America’s trade dispute with China could turn into the new Cold War

If the US president succeeds in his ambition to weaken China's economy, the effects could be disastrous

The US has a huge number of Chinese exports to tax. The reverse is not true. AFP

This week Donald Trump's drive to reduce the US trade deficit with China moved from a softening-up operation to what looks like a real trade war. On Monday the US imposed a 10 per cent tariff on $200 billion worth of imports from China, which could rise to 25 per cent by the end of the year if Beijing does not end what Mr Trump calls its unfair trade practices.

With this latest move, the Trump administration is targeting half of all the goods it imports from China. And, if the president’s words are to be believed, he is not going to stop there. This raises several questions: who is going to win this war? And what will be the effect on the global trade system that has been supported by Washington for decades, but which Mr Trump seems determined to undermine?

Tariffs are a tax on imports imposed at the border. So someone is going to have to pay more to buy Chinese imports, and that means the American consumer will feel the pain. Tariffs also have perverse effects. Since Mr Trump penalised some imports of steel and aluminium, the cost of making cars in the US has risen, making imported cars more attractive. They will have to be taxed too.

The Trump administration is trying to ensure that Americans do not feel the sting of price rises ahead of the November midterm elections, when there is a strong possibility that the Republican party could lose control of Congress, hampering the president's ability to pursue a domestic agenda and raising the likelihood that he could face impeachment.

When Mr Trump launched his drive to bring jobs back from China to the US, he tweeted: “Trade wars are good, and easy to win.” Even if trade wars are bad for the global economy, there is a grain of truth here. Despite Mr Trump’s obsessive focus on the rise of imports, the US as a whole is cushioned because its dependence on imports is relatively low. (The same is not true of US multinationals such as Apple, which rely on complex China-based supply chains).

Put simply, the Chinese economy today needs its US export market more keenly than the US needs cheap Chinese imports.

So far, China has responded in kind to the tariffs. As an export-oriented economy, however, it will run out of American imports to tax before the US runs out of Chinese ones. Despite this power imbalance, the Trump policy is a direct challenge to the authority of president Xi Jinping, so there is no sign of China waving a white flag.

Beijing appears to be waiting for the results of the midterm elections on November 6, in case a Republican drubbing at the polls weakens the Trump presidency and makes it more amenable to the anti-tariff lobbying of US big business.

The larger question is where the White House's trade policy heading. It is already clear that the US-backed global trade system is seriously damaged by the US bending the rules to punish its competitors, and by Mr Trump's view that multilateral trade arrangements are a conspiracy to do America down.

The economic analyst Rana Foroohar has suggested that the trade war is now turning into a “cold war”, in which it is imperative for the security of the US to decouple its economy from China. This view holds that China is a strategic competitor and that its practices – including the theft or forced transfer of intellectual property, the use of state-backed enterprises to buy commercial companies in the west and its growing military might – rule out any prospect that it can become a normal partner in the global economy. These views are undoubtedly held by the men Mr Trump has appointed to run trade policy. But does he take that view himself?

Mr Trump is often driven by what he sees. For many years he has railed against the sight of Mercedes Benz cars speeding up and down Park Avenue, even though many of those nominally German cars are actually made in the US today.  “Why don’t wealthy New Yorkers drive American cars and the European upper crust too?” he asks. There must be something broken. He sees factories closing down and jobs moving to China (but actually many of those jobs are being replaced by robots).

With his fixation on the trade deficit, Mr Trump tends to see things in simple terms. It is possible that if China made a generous offer on trade, he could accept it and declare victory, proof of the success of his hard-charging negotiating style. But that would not disengage the US and Chinese economies, as the hardliners want.

A key element here is one of the first actions he took as president – the cancelling of the Trans-Pacific Partnership, a trade agreement between the US and 11 other Pacific Rim countries, but excluding China, which was designed as a way to contain Beijing's economic power. Had Mr Trump intended to decouple the US and Chinese economies, these countries would have been good allies. So would the Europeans, but now he sees them as only marginally less aggressive on trade than the Chinese. If Mr Trump wanted a cold war, alienating his allies is no way to start.

One of the ironies of the Trump era is that during his time in power, the views of the Washington foreign policy establishment about China’s global ambitions have hardened. The view that China is a status quo power that can be fitted into existing arrangements is in decline. Not surprisingly, the US security establishment wants to highlight the long-term strategic challenge that China poses.

Could what began as bluster to rebalance trade relations end up causing real harm to the Chinese economy by revealing all the structural weaknesses hidden in its dash for growth? Given China’s huge contribution to wealth creation in recent years, a crash in the Middle Kingdom would be by far the scariest outcome.

Alan Philps is editor of The World Today magazine of international affairs