The Weapons of a Modern-Day Trade War
Let’s not sugarcoat it anymore. The U.S. and China are in a trade war. Two weeks after President Trump imposed broad tariffs on imports of steel and aluminum from China and other countries, he started the process of slapping punitive duties on tens of billions of dollars of Chinese imports and restrictions on Chinese investment in the U.S. In Beijing, President Xi Jinping was quick to retaliate, hitting U.S. exports of nuts, pork, and other products with tariffs and warning tougher measures could come. The Chinese Embassy in Washington, in a formal statement, pledged the country would “fight to the end.”
Economists and Wall Street bankers are providing estimates of what a trade war would cost in economic growth, jobs, and corporate earnings. But the bigger, long-term consequences are harder to forecast. Perhaps this trade war will be resolved through negotiations, as U.S. Commerce Secretary Wilbur Ross, an architect of Trump’s policy, has suggested. Talks between the two sides already appear to be under way, behind the scenes and without the hyperbole. The crisis might dissipate into a big nothing, with Xi tossing a few concessionary crumbs at an impatient and inconsistent Trump, who may prefer quick, tweetable wins to the hard work of changing the Chinese trade practices that really threaten U.S. business.
But a darker possibility cannot be ruled out: This trade war may be a critical turning point in history, the moment when the irreconcilable ideological and economic differences between the world’s two most important countries burst into the open. In that case, the world may never be the same.
Some experts would argue that such a conflict was inevitable—that as a reigning superpower, the U.S. will at some point face a confrontation with an up-and-coming one, as has happened throughout history. Destiny or otherwise, today’s trade war is a result of major policy changes in China and the U.S. Trump and Xi have both staked their political futures on making their nations “great again,” resulting in a clash of nationalisms with potentially dire consequences for everybody. However the current trade spat works itself out, its fundamental causes aren’t going away.
Trump is breaking with decades of U.S. foreign policy designed to avoid just such a conflict. Ever since Richard Nixon met Mao Zedong in 1972, Washington’s strategy has been to coax China into the international order crafted by the U.S. and its allies after World War II. Trade and investment would bond the country to Western democracies. The U.S. opened its huge consumer market to Chinese exports and invited Beijing into the foundational institutions of the global economy—the International Monetary Fund, the World Bank, and the World Trade Organization—to give Red China a stake in the free world’s economic system. The whole idea was to cooperate with Beijing’s quest for economic development, to transform it from potential adversary to ally, and, possibly, from dictatorship to democracy.
To Trump, that strategy was an historic mistake that allowed the country to grow wealthy and powerful at the expense of the Western world. “I blame the incompetence of past Admins for allowing China to take advantage of the U.S.,” he tweeted in November. Rather than encourage China to integrate further into the global economy, Trump is trying to limit its influence—and even reverse it.
Those opposed to his “America First” agenda may cringe. Advocates of the West’s pro-integration approach can point to critical successes. China—now the world’s largest exporter—did become an integral part of the global economy, and its momentous ascent has so far been remarkably peaceful. For much of the past 40 years, the country seemed to be moving in the “right” direction—toward a more market-oriented economy and a more open society.
That case has become harder to make. Part of the reason is purely political. Many politicians in the U.S. are fixating more on the perceived downside of China’s rise—supposed losses of jobs, industry, and competitiveness—and less on the benefits of lower prices to consumers and expanding business opportunities to U.S. corporations. Also fueling Trump’s change of course is real frustration at major U.S. companies over the slow pace of market-opening reform in China and their persistent ill treatment by Beijing’s bureaucrats.
A much bigger factor is Xi. Newspaper headlines may blame Trump for setting off the current trade war. But that’s not entirely fair. Xi is just as culpable, perhaps even more so. Like Trump, he’s also broken with his predecessors. China was never really following the path the West anticipated. It borrowed the tools and trappings of capitalism while dispensing with the liberal political, economic, and social principles that have traditionally accompanied it. But earlier regimes were at least slowly allowing the market and private sector more influence in its still-state-led economy. Xi has turned toward more nationalistic policies. He’s painted himself as a national hero, a defender of Chinese interests against a bullying West who’s destined to return the country to its proper place on the world stage. Trump calls his program “Make America Great Again”; Xi labels his the “Chinese Dream.”
Sure, Xi spouts the usual promises to continue “opening up” and to champion globalization. But in real life, he’s dropped even the pretense that China is heading in the “right” direction. His regime is regressing into a one-man dictatorship. A national congress in March amended the constitution to allow him to serve for life. He shows little regard for the rules and norms of the global economic system, preferring to capitalize on the openness of Western economies while dragging his feet on reciprocating that openness. He’s creating rival institutions to those of the West, such as the Asian Infrastructure Investment Bank, a multilateral lender akin to the World Bank. While blathering on about pro-market reform, Beijing is intensifying Communist Party influence over business and heavily subsidizing many high-tech companies to give them an advantage over Western competitors.
This dynamic—rising nationalism in China and defensiveness and grave doubts about globalization in the U.S.—will surely outlast today’s trade tussle. No longer content to join the U.S.-led world economic order, China is striving to change it to suit its own interests. All Trump is doing is calling out what’s become obvious: China is not a partner, but a competitor, and it has to finally be treated as such.
The big question is: Now what? There’s a possibility that these two economies are so intertwined and interdependent that they simply must find ways of getting along. That implies that the old policies—of encouraging greater integration—will endure in some form and that disagreements between the U.S. and China will remain under negotiation and, thus, under control.
At the same time, China’s trade practices are essential to its national agenda. Its leaders recognize that the country’s economic future depends on their ability to upgrade its industries and foster technological innovation, and they’re unlikely to significantly alter their industrial program under any circumstances. Trump may be able to pry open a market here or remove a regulatory hurdle there. Maybe he can even prod Beijing into treating U.S. companies more “fairly.” But he’s not likely to persuade Xi to give up his Chinese Dream.
Nor will his successors. Trump will eventually leave the White House, and the next president may take a softer approach. But the fundamental challenge from China isn’t likely to vanish. The danger that the world could again degenerate into competing blocs—one democratic and free-market, the other authoritarian and statist—will remain a terrifying prospect. Washington invited China into its world order. Now China could destroy it.