In order to make peace, first you have to want it.
That’s a major barrier to any de-escalation of the simmering U.S.-China trade war. The economic Defcon alert went up a notch at midnight on Friday, as U.S. tariffs on $200 billion of Chinese imports were lifted to 25 percent from 10 percent and Beijing promised to retaliate. People familiar with the matter told Shawn Donnan, Jennifer Jacobs and Kevin Hamlin of Bloomberg News that there had been little to no progress in talks that started Thursday.
The problem for those hoping for a speedy resolution now is that players on both sides seem alarmingly comfortable with the deteriorating status quo.
This is most obvious in Washington. President Donald Trump this week declared himself “very happy with over $100 Billion a year in Tariffs filling U.S. coffers” and is confident the trade war is hurting China more than his own country:
“The reality is, with the Tariffs, the economy has grown more rapidly in the United States and much more slowly in China.” Peter Morici, Former Chief Economist, USITC
— Donald J. Trump (@realDonaldTrump) May 8, 2019
Indeed, in many ways it’s the tariffs themselves, rather than a hoped-for deal to replace them, that will best deliver the economic policy platform that put President Trump in power.
One of the more detailed policy proposals put forward by Republicans in Congress after the 2016 election was a border adjustment tax, a form of sales tax that would have been imposed on imports and domestically produced goods, but exempted exports. That plan fell by the wayside, but the emerging order doesn’t look so very different. If tariffs go up on the whole volume of Chinese trade, as the White House has been threatening, roughly a third of America’s non-Nafta imports will have a levy imposed on them. Should this pattern spread to other trading partners, the main difference from the border adjustment tax will be that no taxes would be levied on domestic production – a decent outcome in political terms.
The same populist calculation weighs against the agreement that U.S. Trade Representative Robert Lighthizer has spent months hammering out. A best-case deal would make China a more appealing destination for foreign investment by tightening up intellectual-property laws; cracking down on industrial espionage; ending forced technology transfers; reducing licensing and joint-venture requirements; and ending conditions that favor state-owned enterprises. It’s not hard to see why large U.S. multinationals might be tempted by reforms of that sort – but if you’re looking to make America great again by bringing jobs home, making China a more attractive place to do business seems a strange way to go about it.
In China, the calculus is less skewed in favor of escalation, but there’s still reason for Beijing to prefer that outcome. For one thing, domestic political considerations mean it’s unthinkable that Beijing could be seen giving in to American arm-twisting, even if it were capable of delivering on Washington’s demands (and, as my colleague Andrew Browne has written, following through may not be as easy as U.S. negotiators seem to think).
On top of that, the sectors most likely to be hurt by an extended trade conflict are precisely the ones that far-sighted economic planners want to leave behind to help China escape the middle-income trap. In an extended trade conflict, low-margin manufacturing of toys, furniture, clothing and final assembly of electronic goods would likely shift away from China to destinations such as Mexico and Vietnam. That’s not a bad thing for an economy whose desire to move up the value chain toward the manufacture of battery-powered vehicles, electronic components, aircraft, robots and medical technology is one justification for the trade war itself.
Trade hawks in Beijing can comfort themselves with the likelihood that while the immediate pain has been felt more in China, over the long term the U.S. would likely do as badly. The loss of integration with Chinese supply chains would mean that American manufacturing would also suffer, according to the International Monetary Fund, while both economies would end up experiencing a weakening in growth in the region of 0.5 percentage point.
Those numbers are small enough that it’s little surprise leaders in Washington and Beijing seem so prepared to fight on, especially with the wind of fiscal and credit stimulus at their backs.
Still, the world should still be concerned about the current spat congealing into a lengthy cold war. Deepening rifts between hegemonic powers are often the first warning signs of a hotter conflict. If China and America no longer want to make peace, we should be worried about where we’re all headed.