The United States and China have fired the opening shots in a trade war that may be hard to stop.
Washington has published a target list of 1,300 items imported from China worth an estimated $50 billion that would be hit with an extra tariff of 25 per cent ("Notice of determination”, USTR, April 3).
Beijing has responded with a target list of 106 items imported from the United States worth a similar amount that would be hit by the same ad valorem tariff ("China retaliates for US tariffs”, Reuters, April 4).
The United States has appeared eager to impose tariffs to create leverage and force China into concessions on the bilateral trade deficit, intellectual property protection and forced technology transfer.
President Donald Trump has insisted trade wars are winnable and pushed his officials to increase the scope of the target list. For its part, China has appeared anxious to avert a trade conflict but threatened a proportionate response to any unilateral US action.
Both sides have been careful to leave time for further negotiations in an effort to prevent the tariffs from taking effect. Most investors still seem convinced a last-minute deal can be reached without damaging the world’s two largest economies.
The Trump administration has a track record of announcing aggressive and headline-grabbing trade policies and then diluting or abandoning them in the face of stiff opposition and in exchange for comparatively minor concessions.
Trade wars, however, are like real wars in that they are easy to start, but, once underway, the course is unpredictable and they can be difficult to halt. As a result, trade war between the United States and China must be seen as one of the biggest risks to the global economy and commodity prices in 2018 and 2019.
Neither Trump nor Chinese President Xi Jinping can afford to be seen to lose a trade conflict or make many concessions without securing something in return. Trump made trade a central plank of his presidential campaign in 2016 and faces tough mid-term congressional elections in just seven months.
Fair trade and dealing with China’s perceived abuses is an important issue for the US president’s core supporters and has qualified backing from some elements of the US business community.
In China, Xi has just been re-elected as Communist Party chief and had the constitution changed to allow him to extend his tenure as president based largely on his promise of strong leadership.
Like a real war, the trade measures announced by both sides are largely for domestic political consumption and designed to play to a nationalist audience. Behind the scenes, both sides are trying to negotiate a settlement, and have been leaking some details to the media in an effort to calm concerns about the economic impact. There are plenty of possible options to settle the dispute.
The problem is that any compromise must allow both sides to save face. And that will be much harder now that tariffs have been announced. Both sides are likely to come under business and economic pressure to de-escalate, avoiding a major disruption of global trade and with it the increased likelihood of a recession. But with the domestic political credibility of the leaders of both countries now on the line, just as in a real war, the scope for a mutually face-saving climb-down has narrowed.
The trade conflict is really just one aspect of the increasing strategic competition between the United States and China. The United States wants to maintain its military, diplomatic and economic superiority over all other countries while China is determined not to accept second place and to achieve parity. The problem has been termed the Thucydides Trap, after the conflict in ancient Greece between Sparta (the incumbent superpower) and Athens (the rising superpower) that led to the Peloponnesian War.
The problem of how to manage the rising power of China and its challenge to the superiority of the United States has been evident for two decades (I remember discussing it frequently with colleagues in the late 1990s).
China has appeared anxious to avoid the problem, and the government-run Xinhua news agency has published numerous articles on averting the Thucydides Trap in recent years. The issue has been extensively discussed by officials, including the president and foreign minister, as well as in opinion commentaries ("China voice: Ten reasons China, U.S. can avoid Thucydides Trap”, Xinhua, 2017).
Even with this level of awareness, however, the two countries have already blundered into the Thucydides Trap on trade. The list of areas where the two powers are in increasingly pointed strategic competition now covers trade, overseas investment, advanced technology, naval and military armaments.
Intensifying diplomatic competition also covers multiple regions including the South China Sea, Southeast Asia, the Indian Ocean, Central Asia, the Korean peninsula, Africa and Latin America. There are compelling economic reasons for the United States and China to avoid imposing extensive tariffs on bilateral trade, but both sides face tricky domestic political constraints.
It is possible to envisage a grand bargain that can resolve many if not all of the outstanding differences between the two countries on business issues. There is still time for negotiations and opportunities for a mutually face-saving deal, though the uncertainty in the meantime is likely to be extremely damaging. And just as real wars are often the result of unpredictable and unplanned escalation, trade wars can also spiral out of control. - Reuters
* The author is a Reuters market analyst. The views expressed are his own