Trump’s Doomsday Gamble In China Trade War

Authored by Finian Cunningham via The Strategic Culture Foundation,

President Trump dramatically resumed a trade war footing this week with Beijing, threatening to impose tariffs on virtually all imported Chinese goods to the US.

After earlier negotiations this month appeared to avert a clash, the Trump administration is back to full trade war mode. With fiery language, the US president and his trade advisors said they have run out of patience with what they claim to be “predatory practices” by Beijing.

For its part, China quickly hit back, condemning “unacceptable blackmail” by Washington. Beijing said it will not hesitate to respond in kind with counter-tariffs on American exports.

Markets in Asia, Europe and America tumbled, with companies and investors panicked by the prospect of a full-blown trade war between the world’s two largest economies, and the uncertain repercussions from such a titanic clash.

Trump is gambling big time. He is betting that China will be the “first to blink”, as the New York Times reported. That’s because the Trump administration reckons that with China’s huge trade surplus, Beijing has much more to suffer financially if it goes toe-to-toe with the US in a trade showdown.

“China has a lot more to lose than we do,” said Trump’s trade advisor Peter Navarro, who is a hawk when it comes to dealing with Beijing. Navarro, like Trump, has continually accused China of ripping off the American economy and workers through alleged unfair trade practices and theft of intellectual property from US tech companies.

During his election campaign, Trump fired up voters with tirades slamming China for “raping America”. Recently, the president railed against “China taking $500 billion out of our economy every year”.

But typical of Trump, the emotive charges and figures are not what they appear to be.

For a start, the US economy has been running a chronic trade deficit with the rest of the world for the past four decades. That’s largely because of a structural change in American capitalism whereby US companies and investors bailed out of the country to set up in cheaper labor territories, such as China.

To accuse China of being the problem is a deceitful distraction from the way American capitalists have historically cheated US workers with layoffs and downsizing. One of those capitalists profiting very nicely from setting up in China is Donald Trump’s daughter Ivanka whose clothes business profits from manufacturing in China and exporting to the US, thereby contributing to the American trade deficit.

Another issue is that whatever complaints the Trump administration may have about trade with China it should settle those disputes through the legal mechanisms of the World Trade Organization. If Trump thinks he has a case against unfair Chinese practices then he should trust the multilateral trading authority. Otherwise it’s a recipe for international chaos and a slippery slope to conflict, as history has shown.

But, as with many other facets of this administration, there is a contempt for multilateralism, and a resort to high-handed unilateralism. Rules, laws, what’s that? As one White House official was quoted recently as saying of the Trump’s administration’s attitude towards the rest of world: “We’re America, bitch!”

Trump is playing hardball with China in the belief that its bullying will see Beijing cave to its demands for rectifying trade imbalances. The Americans are trying to solve their structural, inherent flaws by strong-arming China into making concessions. Because China’s $500 billion annual exports to the US are about four-fold what the US sells to Beijing, Trump is betting that his Mad Max approach will scare into submission.

Trump’s browbeating manner is also grandstanding for his voter base in rustbelt states, who might feel a patriotic surge in sticking it to the Chinese. Mid-term congressional elections in November are no doubt on Trump’s mind to get the Republican vote out.

However, the president’s best laid plans are in danger of veering into a political train wreck.

Beijing has said it will not back down to intimidation. In an editorial in the Global Times, which reflects government thinking, the tone was combative: “It is US arrogance to believe that a trade war will exhaust China. But the boot is on the other foot. Trade is mutually beneficial to both the US and China. Scuppering bilateral trade would cause similar suffering to both sides.”

The options at Beijing’s disposal could wreak havoc for the US economy and Trump’s political future. Trump’s inability to see that speaks to his and his advisors’ petulance.

If China goes ahead with threats to impose counter-tariffs on US agricultural products, such as soybeans, corn and meat, the impact on farm states like Iowa, Idaho and Illinois across the mid-west will be severe. Voters from these states were crucial to Trump getting elected to the White House in 2016. By taking the US into a trade war with China, Trump will end up hitting his own political base hardest.

Another repercussion is higher retail prices for consumer goods like televisions and footwear imported from China, if Trump slaps on punitive tariffs. That will inflate consumer prices and crimp household budgets, especially among the lower-income population, who again tended to vote for Trump. Net result is that the fragile American economy would likely tank from cash-strapped consumers, who are already living on the edge. 

The far-reaching injurious effects of a trade war seem to have escaped the Trump administration’s planning. The president seems to have been carried away with a hubristic notion of American power and an irrational ideological hostility towards China. It’s all very well for him and his rich advisors to antagonize China over perceived wrongs. What about ordinary Americans though? So much for the famed deal-maker. Trump’s short-term recklessness betrays someone who is playing tiddlywinks instead of chess.

Yet, in this accounting, the real pain hasn’t even begun. China’s ultimate trade weapon is its massive holdings of US Treasury bonds. With nearly $1.2 trillion-worth in holdings of US federal debt, China is by far the world’s largest creditor for Washington. US-based news outlet Bloomberg calls it Beijing’s “nuclear option”.

“It can just stop buying US Treasury debt,” warns Bloomberg. “China is the world’s biggest Treasury investor, keeping US borrowing costs low, helping us buy more stuff from China. Ending this symbiotic relationship just when US budget deficits are soaring would devastate the US economy.”

Bloomberg adds that such a “doomsday” option “could blow up” China’s economy too. It compares the abysmal scenario to “mutually assured destruction”.

Arguably though, such mutually devastating economic consequences for China are moot. It has the alternative sphere of Eurasian economic integration and the new Silk Roads it has busily been building with Russia and others over the past decade.

If Trump pushes Washington’s belligerence too far with Beijing, the economic ramifications will be wide-ranging and dire for the globe.

China may just survive to trade another day with the rest of the world.

But one thing seems sure. With its chronic debts, deficits and dodo-like dollar, America will be ruined beyond salvation. Ruined by a president who brags about his “art of the deal”.