U.S. President Donald Trump opened up trade battles on multiple fronts these last few months, a trade war has officially begun on July 6 between China and the United States, the two world-largest economies. Indeed, after several months of threats, the United States has finally imposed 25% tariffs on $34 billion Chinese exports in order to protect the United States from China’s unfair trading practices and reduce the trade deficit between them. But it seems that such a war could be more harmful to the U.S. than China and is about more than trade. So, why has Washington set up a policy that could eventually harm more the U.S.?
Why Trump’s trade war should hurt more the U.S. economy than China’s
Trump’s trade moves against China have begun in January 2018 when he imposed a tax on solar panels and washing machines. He escalated tensions on March 1 when he decided to raise import taxes on steel by 25% and on aluminum by 10%. As a result, China decided on April 2 to impose tariffs on $2.4 billion in U.S. exports, the equivalent amount of Chinese steel and aluminum imports that the Trump administration had decided to tax. Then, the United States threatened China with a list of goods that could be hit with tariffs every time Beijing decided to respond. Finally, the trade war has officially started on July 6 with 25% tariffs on $34 billion Chinese exports. China has responded immediately by imposing an equivalent 25% tariff on $34 billion in American goods. But the trade frictions could go on with Trump’s new threat to impose tariffs on $500 billion worth of Chinese imports, almost all the goods China ships annually to the United States, whereas Washington has officially listed $200 billion of additional Chinese imports that could be subject to tariffs.
But this trade war could actually hurt more the U.S. economy than the Chinese one. Indeed, the new international division of labour leads to a spatial reorganization of good production process in various places all over the world. In the global value chain, where developed countries like the United States dominate the innovation process in which they invest a lot in Research and Development (R&D) to design new products, China’s main activity is to assemble components from countries all over the world in order to produce its famous “Made in China” products which are then exported to western markets and especially to the U.S. This is illustrated the best by U.S. multinationals specialized in computers, telecommunications devices and electrical equipment, which focus on marketing, design and innovation while outsourcing stages of the physical production process in order to benefit from an inexpensive production abroad. Thus, it seems American innovation and production stimulate a lot Chinese exports to the U.S. market and any product designed by the United States is made in China with components from all over the world, including from the U.S., the greatest example being the Apple products which are “designed by Apple in California” but “assembled in China”. As a result, China receives high-value-added inputs from the U.S. while exporting final goods with low shares of Chinese domestic added value. So, by putting tariffs on Chinese exports, Washington will hurt U.S. companies and U.S. technological competitiveness while China pays a fraction of the total cost.
Moreover, some analysts from the Peterson Institute for International Economics have underlined that Trump’s tariffs are also attacking intermediate goods and capital equipment that U.S. companies import for domestic production to remain competitive but also consumer goods. Thus, it should damage U.S.-based manufacturers dependent on Chinese imports to produce goods with inputs from the U.S. but also increase the prices for American consumers who depend a lot on Chinese exports to satisfy their demand. And if we add China’s countermeasures, it seems quite clear the trade war should damage more the United States than China, and even more considering the economic growth gap between both countries, China growing at 6–7% whereas the U.S. grows at 2–3%.
What is driving such a trade war with China?
Initially, U.S. President Donald Trump began the trade threats against its second-largest trading partner arguing tariffs were necessary to protect the United States from China’s unfair trade practices. Indeed, these past few months, the U.S. Trade Representative (USTR) led an investigation under Section 301 of the 1974 U.S. Trade Act and accused China of stealing American intellectual property and industrial secrets, of cyber espionage, and of acquiring American companies and technology through predatory and state-sponsored foreign investment. That explains, to a great extent, why the United States sees China as a threat to the liberal market system, “undermining the international order from within the system by exploiting its benefits while simultaneously undercutting its principles” according to the 2018 National Defence Strategy. But the U.S. Trade Act authorizes the United States to respond to a foreign government action that violates an international trade agreement and that burdens or restricts U.S. commerce, which is why the United States has initiated a trade war directly without using the WTO dispute settlement mechanisms.
The other reason given by the Trump administration is that the United States should no longer tolerate the trade deficit with China, which is almost $400 billion. However, according to Oxford Economics, if we consider the U.S. trade balance with China as a share of GDP, it has remained relatively stable since 2009.
However, the trade war seems to be about more than trade since the lists of Chinese goods produced by the White House that could be hit by tariffs include examples of sophisticated technology targeted by the “Made in China 2025” plan. This initiative, launched in 2015, is a 10-year national strategy aiming to develop high-technology and upgrade China’s manufacturing industry in order to reduce China’s reliance on foreign technology imports and compete both domestically and globally in advanced manufacturing. Ten strategically and technologically important sectors are affected such as cyber security, robotics, aerospace and 5G networks. Thus, this strategy could allow China to become a global manufacturing power able to drive global innovation and to move from a low-cost manufacturer to a direct added-value competitor. That is why it could pose a serious threat to U.S. dominance, competitiveness and leadership in these fields. As a result, slowing China’s progress in developing technologies is probably one of the main reasons for starting a trade war with China. However, as explained previously, Trump’s tariffs damaging U.S. companies’ competitiveness in a wide range of high-tech sectors, tariffs on Chinese exports seem not the right choice to counter the “Made in China 2025” Initiative.
Moreover, the Trump’s administration does not have to forget that the “Made in China 2025” Initiative is connected to the government’s long-term Chinese Dream which aims “the great rejuvenation of the Chinese nation”. Thus, any obstacle to this goal and its economic development could exacerbate the Chinese nationalism and lead to retaliation. That explains why China has taken measures against U.S. tariffs, accusing Washington of trade bullying and launching “the largest trade war in economic history”, and will respond to any other measure against its economy. Thus, such a trade war could lead to more hostile and aggressive foreign policies on each side and to a more complex and serious conflict between these two economic and military powers.
In conclusion, Trump’s tariffs are justified to prevent China’s unfair trade practices, especially the theft of U.S. intellectual property, and to reduce the huge trade deficit between both countries. But it seems that these measures are also aimed to hinder the “Made in China 2025” Initiative that could seriously threaten U.S. dominance and competitiveness in high-tech sectors. However, some studies reveal that such a trade war with China will harm more American interests than its targets. Indeed, these tariffs will damage a lot the U.S. economy, companies and technological competitiveness while being ineffective to prevent China’s high-technology aspirations. So, the United States does not seem well prepared to counter China in the coming long-term strategic competition between both countries, announced in the 2018 National Defence Strategy.
But Trump’s protectionist policy could be even worse for the United States, with the risk of alienating its allies. Indeed, the trade war with China should damage American allies involved in global supply chains. But also, the trade battles initiated by Washington with the European Union and Canada for national security reasons have heightened tensions between them and could deteriorate tremendously their relations, particularly with Washington’s decision to sue them at WTO for retaliation against U.S. tariffs on July 16. So, Trump’s hostility to globalization could be extremely harmful to the United States’ economy and its leadership on the international stage.