Apr 06, 2018 12:50 PM

Opinion: Cooler Heads Will Prevail in U.S.-China Trade Squabble

I am optimistic that the current scuffle between the U.S. and China over tariffs will eventually be resolved before it becomes a full-blown trade war that spills over into the global economy, forcing, for example, the European Union to choose a side.

Just last month the EU appeared to win a round against U.S. President Donald Trump who threatened them with tariffs on American aluminium and steel. The EU countered with threats of its own: tariffs on Levi jeans, Harley Davidson motorbikes and bourbon. In the end, it was the U.S. that blinked. The EU was excluded from the list of countries slapped with tariffs on those metals. The EU’s stance against protectionism and accompanying efforts to hammer out deals with individual member states is well documented. Understandable, as these are very clear threats to an already fragile union.

Some may argue that, in addition to its anti-protectionist stance, another reason the EU would side with China in a trade war with the U.S. is the union’s reliance on Chinese imports. It simply does not want to get into a fight with China. Others may counter with the argument that the last time the U.S. was trying to correct a major trade imbalance with an Asian country, Japan, three countries from the European side — Germany, France and the UK — sided with the U.S. The resulting Plaza Accord of 1985, under which it was agreed to depreciate the U.S. dollar relative to the Japanese yen (and German Deutsche Mark), failed to close the trade gap with Japan and instead severely weakened the country’s economy. The effects were felt for many years after.

So far there has been no official indication which side the EU would choose in a trade war between the U.S. and China today, so the issue is worth watching as there are implications for not just China, the U.S. and the EU but the entire global economy —to varying degrees. In China, for example, while I believe the negative effects of a trade war with the U.S. would be minimal, the country’s manufacturing sector would have to cope with the fallout. The sector would be vulnerable if tariffs were imposed on raw material needed for production of goods. Meanwhile —on a smaller scale —mid-to-upper class Chinese consumers who have an affinity for U.S. beef, cherries, wine and other discretionary goods would need to find local alternatives. On the other hand, large swathes of everyday U.S. consumers would feel the pinch if, for example, prices went up at WalMart. It is estimated that the retail giant —which says it serves 100,000,000 customers per week and 90% of Americans live within 15 minutes of one of its stores —imports more than 50% of its products from China.

In a trade war fought by politicians, consumers are often the ones that feel the pain —until they make their voices heard at the ballot box. U.S. President Donald Trump, with an eye on this November’s mid-term elections, is playing to his audience by appearing to fulfil campaign promises. With China accounting for almost 50% of the U.S.’ overall global trade deficit, it is an easy target. In addition to this, Trump has based his threat of tariffs on allegations of forced technology transfer from American firms to Chinese, and resurrected longstanding complaints that China does not do enough to respect and safeguard others’ intellectual property. While it may be argued that there is some merit to aspects of his argument, I believe the underlying issue is the battle for global leadership status.

With the rolling out of Made in China 2025, China put the world on notice that it intends to become a major player in key areas such as AI and robotics, new energy vehicles, modern rail transport, advanced medical products, etc. I believe the U.S. sees this as a clear threat to its global position and all this talk of tariffs is a way to create hurdles for what it perceives as a challenger to its throne.

This is a turning point in the relationship between both countries.

In many previous U.S. administrations, the perceived threat of China’s rise has always been there, and Trump’s predecessors would have discreetly taken action they thought necessary to counteract this. But Trump is not your typical politician. He apparently eschews diplomacy and official channels, opting instead to communicate directly to his base through frequent comments on Twitter.

Chinese officials, like many others, have yet to master the art of effective engagement with the mercurial 45th President of the United States. Thus far in this spat over tariffs, their efforts at rapprochement have been rebuffed but I am confident that they will eventually figure him out. They can start by remembering that, at his core, Trump is a businessman. They simply need to make him an offer he cannot refuse.

Oliver Rui is Professor of Finance & Accounting at China Europe International Business School (CEIBS).

Corrects earlier version to show that in previous instance U.S. dollar was depreciated relative to Japanese yen

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