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A US-China Trade War? Not So Fast

For all its recent threats, Washington doesn’t want a trade war.

|March 22, 2018

By Jacob L. Shapiro

The United States and China are not fighting a trade war – yet. This may seem strange to say, considering that the Trump administration announced on March 22 that it would be seeking to place tariffs on $60 billion worth of Chinese imports in the next few weeks. But the measures introduced this week, combined with the steel and aluminum tariffs announced earlier this month, do not amount to a declaration of war. They are a shot across the bow designed to demonstrate U.S. resolve to the Chinese when it comes to trade. The U.S., for all its recent threats, wants to use these tariffs to build additional leverage with China that it can use in negotiations and to score political points at home. China will make token feints at responding for its domestic audience, but the most likely scenario is Chinese capitulation today so it can live to fight tomorrow.

A Lot to Lose

The U.S. has been working up to this moment since Donald Trump’s first day in office. After all, a U.S. president is not endowed with extensive powers over trade relations just by virtue of being elected. A number of legal hurdles must be cleared before the U.S. executive can consider imposing trade restrictions. Such measures may also be subject to judicial review, and there is not much precedence for Trump’s moves in U.S. case law. But nonetheless, Trump has used various laws – section 232 of the U.S. Trade Expansion Act of 1962 for the steel and aluminum tariffs, and section 301 of the U.S. Trade Act of 1974 for the restrictions imposed this week – to claim more power over U.S.-China trade relations than any previous U.S. president.

China would have a lot to lose in a full-fledged trade war with the United States. The U.S. is the largest destination for Chinese exports by far – in 2016, 23 percent of Chinese exports, worth roughly $481 billion, ended up in the United States. China’s other top export destinations were key U.S. allies in the Pacific – Japan and South Korea. Meanwhile, just 8 percent of U.S. exports, worth about $116 billion, went to China. China’s economy also depends more on exports than the U.S. economy does. China has managed to decrease this dependency in recent years, but one-fifth of Chinese gross domestic product still comes from exports; for the U.S., it is more like one-tenth. At the broadest level, China is the weaker party in this fight.

China is not without significant leverage of its own, however. There are certain sectors in the U.S. that are highly dependent on the Chinese market. For example, in 2016, 62 percent of U.S. soybean exports, 77 percent of sorghum exports and 60 percent of animal hide exports were destined for China. China’s Ministry of Commerce has already begun to lay out what retaliatory action would look like, and unsurprisingly it has focused on U.S. agriculture and farm products, such as pork, which would not substantially affect the U.S. economy but could severely hit parts of Trump’s electoral base.

China can also respond with great effect using non-trade-related measures. Beijing could, for example, make it more difficult for U.S. businesses to operate in China. Companies like Apple, Boeing and Starbucks all derive substantial revenue from Chinese operations and have been forecasting increased involvement in China in the years to come. Indeed, China showed just how effective such moves can be when it forced Marriott International, an American hotel chain, and Delta Airlines, the second-largest U.S. airline, to apologize for listing Taiwan and Tibet as separate countries on their websites, threatening to cut their access to the Chinese market if they didn’t. Moreover, China knows that the U.S. economy is consumption based, and tariffs targeted at China will raise the price of consumer goods for average Americans without China having to lift a finger.

The Trouble With War

But what China is capable of and what China will actually do are two different things. And Trump’s anti-China measures, impressive though they may sound, are not so severe that they will lead to a vigorous Chinese response in the areas where Beijing has leverage. The tariffs and penalties the U.S. is proposing apply to only about 10 percent of Chinese exports to the United States and just 2 percent of Chinese exports to the world. That is not exactly a scorched earth policy; in fact, it’s more like a slap on the wrist. But the U.S. is doing this because it has never forcefully pushed back against China, in large part because the U.S. has profited from cheap Chinese goods for the past three decades. In a negotiation, it is not always enough to simply point out your adversary’s vulnerabilities; sometimes, it is necessary to demonstrate how badly those vulnerabilities could hurt when they are exploited.

That is what the U.S. is doing here – it wants to reset the conversation with China on its own terms. And China does not have much choice but to go along. After all, Chinese President Xi Jinping is launching massive structural economic reforms that will necessarily lead to lower GDP growth rates, and that means China can ill afford a trade war that will lower those growth rates even further. If the U.S. were to raise tariffs on all Chinese exports, it could send the Chinese economy into crisis or, at the very least, force China to abandon its attempt to rein in stimulus spending and irresponsible credit growth, which would just delay the inevitable reckoning by a few years. That is why Xi has chosen to make his best two lieutenants – Wang Qishan and Liu He – responsible for China-U.S. relations. By doing so, Xi has revealed that he believes his fate depends more on careful management of Beijing’s relationship with Washington than on the ongoing purges that ensure loyalty at home.

The trouble with war is that once started, it is unpredictable. A shot across the bow can accidentally hit the ship and trigger conflict even if both sides aren’t yet prepared to do battle. This most recent raft of measures is not in danger of hitting China’s bow, but if in negotiations the United States pushes China too far and Beijing feels backed into a corner, China could get more aggressive. China would then have to compensate for the economic backlash that would come from losing access to the U.S. market by rallying the Chinese nation around the flag, and that might lead to anything from boycotts of U.S. products to military engagements designed to unite the Chinese people around their shared identity instead of around shared economic disappointment. This is by far the less likely scenario, but it is possible.

The Trump administration will proudly tout these more recent measures as a major victory against China. China will beat its chest with equal vigor and make harsh statements about defending its rights and interests against irresponsible U.S. overreactions. But unless the Trump administration announces far greater curbs on Chinese access to the U.S. market than it has intimated, the public statements will be little more than posturing. As always, Beijing will be looking for a win-win scenario, where the Trump administration can claim victory at home but no real damage is done to the Chinese economy at this critical juncture. That may not be as sexy as describing the new tariffs as the first salvo of a trade war, but it is the truth.