BALANCE OF POWER
Why China Could Kick Trump’s A** in a Trade War
Beijing’s economy is strong, its leader’s power absolute, while Trump’s economy is confused, and his leadership in vast, self-inflicted disarray.
HONG KONG—The China that Donald Trump campaigned against in 2016 is not the China he is up against now. Chinese President Xi Jinping has prepared well for a showdown between the two largest economies on the planet.
When Trump was still a candidate in the presidential race, the People’s Republic was experiencing slowed growth, ballooning debt, and severe capital flight. We may never know the real numbers about China’s GDP growth, but today the channels of financial exodus have been choked off to a level deemed acceptable by the Chinese Communist Party, and the debt is being reined in. As Xi tightens the Party’s monetary policy, he has also put his political house in order, with loyal supporters installed in key positions after a series of high-profile purges and power shuffles. The Chinese president has all the elements in place to make the big moves required for international financial confrontation.
And these facts may be dawning on Trump, whose economic policies are in confusion, and whose leadership is in vast, self-inflicted disarray. Trump tweeted last month that “trade wars are good, and easy to win.” But after Beijing’s announced retaliation slapping America with sanctions on $50 billion worth of goods—in response to Trump’s proposal to do exactly the same—Trump’s immediate response on Twitter was to backpedal: “We are not in a trade war with China,” he wrote, before pivoting to a rant about the previous occupants of the White House.
Trump’s vision of China appears to be a decade old or more, in fact.
I am reminded of a woman I know who set up a factory to make sweaters, t-shirts, and trousers in Guangdong in 2009. It took her just three months and five days to break even. Every yuan flowing into her bank account after that, she once told me, was “from the heavens.” The timing of her entrepreneurial efforts, then, was fortuitous—fast fashion was booming, and the plant could run for 16 hours a day, six or seven days a week.
But now, businesses like hers are being squeezed out. Low-tech, labor-intensive industries find little favor in Beijing, where the official line of thinking says they can find new homes in Africa or Southeast Asia.
Today, and with a vengeance under Xi, the Chinese Communist Party is modernizing the country’s industrial sector in an attempt to further evolve its economy and establish itself as a true leader on the world stage, and that evolution already is well under way.
Facing the Trump administration’s proposed tariffs on Chinese electronics, aerospace and machinery products, as well as constant accusations of thieving intellectual property via forced technology transfers that are part of international business deals, the Chinese embassy in Washington parried in a statement on Tuesday: “As the Chinese saying goes, it is only polite to reciprocate.”
It wasn’t long before the riposte struck home. Beijing followed up by announcing its own plans to slap retaliatory duties on soybeans, sorghum, pharmaceutical goods, automobiles, and aircraft.
While the 1,300 types of Chinese goods that Trump has listed seem like a grab-bag assemblage, there is a certain logic. China has shown a remarkable ability to sell pickaxes during every gold rush, most conspicuously in technology. The U.S. tariffs are meant to make that more difficult.
Since 2015, as noted, the Chinese Communist Party has been overhauling the country’s manufacturing sector. Instead of sewing together t-shirts, China wants to sell the machines and materials to make them. Instead of high-definition television sets, Chinese companies offer the entire production line, complete with robot arms to trim labor costs. Containers that are crossing oceans hold MRI machines instead of fridge magnets.
“Made in China 2025,” as the strategy is called, has been one of the initiatives that maintain economic growth in the People’s Republic. It’s DIY at an epic scale, albeit with significant help, some offered, some pilfered, from American innovators.
In a 2017 report, the Commission on the Theft of American Intellectual Property didn’t mince words when it stated that China “remains the world’s principal IP infringer.” As the report noted, “IP theft by thousands of Chinese actors continues to be rampant,” and worse still, “the United States constantly buys its own and other states’ inventions from Chinese infringers. China (including Hong Kong) accounts for 87% of counterfeit goods seized coming into the United States.”
Calculations of the damage suffered by American enterprises are fuzzy, but the Commission estimated it to be between one and three percent of the U.S. GDP, or between $180 billion and $540 billion, annually.
Talk of intellectual property infringement was, unsurprisingly, absent during Beijing’s announcement on Wednesday. But the targeting of the tariffs the Chinese threaten to impose is carefully, almost cruelly directed straight at Trump’s base.
The items on Beijing’s target list are tailored to strike blows at the agriculture sector and those who believe in talk of reviving the American blue-collar dream. Although the PRC’s planned duties amount to only 0.3 percent of the United States GDP, they clearly are designed to damage the popularity of Trump and the Republican Party ahead of this year’s midterm elections.
And Beijing’s gambit might be working, especially since Washington and Wall Street are using soybeans to gauge the ferocity of the feud. The American Soybean Association already has blasted the Trump administration, noting in a statement that it is “again expressing its extreme frustration about the escalation of a trade war with the largest customer of U.S. soybeans, and calling on the White House to reconsider the tariffs that led to this retaliation.” On Wednesday morning, the crop lost $1.72 billion in value in the futures market.
Further fallout has been broad but shallow. Ninety-eight percent of stocks in the S&P 500 fell as the market opened. Boeing’s share price dragged down the Dow Jones Industrial Average. As one would expect, companies that make or trade aircraft, agricultural goods, and automobiles soaked up most of the pain.
All that and the real battles have hardly begun. So far, the U.S. and China have both been posturing like football linemen trying to draw their opponents offsides. And both have offered an escape route away from escalation: Chinese officials repeatedly have signaled that the Party would like to engage in negotiations with Washington, while Treasury Secretary Steven Mnuchin has said that he is hopeful for an agreement between the two nations.
Threats of heavy duties can be merely a means for both sides to get a deal, whether artful or not. But what has been missing from the conversation so far is how and when talks might take place.
When Trump tweeted that this isn’t a war, he was right. For the moment it’s a light joust, a game of chicken, where both sides seek weaker resolve in the other. But remember this: only one of the two national leaders has a consistent record of flip-flopping and contradicting himself, of valuing short-term gratification over long-term benefit. One thing is certain: if common sense is meant to prevail, then the United States may not be able to count on its president to weather this storm.