APD Review | What’re behind Trump’s trade war against China?

By APD writer Hu Qimu

Translated by Chen Weijie

Trump started the trade war against China based on the trade protectionism

Things are always the unity of opposites, and international trade is no exception. The two contradictory economic policies - free trade and trade protection - have coexisted for centuries. With the viewpoint of economics, free trade can promote the free flow of factors and products all over the world, thus the balance of supply and demand can be achieved on the basis of production efficiency, resource endowment and supply and demand condition in different countries. Instead, trade protection is the economic policy of distorting prices of production factors and products through methods such as tariffs and non-tariff barriers to protect domestic trade interests and support national industry.

It is noteworthy is that the trade protection will damage the interests of its trade partner, then the trade partner will take the same measure against its rival - an eye for an eye, a tooth for a tooth. The escalated trade war will have the extremely negative effect on the world’s economic growth and economic welfare.

According to the economics, GDP by expenditure (Gross Domestic Product) is the sum of consumption, investment, government spending and net exports. Trump had to focus on these four aspects in order to reinvigorate the American economy, eventually making his slogan “Make America Great Again” come true.

Three major US indexes plummeted on March 22, with the DOW losing more than 700 points.

However, the consumption depends on people’s income level, but the simply wage increase may cause price inflation. Reviving investment from the private sector is also impossible because of higher labor cost in the largest developed economy. Trump’s new tax cut plan makes the increase of government spending almost impossible.

Therefore, Trump has to grasp at the last straw - increasing net exports in an attempt to boost the economy, which can be designed from two aspects: increasing exports to China and reducing imports from China. The “Beggar-Thy-Neighbor” policy and “China threat theory” are still popular among the American hawkish politicians, which urge Trump to take actions to China – its largest trading partner.

To win support by customs exemption

In addition, Trump is trying to tempt its allies to move against China together by customs exemption. If so, the bilateral trade war could easily be escalated as a multilateral trade war, which will have the devastating impact on the world economy.

Realistically speaking, as the world’s largest beneficiary of the free trade, America is enjoying better and low-cost products - commodities and electromechanical products at lower prices (mainly from China) for its currency advantage. Trump, however, puts a label - economic aggression - on China, criticizing it for hindering the development of American manufacturing industry and bringing about mass unemployment problem.

What’s more, because of higher profits, investors are willing to invest in China rather than America. So Trump’s weakly groundless accusation to China is just a political tool, a way to winning votes.

China will fight back in any trade war

In front of the sharp increase of export cost for the penalty duty, China has three options.

First, “an eye for eye and a tooth for tooth”. Imposing tariffs on the products of America, especially agricultural products, will damage the interests of American farmers, Trump’s main supporters.

Second, increasing exports to countries along the Belt and Road route and reducing exports to America. Predictably, a faster pace of Chinese yuan-internationalization will further weaken the US dollar’s international status.

Third, increasing imports from America such as its high-tech products to reduce trade surplus with the U.S.

No Winners, but a Cocoon for America

In such circumstance, improving the quality of products by the supply-side reform and exploring new markets by the Belt and Road Initiative will drive China’s economic development. So, China is ready to fight to end in any trade war triggered by America.

However, it must be pointed out that no countries always wins in the trade war in the history and can immune from the global economic turmoil. The trade war tends to increase economy uncertainty and pessimistic mood. In reality, the poor performance of capital market and commodity market after Trump’s trade war is the accelerator of social contradictions of America and the fluctuation of global trade.

(ASIA PACIFIC DAILY)