Veteran diplomats who have spent years toiling in the global trade trenches must feel as if they have been transported to an alternate universe where everything’s upside down. At least that would explain the striking role reversal of Washington and Beijing, as worsening trade tensions threaten to ignite a full-fledged war that could send the global economy into a tailspin.
The risk of such a grim outcome stems from President Donald Trump’s obsession with the huge U.S. trade deficit and his conviction that erecting barriers and bullying key partners is the way to fix it. To that end, he has embraced protectionism and threatens to quit the World Trade Organization, which sets and enforces the playing rules for the global game. Gone is Washington’s long-time pursuit of freer world trade and closer multilateral ties.
In the other corner, Beijing has emerged as the Great Defender of the global order, conveniently ignoring the fact that it has been a serial violator of international trade rules. It was Washington that opened the door to China’s admission to the WTO in 2001, in the hope it would push Beijing into mending its ways. Rather than working with other countries to toughen international standards, Trump would blow the whole thing up.
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Trade isn’t the only sphere where Trump, who operates in a zone largely devoid of knowledge, logic or sensible advice, has opted to shake up the status quo without a clue about what to do afterward. But it’s the one where his tunnel vision and poor grasp of economics could cause the most harm.
Contrary to Trump’s boast that trade wars are “easy to win,” a tit-for-tat tariff tussle with China could easily spread, causing considerable collateral damage, destabilizing currencies, cutting investment and slowing economic growth. As it is, more than half of Chinese exports to the U.S. are part of supply chains serving Apple and other American tech and automotive giants. Chinese labour assembles the pieces, but these are American products built for American companies.
After the Trump administration revealed plans to slap stiff duties on billions of dollars’ worth of Chinese electronics, machinery, aerospace products and myriad other industrial items, Beijing followed the usual playbook by releasing its own hit list. At the top were important Midwest farm products like soybeans (China is by far the biggest customer), booze, vehicles and other U.S. exports selected to cause the most political headaches for Republican lawmakers facing elections in November.
But Beijing has also been playing its free-trade-for-all card since just before Trump moved his China-bashing reality show into the White House. “We will continue to safeguard the international order and rules, and support free trade and the liberalization and facilitation of trade and investment,” Chinese leader Xi Jinping assured a financial conference after Washington fired its latest broadsides.
Xi also held out an olive branch to the American tweeter-in-chief, offering modest concessions that were already in the works. These include improved market access for financial firms, increased foreign investment in certain industries and lower tariffs on imported autos. He insisted that Beijing doesn’t seek trade surpluses, respects intellectual property rights (especially now that China has a growing number of its own tech patents to protect) and has no desire for an economy-dampening conflict. So the Chinese ended up staking out the high ground Trump had ceded, sounding oh-so reasonable, while waiting to see if he would walk back his threats.
Trump has a habit of doing just that, as he showed again last Saturday when he claimed success after U.S. and Chinese negotiators reached a shaky truce in the trade spat. Washington agreed to delay the punitive tariffs in exchange for promises of much higher imports of U.S. farm products and other stuff that China needs anyway. But the tensions remain unresolved. So markets have good reason to remain jittery. “When investors do not know under what terms they will be trading, when they don’t know how to organize their supply chain, they will be reluctant on investing,” warned International Monetary Fund chief Christine Lagarde in April. “Growth is being driven by more investment … and more trade. So why damage those two engines that are effectively working for growth?”
Why indeed? The answer lies in Trump’s primitive view of trade as a win-or-lose proposition. If China or Mexico or South Korea consistently sells stuff to the U.S. worth more than the stuff the U.S. sells to them, it must be because of lousy deals. Never mind that services account for about 80% of the U.S. economy and that this expanding sector typically produces healthy trade surpluses. That increased imports in the industrial world usually go hand in hand with growing economies and higher living standards. Or that Trump’s vaunted tax cuts will stimulate even more demand for imports, widening the deficit he complains so much about.
In the end, Trump, who often brags about his supposed deal making prowess, may pronounce himself satisfied with the modest Chinese moves, chalking the resulting truce up as the big trade win he desperately seeks. But while he focuses on protecting fading industries like steel and home appliances, the real economic threat lies in Beijing’s pursuit of world dominance in artificial intelligence, information technology, renewable energy, biotech and other critical sectors.
U.S. trade officials are well aware that this is the real battleground. And the way to meet this formidable threat lies not in erecting more self-defeating trade barriers, but in pressuring industrial countries to safeguard their own technological innovations and compelling China to adhere to international rules. It also means mustering support for revamping and better equipping the WTO to adjudicate increasingly complex trade and investment disputes.
Trump has gone out of his way to infuriate Washington’s closest allies while abandoning multilateral agreements like the Paris climate accord and Trans-Pacific Partnership, which was designed as a check on China’s global ambitions. He will never be able to lead this particular war.