Trump Can't Win a Trade War Alone
As U.S. President Donald Trump prepares a wide-ranging package of tariffs and investment restrictions targeted at China, a trade war between the world’s two most important economies looks unavoidable. On the face of it, the U.S. might seem to have the leverage it needs to win. Since it runs a huge trade deficit with China, the Chinese have a lot more to lose.
But, there’s a flaw in Trump’s logic. He appears to have an outdated and exaggerated view of how big a role the U.S. plays in the global economy. By overestimating American economic power, he’s also greatly overestimating his chances of compelling China to change its trade practices.
True, the U.S. remains by far the world’s biggest economy. The next largest, China, was only 60 percent as large in 2016. And the U.S. plays a massive role in international trade. It was the world’s biggest importer and second-largest exporter in 2016. As China’s top customer, the U.S. retains a great deal of influence over Chinese trade and employment.
At the same time, though, America’s economic clout isn’t what is used to be. The rise of economies from Japan to India have inevitably whittled down U.S. power in relation to other nations. Back in 1960, the U.S. accounted for 40 percent of world gross domestic product; in 2016, the share stood at about a quarter. Growing wealth in emerging economies has opened up all sorts of new markets for exports and investment and, increasingly, those countries are trading with each other. In 2016, trade between Asian countries topped 57 percent of their total, a record high, while the share of intra-regional foreign direct investment rose to 55 percent.
As a result, China will have many more alternatives than before if it needs to find replacements for U.S. customers. Chinese data show that Europeans buy almost the same amount from China as Americans do, while the rest of Asia absorbs twice as much. Historical figures reveal that while Chinese exports heading to the U.S. increased nearly eight times between 2000 and 2015, those to India and Vietnam surged 37 and 43 times, respectively, over that same time period.
And let’s not forget that China’s domestic market has also become more important to Chinese growth. China’s already the world’s biggest market for products such as cars and smartphones, and its middle-class consumers are well on their way to supplanting U.S. households as the world’s most important shoppers. Overall, external trade just isn’t as critical to China as it once was. Exports fell from a peak of 37 percent of GDP in 2006 to less than 20 percent in 2016.
All this tells us two things: First, the U.S. can inflict a lot of pain on the Chinese economy. And second, it still may not be enough. Trump would have a much greater chance of succeeding if he coordinated his efforts with other major Chinese trading partners, nearly all of whom are U.S. allies. Close friends Japan, South Korea and Germany are all top 10 destinations for Chinese exports. If these countries took similar action against China as Trump, they could squeeze leaders in Beijing with much greater force.
At least some U.S. allies might be willing to enlist in such an effort, especially if their actions were coordinated and well-targeted. The European Union and other countries, for instance, have also been moving towards restricting Chinese investment. As recently as December, the U.S. had pledged to work with the EU and Japan to combat Chinese excess capacity in industries such as steel, as well as policies that force foreign companies to transfer valuable technology.
Without such a collective strategy, China could play the U.S. against its own allies. U.S. partners in Europe and Asia would benefit from Trump’s war without suffering any of the economic pain. A go-it-alone approach could leave the U.S. isolated, allowing the rest of the world to trade with and invest in China while America’s farmers, workers and companies are singled out for Chinese retaliation.
That should be cause for concern in Washington. Trump is more vulnerable politically than Xi. He's already coming under pressure from business associations and economists to reverse course -- pressure that will only intensify as the impact of Chinese actions is felt nearer November's midterm elections. By contrast, any complaints Xi hears will come behind closed doors. He controls the press and doesn't have to worry about elections. And he can marshal vast financial resources to keep Chinese factories running and workers employed regardless of economic conditions -- aid U.S. firms are unlikely to receive.
Unfortunately, the U.S. president seems to have no plans to work with anyone outside of his own White House in his coming confrontation with China. Even worse, his trade policies -- steel tariffs and his abrasive stand on existing pacts like the North American Free Trade Agreement -- have already alienated many potential allies. On Saturday, German Chancellor Angela Merkel agreed with China’s President Xi Jinping to address the problem of excess capacity in the steel industry through the G-20, in an apparent slap at Trump. If he tries to fight this war alone, the U.S. leader may find himself in a battle he can’t win.
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Nisid Hajari at firstname.lastname@example.org