Why the U.S.-China Trade War is a Huge Mistake

June 28^th, 2018

Hot on the heels of a G7 summit that ended in acrimony between the United States and its allies, and a historic first meeting between U.S. and DPRK leaders, a third seismic event is about to unfold next month.

The impending U.S.-China trade war foreshadows huge geopolitical and economic repercussions for the world, if Washington fails to reverse its decision to impose a first set of tariffs covering over 800 Chinese products worth US$34 billion on 6 July.

China has swiftly indicated that it will impose retaliatory tariffs on U.S. imports and has called on other states to come together in opposing the administration’s provocative anti-free-trade actions.

The U.S. President has also declared that Washington would “pursue additional tariffs if China engages in retaliatory measures”, forewarning an escalatory slippery slope that could get unwieldy and out-of-hand rapidly – a particularly unnerving prospect considering that America and China are the top two economies in the world.

It should be clear to everyone – including economic advisors in the White House and the U.S. Trade Representative’s office – that a trade war benefits no one.

A Trade WaR Benefits NO ONE

The logical assumption is Washington calculates that its tariffs will hurt Beijing more than the reciprocal tariffs that will come.

Washington’s larger strategic purpose, however, is to counter the perceived threat posed by China to American intellectual property (IP) through its “unfair economic practices”, evident in Chinese industrial and technology transfer policies.

It stands to reason that Washington perceives the losses suffered over waging the trade war as more than justified in the long run – if Beijing agrees to rectify these ‘unfair practices’.

Why the U.S.-China Trade War is a Huge Mistake

The Politics of Trade – Why the U.S. Won’t Get Its Way

But the trade war is a huge judgemental mistake if that is indeed the envisaged desired objective.

It is neither practical nor reasonable to expect that China will be cowed by U.S. pressure to change its industrial and IP policies.

Three justifications back the conclusion that Washington is suffering from wishful thinking.

First, it is unwise to expect that China will back down when faced with the very first real test of its economic dominance – or, in fact, any concrete challenge from the U.S. in any manner since Beijing’s ascendance as a great power.

Thus far, in the security realm, Beijing’s enhanced assertiveness in its periphery regions has gone largely unchecked, be it in the South and East China Seas, the Taiwan Strait or the disputed territory of Arunachal Pradesh.

The United States have offered little beyond rhetorical assurance, declaratory statements and token responses – such as increasing the frequency of non-consequential Freedom of Navigation Operations in the South China Sea – toward its regional allies and partners that face territorial disputes with Beijing.

However, the administration has taken a more hawkish stance when it comes to trade matters that directly threaten U.S. economic interests.

It being the first tangible manifestation of great power competition between the two, the manner in which Beijing responds and the action it takes will be scrutinized by states for an understanding of the policy-making deliberations within the Chinese Communist Party (CCP).

Beijing will be wrath to appear weak to its neighbours in the face of American coercion.

How China responds to this provocation – by doubling down on or backing down from U.S. demands – will set the tone for future U.S.-China relations as the two powers seek a mutually acceptable modus vivendi.

The conflict over trade therefore presents broader geopolitical repercussions than economics; it potentially portends the manner in which future great power competition will take place.

With Chinese prestige and credibility on the line – for the first time since Beijing’s rise to great power status – the stakes are high, and it is foolhardy to assume that Beijing will bend over backwards to accommodate Washington.

Second, beyond the lens of power politics, Beijing has already sought to position itself as the victim of the Trump administration’s fickle trade policy.

The Chinese Ministry of Commerce said in a statement that U.S. actions “did not meet the current development trend of the world, harmed the interests of the people and enterprises of China and the United States, and harmed the interests of the people of the world”.

Believing that it holds the principled moral high ground and backed by global popular opinion among states that the initiation of the trade war runs counter to the free and open trade order, it is unlikely that China will back down.

Doing so would implicitly mean backtracking on the morals and values China has circumscribed to – since its economic opening – in the face of unreasonable U.S. demands.

This severely delegitimizes Beijing’s self-assessment as a credible counter to American hegemony.

It is therefore not conceivable that China accepts U.S. conditions – if only because it holds the moral advantage over Washington in this case.

Third, Beijing cannot acquiesce to American strong-arming because of the domestic optics that this would convey.

The CCP’s prevailing nationalistic rhetoric speaks about achieving the China Dream of the “great rejuvenation of the Chinese nation”, delivering the masses from poverty and avenging the ‘century of humiliation’ imposed by imperialist powers.

Backing down when challenged by one such imperialist power would be viewed by the Chinese as the state’s dignity being trampled upon and bullied – in full gaze of the world.

This calls into question the legitimacy and ability of the ruling CCP to lead the country toward the rightful restoration of its status as the preponderant power in Asia.

The potential domestic political repercussions would be a strong deterrent for CCP policy-makers against succumbing to U.S. trade pressure.

Implications of a U.S.-China Trade War

These three factors – great power politics, moral implications of backing down and domestic politics – paint a grim picture of the impending trade war.

Washington is unlikely to achieve its bottom-line of addressing the threats posed by Beijing on American IP.

Yet its actions will lead to the reinstatement of punitive tariffs, with knock-on effects on economic growth and unemployment in both countries.

More importantly, it could set the stage for a monumental collapse of the liberal trade order the U.S. constructed post World War II, decimate the already eroding American influence in Asia and cripple the global trade-dependent economy.

One can only hope that the Trump administration realizes the folly of this lose-lose proposition and rein in at the precipice – before a full-scale geo-economic crisis erupts.

Jansen Tham holds a Masters in Public Policy degree specializing in Politics and International Affairs from the Lee Kuan Yew School of Public Policy, National University of Singapore.

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