corner; the PRC proposes fewer retaliatory tariffs than those of US. The Chinese foreign ministry has also made statements saying that it intends to pursue remediation of tariffs through the WTO resolution mechanisms–mechanisms which the United States has a veto over.

Furthermore, Reuters reports that members of the upper echelons of the Chinese Communist Party have overplayed elements of Chinese nationalism in propaganda materials. Among these recipients of criticism is Wang Huning, a close associate of Chinese President Xi Jinping. Wang Huining has been a prominent advocate of what’s called the “China Dream”. It is reported that President Xi has come to believe that the image of China that Wang Huning crafted was excessively nationalistic, thereby hardening the American negotiating position.

While both sides stand to gain from resolving their trade differences, it is clear that China depends much more on trade with the US than the US does on it. According to the WTO, international trade makes up roughly 9% of US GDP. While this is by no means an insignificant number, this pales in comparison with almost three decades of export driven for China, from which it derives 38% of GDP; in 2016, China exported $447 billion of goods to the US, whereas the US exported only $125 billion of goods to China. This disparity can be used to at least partially explain why the PRC is hesitant to institute retaliatory tariffs proportionate to those of the United States.

This problem is made even more difficult for the PRC because of a key tenet of Chinese industrial policy: maximum employment is the prime state objective. While the US’s Federal Reserve is legally charged with managing inflation and unemployment in the name of economic growth, in China the employment rate is more seen as a way to prevent social unrest (OECD). This is a common feature of semi-authoritarian systems. For example, following the Obama administration’s final round of sanctions, Russia lowered its minimum wage by 25% to prevent the possibility of large scale social unrest stemming from widespread unemployment. This policy was successful, mitigating large scale layoffs, and preventing large scale popular protests.

1508319111906Chinese citizens rally to view President Xi’s speech at the Chinese Communist Party’s decennial meeting. Photo: Associated Press

The underlying objective of PRC trade policy–namely, to keep the populace employed and to retain net inflows of trade in order to stimulate internal modernization–makes China much more vulnerable to tariffs. When this is viewed in conjunction with recent internal developments in President Xi’s inner circle serves, it in some way to validates America’s unwavering trade policy and its doubling down on tariffs.

Anonymous voices in the PRC administration report that the economic outlook looks increasingly grim. Despite managing to present decent earnings this quarter, the Shanghai composite index has seen major outflows this year since January as domestic investors seek to reduce risk in the face of increasing volatility. This is likely to deepen over the year as current trade policy stances result in fewer future orders from US customers.

Additionally, it will become increasingly difficult for the Chinese government to prop up so called “zombie” or “golden rice bowl”  industries like steel and coal. These are already heavily in debt, and US anti-dumping actions will make their positions even more precarious. These industries represent are only a fraction of the indebted, dysfunctional sectors of the economy that threaten to halt China’s economic growth;  Forbes estimates that the Chinese economy carries a debt ratio of 328%, nearly triple that of the United States.

Deepening economic uncertainty may come to soften Chinese expansionism, as weakening economic growth impair the PRC’s drive to modernise its military and manipulate and economically exploit  developing countries, thereby diluting its ability to project power. This aggression has been evident over the past decade in the militarization of the South China Sea, and more recently with its use of its Belt and Road program to gain influence in partner nations. If a weaker Chinese economy diminishes these activities, Trump’s current strategy in trade with China would be further validated. Lowering American economic dependence on the PRC will further improve the capacity of the United States to pursue independent policy objectives, which will thereby expanding  our ability to spread American values.To this author, there is little doubt that such independence is more than worth the short term financial and political costs.

 

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