China still has several tools in its kit to mitigate the negative effects of President Trump’s trade war on its economy. With a top-down economic structure and a huge domestic market, China may be able to absorb some impact of the latest round of tariffs by turning goods destined for export around for internal consumption.
While pushing back on U.S. demands, China continues expanding to new markets. President Xi’s “One Belt and One Road” initiative to build infrastructure projects from Europe to Africa has already provided a big market and consistent demand for Chinese exports, especially those running into overcapacity issues, such as steel and cement. Many countries along the initiative routes are resource-rich. They will provide a steady supply of raw material and energy to support China’s long-term economic growth.
China can also increase its investment in Africa. In early September, Xi announced a $60 billion package of aid, investment, and loan money for Africa. Since Africa is already becoming overloaded with Chinese debt, the majority of this aid package is expected to be investments that will provide an outlet for Chinese goods and services.
Beijing has also started a charm offensive with U.S. businesses. Xi’s top economic advisor recently promised a delegation of U.S. multinationals that U.S. businesses operating in China “won’t be targeted in Beijing’s trade counterattacks.” China’s government-run tabloid, the Global Times, tried to appeal to U.S. businesses by stating, “The Chinese market can help them make money, but the White House can’t.”
Most importantly, Xi became president for life in March of this year. Time is on his side. He doesn’t face much political pressure to reach a trade deal with the United States. As a matter of fact, China’s hardliners may grumble if they perceive any trade deal has sold out China’s interests. So Xi has strong incentives to act like the tough guy who won’t yield to U.S. demands. This probably explains why China already warned the United States that it would back out of the latest round of trade talks if Trump goes ahead with his latest tariff announcement.
While Xi doesn’t have to worry about elections, Trump does. The midterm election is less than two months away. The booming economy and rising stock market are two bright spots under the Trump presidency. But both threaten to lose steam with the ongoing tension with China. For instance, the U.S. stock market drops every time Trump makes threats on tariffs and trade wars.
Midwest farmers are complaining China’s retaliatory tariffs on U.S. farm goods like soybeans, pork, and beef have hit farmers’ bottom lines. Many of these farmers have been steadfast Trump supporters, but even they have come out against his trade war with China. The Trump administration promised to provide up to $12 billion in aid to farmers who are hurt by the trade wars. But some farmers would rather see the Trump administration remove punitive tariffs against China, so they can regain access to the Chinese market.
Many other U.S. businesses seem to agree. According to the Wall Street Journal, the majority of U.S. businesses oppose the Trump administration’s tariffs because they worry that rising costs of inputs and losing exports to China will hurt their bottom line and erode any positive stimulus from the tax cut. So businesses have intensified their lobbying efforts against tariffs. Last week, organizations representing thousands of companies in a number of industries announced a lobbying campaign to oppose Trump’s tariffs.
If the trade war spills over into the holiday shopping season, retailers are rightfully concerned about the potential disruption of their supplies for holiday shopping. When that happens, U.S. consumers may join businesses to revolt against Trump’s trade policy. Republicans who are hoping to tout the economic growth when running for midterm elections may come up empty handed.
Trump’s current focus on tariffs creates a lose-lose situation for both the United States and China. No government or businesses outside China are happy about the Chinese government’s policy of forcing technology transfer for foreign investment. In June, the European Union filed a complaint with the World Trade Organization to challenge this intellectual-property law.
From Canada to Europe, governments agree with the United States that China’s publicly declared industrial blueprint, the “Made in China 2025” plan, is a threat to their economies. The plan aims to “lift the countries industries … up the value chain” by emphasizing local products instead of imports and “building global champions” to compete with Western tech giants.
More countries are also joining the United States in saying no to Chinese investments out of concern that China may use investments and merger deals to steal technologies and gain access to sensitive data that could endanger the national security of other countries. Consequently, China’s outbound direct investment dropped globally for the first time this year since 2002.
If Trump wants to win a trade war with China, rather than focusing on slapping punitive tariffs on Chinese goods, which will hurt U.S. businesses and consumers, he should focus on intellectual property rights protection, which is the winning issue. By doing so, he will have not only the support of U.S. business, but also our allies and trading partners. As the rest of the world is united and China becomes more isolated in its approach, Trump may finally get a good trade deal.
