The tit-for-tat exchange of tariffs between the United States and China gives the impression the world’s two biggest economies are headed down the road towards a trade war, which would have hugely damaging economic consequences. But this could be averted if they continue quiet backroom discussions to open up their markets, particularly China’s.
The US imposition of tariffs on a range of Chinese imports – which amounts to a tax on imported goods – is the first step in a series of measures announced by the Trump administration. So far, China has responded by announcing tariffs on US imports. The next stage would be for the US to restrict Chinese investment into America.
Presumably, if this happens, then China would respond in kind. In other words, the tensions between the US and China could go beyond taxes and directly disrupt global supply chains as investment is targeted.
Any disruption to supply and distribution chains, which are a key part of world trade, could have a lasting impact. In the worst-case scenario, companies may have to relocate factories or distribution centres. Investment decisions affect employment and taxes raised, and are in some ways more disruptive than tariffs, which can be reversed more easily.
This escalation would be damaging for the US and Chinese economies since global companies, such as Apple, invest in both countries. This would affect not only US businesses but also American consumers. Retailers such as Walmart import goods from China, so prices would go up and living standards would be squeezed. And since US goods are sold worldwide, if they are reliant on parts from China, consumers here in the UK and in the rest of the world would also be affected. The same applies to Chinese consumers and producers, particularly since about half of Chinese exports are made by enterprises with foreign investors.
The US is targeting hi-tech manufacturers to disrupt President Xi’s flagship industrial strategy, the Made in China 2025 plan, which seeks to make Chinese manufacturing globally competitive by introducing more artificial intelligence and automation. The ability of emerging economies such as China to “catch up” with rich economies depends on their being able to access and adapt the best technology in the world. This lies at the heart of the problem. The US has launched these trade measures in retaliation for China’s poor record on intellectual property rights protection, which includes requiring foreign companies to transfer their technology as a condition of investing in China.
So, there is a lot at stake for both countries. But a trade war wouldn’t result in better protection of US technology or give American firms better access to Chinese markets. Nor would it help China invest in America. A perennial Chinese complaint is that its companies are blocked, particularly in the technology sector, which is crucial for its economic growth. After an initial round of tariffs on steel and aluminium was unveiled, US and Chinese officials met to discuss ways to open markets wider and create a more level playing field. Opening up China would improve the US trade position. After all, its huge trade deficit could be reduced either by cutting back on imports – or, a much better option, expanding exports.
China may be reluctant to open up its relatively closed markets to foreign competition. It firmly believes its industries need protection against the dominance of multinational companies. But it has some of the biggest companies in the world, such as Alibaba, Huawei, and Tencent. And more competition may well improve China’s growth prospects by increasing productivity, especially in sectors where there are less efficient state-owned enterprises.
But far from the US and China coming to the table and forging an agreement to open up trade, more rounds of trade barriers could be announced with growing economic damage and no resolution in sight. President Trump may even show his dissatisfaction with the body that oversees international trade, the World Trade Organisation, which he has described as a “disaster”, and pull America out. That would potentially overturn the whole worldwide trading system with dire consequences. So it’s critical that a US-China trade war is avoided at all costs.
