The trade war, while economic in intent, has strong political undertones, & while the stakes are high for America, they are much higher for China.
In the 1970s, America normalised relations with China, sending ping-pong teams. Today, China and America are playing a brasher version of ping-pong, with a tit-for-tat trade war, reneging on the agreement made in June 2019 where they agreed not to levy tariffs.
In early August, US President Donald Trump announced a planned tariff hike. This was met with China slamming tariffs on 5,000 American items. In retaliation, America announced tariff hikes on Chinese goods.
The trade war has sent global investors, China’s manufacturers, American automobile industry and American farmers into a tailspin. The trade war, while economic in intent, has strong political undertones, and while the stakes are high for America, they are much higher for China.
The trade war cannot be seen in isolation. In recent years, the South China Sea territorial dispute and militarisation of the seas has aggravated, as have boroughs of China’s economic influence in Asia, Africa, Latin America and even Europe. And more recently, Hong Kong has descended into political chaos, where the Beijing-backed government is asking for a dialogue with the protesters, but clearly lacks the mechanism to facilitate it.
China moving paramilitary forces to Shenzhen and sending fresh troops to Hong Kong as ‘normal routine’ does not help. A few protesters in Hong Kong have marched singing ‘The Star-Spangled Banner’, asking President Trump to ‘liberate Hong Kong’. The ball is clearly in the American court.
The American negotiating demands are transparency of an ‘enforcement mechanism’ backed by legislation in China and guarantees of farm purchases. China agreed to a ‘regulatory mechanism’ (not ‘enforcement mechanism’) and fell short of the American demand of reviewing the Chinese legislation prior to adoption.
Months of trade talks failed to steer a deal. In response, President Trump indicated that tariffs on Chinese imports would be hiked.
In anticipation of the tariff hike, China announced counter-tariffs on $75 billion worth of goods, raising tariffs by 5-10%, in two tranches on September 1 and December 15. China also said that it would resume duties of 25% and 5% on vehicles and auto parts beginning December 15, and 5% tariff on crude oil from September 1.
The Chinese step led to America escalating the tempo of the trade war. American tariffs apply on $550 billion worth of Chinese imports, including a 15% tariff to $300 billion worth of Chinese imports beginning October 1 and raising the rate on $250 billion of Chinese imports from (existing) 25% to 30% beginning September 1.
So, how will Chinese tariffs impact America? The People’s Daily (China) reported that Beijing’s tariffs were aimed at “inflicting pain on the US manufacturing sector.” An analysis by Brookings Institution (2018) indicated that the ‘hit list’ of American industries was calculated to scare both ‘red and blue’ America. The items that China proposes to raise taxes include agricultural products (nuts, pork, soybean), textiles, toys, clothing and automobiles.
The Wall Street Journal has reported that major car companies, including Tesla and Ford Motor, which build their vehicles in America for export to China, will be hit hard. As for America’s Midwest, G William Hoagland, senior Vice President at the Bipartisan Policy Center, a think tank, has thrown the spotlight on 240 Midwestern farms filing for bankruptcy due to the trade dispute and bad harvests. In fact, the agricultural sector has been recently granted $28 billion in subsidies.
Now, how will American tariffs impact China?
These will impact Chinese companies and manufacturers who are facing slowdown. Job losses from the trade war are estimated at 2 million, or even 3 million. For China, this is bad news, with its incessant factories cutting production and jobs leading to unemployment and the circle of social problems.
Goods such as clothing, footwear, toys and cellphones imported from China will cost more a cost that the American consumer would bear. This would affect China’s manufacturers, American consumers, importers, retail sales, disrupting the supply chain.
President Trump has been upbeat and optimistic that American companies would leave China and come home. But as it unfolds, American companies cannot ignore the massive Chinese market, nor the advantages of shifting base to Vietnam, Indonesia and Cambodia.
It is true that China’s paternalistic state has ways to support Chinese businesses with cheaper credit and tax cuts. In fact, the American administration has labelled China a ‘currency manipulator’ with the yuan going past 7 against a dollar, making China’s exports cheaper for the developing world.
But this, too, is a double-edged sword as foreign/domestic investors could pull their investments out. China’s Belt & Road Initiative indirectly facilitates exporting/dumping of products in the developing world.
But China has a lot to worry about. In the trade war, President Trump has channelled the old gripe of China profiting on the back of intellectual property theft, forced technology transfer, and the pulse of America’s domestic audience.
Presidential elections are round the corner. America, despite not in decline, is perceived by a large section of the American public as a power in decline. Only a narrow majority (56%) are optimistic about America’s future (Pew Research Center, 2019).
According to the Pew Research Center, seven in 10 Americans (January 2019) are dissatisfied with the current state of affairs. A quarter of them (24%) view China and Russia as a threat to America, with 60% Americans having an unfavourable opinion of China (up from 47% in 2018), including a quarter who have a very unfavourable opinion (italics and data, Pew Research Center, 2019).
President Trump taking on China resonates with the domestic audience and cuts across party lines. This has reverberated in bipartisan support for Hong Kong, be it Kevin McCarthy’s (Republican leader, US House of Representatives) opinion that America must help Hong Kong, to Nancy Pelosi’s (Speaker, US House of Representatives) backing of the Hong Kong Human Rights and Democracy Act.
The truth is, as economist Eswar Prasad has noted, “the U.S. economy is about 50 percent larger than China’s, and is less dependent on trade, so its prospects look better.” Clearly, with the Chinese economy slowing down, China has a lot at stake. While it is upbeat about the trade war, it is only so, with respect to its own domestic audience.
China is cognisant of the downside of the trade war and hence makes conciliatory noises now and then. This explains Vice Premier Liu He’s call for “calm negotiations.”
This also explains why China has softened its stand with a tariff waiver on 16 US goods as a goodwill gesture ahead of the trade meet. China cannot ignore that America may not lose out too much economically and that the ‘China card’ is a trump card in the coming elections.