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The United States and China are on a collision course. These are the world’s two largest economies. However, the combatants are not evenly matched. To the untrained eye China might seem in an better position to cope with a trade war. Since it is a heavily managed economy and the government crushes political resistance. However, its economic strategy carries enormous risks. Meanwhile, President Trump is managing a durable and flexible economy. If the U.S. consumer is price sensitive and the Chinese products are made more expensive by the trade war, this will help improve U.S. competitiveness. The breakdown in trade between the 2 countries is causing economic woes for both China and the U.S. alike. The battle will intensify if tensions keep on rising. This will result in decreased investment and dampen the movement of tourists and students between the two countries.
The U.S. economy is 50% larger than China’s and is less dependent on trade. China exports more than it imports. So China will be affected more by the trade restrictions. China does have some internal benefits, because the government controls most aspects of the economy, it can focus on areas of economic concern. They also support their major corporations through investments. They can also shut down dissent. While China dominates the trade market with the U.S., there are some companies that do export to China, and they will be adversely affected by the poor relations.
China is also dependent on global trade. Due to the Coronavirus Pandemic, many countries are having doubts about their previous trade agreements. China is being seen as unpredictable and is responsible fora volatile business environment, this could eventually hurt their plan for modernizing its economy. To offset the affect of American tariffs, they could devalue their currency. But this could serve as a double edged sword, it could decrease further investments in China. China could also stimulate its economy by ordering an increase of internal investment to stimulate the domestic market. But again, this could cause an increase in bank failures related to more bad loans being floated. China’s plan to shift the focus of its economy from staid and inefficient state enterprises to high-productivity and high-value industries will fall short if it loses access to technology from the United States and other Western nations. China has made its lack of independent institutions a source of strength in dealing with external economic aggression. China has strategic advantage: Xi Jinping can wait out Trump’s presidency, as the American needs to be re-elected in less than a year where as his Chinese counterpart resides in office for a lifetime. This is a critical factor, it means China can play the very long game. There is no counter to the Communist Party, so it will not worry about dissent from economic flux or protests in Hong Kong. Remember too that China has a history of bearing through extreme hardship for decades, which gives Xi Jinping further incentive not to show weakness.
In some ways, Trump seems more constrained than Xi because of America’s democratic political system, its more laissez-faire economy and the limits on his executive power. But he, too, has some elements in his favor as he does battle with China. Trump has the advantage of managing an economy that is enormously flexible and resilient. And getting tough on China resonates not just with his political base but even with Democrats, many of whom have long called for aggressive U.S. action against Chinese trade and currency practices, even if they disagree with Trump on tactics. To rescue the agricultural sector from the consequences of the trade war, Trump has already dispatched $28 billion in government subsidies. Trump has even pressured the Federal Reserve, to lower interest rates and suggested that the Fed should help drive down the value of the dollar. Trump has the upper hand, for the moment. The U.S has greater geopolitical power and bigger GDP per capita. Only in terms of raw power is China rapidly closing the gap. The American economy is proving resilient with re-expansion of employment and a slowing growing economy.
By comparison, the Chinese economy is cooling. Ominously for the country, foreign companies from America and elsewhere are looking outside China as they expand their sourcing, production and distribution activities. The shift away from China, limited as it is began before the trade war, is spurred on by rising prices and intellectual property theft. As too did the nation’s transition from reliance on cheap manufacturing to the production of higher value-added goods.
If the Trump administration’s approach to trade represented a bipartisan consensus, the U.S. could keep up the pressure over the long term. But because the tariffs are so associated with Trump’s personality, the Chinese government can afford to wait for a new president. If a Democrat wins in 2020, he or she will likely maintain a harder line on China than we saw before Trump, but will probably repudiate the current president’s penchant for punitive and precipitous tariffs. In a sense, America’s negotiating credibility has become yet another casualty of its polarized politics.
Their are other recent parallels to the current China and U.S. trade war. In recent times, containment policy during the Cold War, in which the United States committed itself to curbing Soviet influence, represents the classic example of a consensus that was credibly maintained, in one form or another, across several administrations. But this created a war of hyper attrition consisting of belligerent attempts to succeed by wearing each nation down to the point of collapse through continuous losses in personnel and material; it bankrupted the Soviet Union into extinction.
This example suggests that victory can only be achieved when one country has more bargaining leverage than its opponent. In other words when it can impose more pain on its adversary than it experiences itself. But the longer the trade war continues, the more it hurts both parties. Which raises the question often asked of any war, will it be worth it?
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