America, China and the Route to All-Out Trade War

“Trade wars are good, and easy to win.” Donald Trump’s breezy tweet of last March may go down in history as the economic equivalent of a prediction in Britain, in August 1914, that the first world war would “all be over by Christmas”.

The US president’s initial tariffs, imposed on $50bn worth of Chinese exports in June, did not bring swift victory. Instead, they were met with Chinese retaliation. Now Mr Trump is preparing to impose tariffs on a further $200bn worth of imports from China, which will probably be met, once again, by a tit-for-tat response from Beijing. The world is on the very brink of a major trade war between the US and China, and it is unlikely to end quickly.

To date, markets have been oddly relaxed about all this. Perhaps they have assumed that a last-minute deal would be reached between the US and China? But that is far too complacent. Instead, there are political, economic and strategic reasons that are pushing the two sides towards prolonged confrontation.

If both sides proceed as threatened, they will soon have covered more than half of their bilateral trade — with Mr Trump threatening even further tariffs after that, which would essentially cover all Chinese exports to the US.

America’s biggest companies and products are already in the line of fire. Apple warned last week that the cost of its products will rise if the next round of proposed tariffs are imposed. It was met with a presidential suggestion that they relocate production to the US. American farmers, hit by Chinese tariffs on soyabeans, have been offered government subsidies and appeals to their patriotism.

For political reasons, both Mr Trump and President Xi Jinping of China will find it very hard to back away from this fight. It is possible that Mr Trump would accept a symbolic victory. But Mr Xi cannot afford a symbolic defeat. The Chinese people have been taught that their “century of humiliation” began when Britain forced the Qing dynasty to make concessions on trade in the 19th century. Mr Xi has promised a “great resurgence of the Chinese people” that will ensure that such humiliations never occur again.

There is also reason for doubt that, when it comes to China, the Trump administration would settle for minor concessions — such as Chinese promises to buy more American goods or to change rules on joint ventures. The protectionists at the heart of the administration — in particular Robert Lighthizer, the US trade representative, and Peter Navarro, policy adviser on trade and manufacturing in the White House — have long regarded China as the core of America’s trade problems.

Optimists will take heart from the fact that Mr Trump has backed off, possibly temporarily, from the dire trade threats he was aiming at Mexico and the EU. The Mexicans have promised to restructure automobile supply chains, and the EU has pledged to buy more American soyabeans and gas, and to open discussions about a free-trade pact.

But the US’s complaints about China are much more far-reaching than its concerns about the EU or Mexico. They relate not just to specific protected industries, but to the entire structure of the Chinese economy.

In particular, the US objects to the way China plans to use industrial policy to create national champions in the industries of the future, such as self-driving vehicles or artificial intelligence. But the kinds of changes that the US wants to see in Beijing’s “Made in China 2025” programme would require profound changes in the relationship between the Chinese state and industry that have political, as well as economic, implications.

Seen from Beijing, it looks as though the US is trying to prevent China moving into the industries of the future so as to ensure continued American dominance of the most profitable sectors of the global economy, and the most strategically-significant technologies. No Chinese government is likely to accept limiting the country’s ambitions in that way.

The contest over future technologies also underlines the fact that there is a strategic aspect to this trade rivalry — something that is completely lacking in the Trump administration’s confrontations with Mexico, Canada or even the EU.

China is the only plausible rival to the US as the dominant power of the 21st century. So while Mr Trump’s trade tariffs reflect his own personal quirks — in particular, his longstanding protectionism — they are also part of a broader mood-shift within the US.

Large parts of the US establishment, well beyond the Trump administration, have soured on the idea that economic engagement is the best way to deal with a rising China. Instead, the appetite for confrontation is growing. Prominent Democrats are now as vocal in their calls for tariffs and trade sanctions on China as Mr Trump.

The dangers of US-Chinese confrontation over trade are amplified by the fact that both sides seem to believe that they will ultimately prevail. The Americans think that because China enjoys a massive trade surplus with the US, it is bound to suffer most and blink first. The Chinese are conscious of the political turmoil in Washington and the sensitivity of American voters to price rises.

Both sides are preparing for a trial of strength. It is unlikely to be over by Christmas.

gideon.rachman@ft.com