US-China Trade – End of Globalization or Political Drama?

 Chinese Consul General for Chicago Hong Lei discuss recent US-China posturing on trade, tariffs

Chinese Consul General for Chicago Hong Lei discuss recent US-China posturing on trade, tariffs

By Andrew Wang, Class of 2019

“China has to respond, but China is open to dialogue”, said Chinese Consul General in
Chicago Hong Lei at the UChicago Graduate China Forum on April 7 th , 2018. His statement
essentially summarizes the sentiment of US-China trade turbulence since early 2018. On
March 8 th , President Trump signed off on stiff tariff on imported aluminum and steel, setting
off tit-for- tat retaliations between the world’s two largest economies. Market fears over the
potential US-China trade war escalated and sent the US stock market plunging off its record
high in late Jan. Will the world rewind the triumph of globalization and retreat to the
autarky we saw in the inter-war period? Or is this trade dispute simply a short-lived political
drama? A closer look at the goals and trade restrictions of US and China may give us a hint.
No matter how you feel about Trump, Trump’s victory in election reflected the discontent of
people who were left behind by globalization. Trump’s goal is both an economic and
political one – revitalize the industries that employ his supporters; more succinctly, “make
America Great again”. Economically, he established this tariff in an effort to protect specific
industries, notably steel and aluminum, from foreign competition. Regardless of its
economic consequences, the tariff itself serves as a reminder of the political rhetoric that
appeals to Trump’s support base.

In contrast, the recent trade restrictions, ranging from protection of intellectual property
right to levies on strategic sectors targeted by the “Made in China 2025” plan, were much
broader and crafted by US trade representatives in response to China’s restriction of foreign
investment and China’s retaliations. US technocrats intended to seize this opportunity to
correct trade practices that they view unfair.

China, on the other hand, took a more passive position as a spokesman of Chinese Ministry
of Commerce stated “we do not want to fight, but we are not afraid to fight a trade war.”
Benefiting from the multilateral trade order, China has been experiencing phenomenal
growth and wants to maintain the status quo. Still, President Xi, who recently oversaw the
abolition of his term limits and pledged to empower China last month, appears as a strongman in this period. In other words, China has only been reacting to US moves, as
opposed to being the first mover, as exemplified by China’s immediate tit-for- tat retaliation
on US exports one day after the US’s tariff announcement.

So in light of the driving forces above, two outcomes are possible:
First, both sides will compromise. This is based on an assumption that Trump is a rational
businessman and would retreat when the loss incurred by trade conflicts became too big.
Although this may seem implausible now, based on his philosophy in “the Art of the Deal”,
President Trump often initially uses a bold threat and backs down only when the other side
is ready to make a modest concession. He used the same tactics on North Korea’s issue, for
example. Rather than appearing to “lose” in this scenario, Trump might strike a modest
concession with China that justifies his initial claims and appears to satisfy his protectionist
rhetoric. We have started to see signs of such a compromise after President Xi promised to
open China up in his speech on April 10 th at the Boao conference.

If the tit-for- tat retaliation spirals out of control with no country willing to back down first,
China has an upper hand in this scenario. Although many sources suggest economic impacts
of announced tariffs on both countries are minimal (<0.5% of GDP), China could potentially
inflict much bigger damage on Trump’s political base by imposing tariff on industries with
powerful lobbies or products from swing states. For example, China imposed a 25 percent
tariff on soybeans: exports to China account for one-third of total US soybean exports and
are mostly produced in Midwest’s political swing states. Their tariffs also target cranberries,
which are mostly produced in Wisconsin, the home state of Paul Ryan, the retiring House
Speaker, and orange juice, produced in Florida, another key political battleground.
Therefore, if both governments do not compromise early, pressure from the voter base may
force the Trump administration to compromise by November’s mid-term election.
Given these dynamics, the US-China trade is likely to be a short-lived political drama rather
than an end of globalization.

Andrew Wang Headshot China Tariffs Article.png

As a co-chair of Chicago Asia Pacific and Greater China Club, Andrew (MBA ‘19) is passionate about political economy and finance, especially in Asia.