If you are expecting the “tariff war” between the United States and China to end anytime soon, much less in a trade agreement, please don’t hold your breath.
Here is how Steve Bannon, former White House Advisor to the Trump Administration and co-architect of the current U.S. China policy explains its intent –
“Tariffs are a proxy to a great economic war we are engaged in with China… There is no middle ground… Only one side can win.” (PBS Frontline documentary, “Trump’s Trade War”)
This binary world view held by the Trump Administration is the complete antithesis to the “win-win” approach needed to successfully conclude a trade agreement. And from all reports, these negotiations have been about more than trade. The Trump Administration is trying to get China to agree to changes in the very way it operates its economy. Chinese officials, not stupid, realize this and are probably playing for time but with no plans to agree to what the Trump Administration puts on the table. Just as companies are busily trying to rearrange their supply trading routes the Chinese may just be dragging things out until US markets can be replaced. And a look at the numbers suggest that, in the long term, time is probably on China’s side –
- Internal market: China has a population and internal market of 1.4 billion, ten times the size of the entire US population of just over 300 million. China’s middle class alone is larger than the entire US population.
- External markets: Unlike the US which seems bent on dismantling its trading relationships, China is negotiating an ambitious Regional Comprehensive Economic Partnership (RCEP) Agreement with 16 Asian-Pacific countries, and has embarked on an even more ambitious Belt and Road Initiative of infrastructure investment and development projects circling the globe. Meanwhile, the renegotiated US-Mexico-Canada Agreement (USMCA) is floundering on US refusal to lift steel and aluminum tariffs on even its closest trading partners.
- Vision: China has been preparing to assume its place at the top of the world economic pecking order, by fair means and foul, and remains focused on its “Made in China 2025” Policy. The U.S., on the other hand, seems focused on trying to force China to play by US rules in an effort to stop the inevitable. But time spent trying to stop China is time not spent on a plan for US economic growth and prosperity. To illustrate, during the years (2008-2014) that US car manufacturers were being bailed out by the US Government, China emerged as the world’s largest manufacturer and purchaser of automobiles.
- Growth: China’s economy has been growing twice as fast as that of the US (although both economies will undoubtedly be negatively impacted by the tariff war). Remember how amazed you were by China’s opening and closing ceremonies in the 2008 Summer Olympic Games? By the Fall of that same year, the U.S. was in the financial crisis which would spiral out to the entire world.
As the Frontline documentary makes clear, because of the 2008 crisis, in China’s eyes the U.S. lost prestige and any grounds to lecture China about the superiority of its economic system. So, don’t expect China to cave into U.S. demands.
What we can hope for is that the U.S. gets as focused on rebuilding its trading relationships and establishing its own vision for its future. Sadly, this seems unlikely to happen any time soon. And in the short-term, there are no winners on the current path, whose negative repercussions may yet spread out to again encompass the rest of the world.