[Special Report] Trump versus China

China is pivotal to the Trump phenomenon. His victory flows from the poorly acknowledged conflict between the East Asian development model and Western free-trade ideology.

Trump trade

Donald J. Trump, the U.S. president-elect, said before his surprise election victory on 8 November that he intended to impose tariffs of 45 per cent on all Chinese exports to the United States. Speaking to the editorial board of the New York Times in January 2016, Trump claimed to be a ‘free trader’ but that ‘it’s got to be reasonably fair’. He said that the ‘only power’ the U.S. had over China was its trading relationship.

Such comments are a theme of Trump’s public statements since 2009. In 2011, he gave an interview with the publisher Steve Forbes in which he said that dealing with China is ‘never easy’, that he was not anti-China (‘I get along great with them’), but that it is ‘ridiculous to allow them to do what they are doing to this country’, accusing China of manipulating its currency. Trump added, however, that he would behave the same way if he could ‘get away with it’, implying at least a grudging respect for Beijing’s commercial acumen.

Nevertheless, at a 2014 political conference, Trump again criticised China for devaluing its currency. ‘What they are basically saying,’ he said, ‘is that “we are really ripping you big league and nobody’s ever done it better than us, but now we are really going to do it again”.’ Trump said China devalued in response to weak and ‘pathetic’ U.S. leadership. ‘Believe me, they are taking our jobs,’ he added, saying that other countries were doing the same.

By this, he seemed to include Japan. ‘When was the last time you saw a Chevrolet in Tokyo?’ Trump asked on this year’s campaign trail, highlighting the number of Japanese cars sold in the United States – albeit almost all of them made in the U.S. by American workers. Such arguments have been made in the U.S. since the 1980s, given that Japan was the country that first pioneered the East Asian model of industrialisation. Yet the potency of such arguments was lessened by Japan’s relatively small size, lack of a military threat and friendly relations with the U.S. Resurgent China presents a very different proposition.

A long time coming

For the past 38 years, China has pursued the East Asian model, along with Japan and South Korea. All three countries enjoyed rapid industrialisation in the second half of the 20th Century by offering varying degrees of protection to infant-industries tasked with ‘catching up’ with Western technology, replicating it, and then exporting cheaper versions of those products, while at the same time protecting their domestic markets with a tangle of trade barriers, many of them cultural.

For much of this time, the West’s policy response to this mercantilist East Asian model has been serenely relaxed, a response its critics have dubbed ‘unilateral economic disarmament’. Many Western policymakers, often with legal backgrounds and versed in academic theory rather than with direct experience of business or finance, appear to have assumed that rules-based capitalism (even state capitalism) would inevitably bring democracy and freedom to Asia in general and to China in particular. Rising income levels in China, so the theory went, would inevitably raise levels of education, private property ownership and private enterprise among the Chinese to the point that Beijing’s authoritarian political and economic system would give way to liberal capitalism and democracy.

This theory was effectively repudiated by the Chinese state’s crushing of the 1989 Tiananmen protests. Nevertheless, the West persisted, drawn increasingly by the allure of China’s huge markets and low cost-base rather than earlier neo-missionary beliefs in the need to somehow ‘save’ the Chinese from themselves, or at least from their system of government. U.S. manufacturing employment moved rapidly offshore, largely triggered by U.S. companies seeking lower manufacturing costs and access to the Chinese market.

The process was accelerated when China was admitted to World Trade Organisation (WTO) in 2001, even though its government still controlled almost all key sectors of the Chinese economy. Despite much congressional debate, however, the U.S. never labelled China a currency manipulator under WTO rules, despite the Chinese renminbi often being markedly undervalued against the dollar as a result of Chinese state policy.

The inevitable backlash

The West’s complacency towards China’s economic policies began to fray in the 2000s. China’s imbalanced trade and development strategy saw it amass colossal reserves of dollars, which it recycled back into U.S. Treasury bonds – the only market big enough to accommodate them. Effectively, the U.S. government no longer needed to pay interest on its debt, so great was Chinese demand for it. This served to flatten interest rates across the West, made credit too cheap and helped inflate financial and property bubbles that burst in 2008, causing an economic depression in Europe and North America.

China’s inefficient state-directed economy also ‘dumped’ over-production onto Western markets, a deflationary wave that heaped intense pressure on some Western industries such as steelmaking. Yet rather than acknowledging this, Western politicians of the centrist mainstream tended to attribute such job losses to the ‘Invisible Hands’ of globalisation and Ricardian comparative advantage, refusing to admit that the hands of the Communist Party of China (CPC) and its economic strategists were neither ‘invisible’ nor market-led.

Today, there is no obvious sign that globalisation is about to change China’s political system, but it is unquestionably causing upheaval across the U.S. and Western European democracies. The question now is whether the U.S. government under Trump is about to abandon the ‘capitalism brings democracy’ approach to China and impose the sizeable tariffs on Chinese exports that he has promised.

This would stoke inflation in the U.S., push up interest rates and potentially bring stagflation. But as the United Kingdom’s vote to leave the European Union showed in June, many Western voters are mutinous and care less about ‘the economy’ than was the case before the 2008 financial crisis, not least because many felt betrayed and ignored by an insulated and self-referential political and commercial class. Moreover, by some measures, U.S. living standards peaked in 1999, the year that the U.S. and China signed the bilateral trade deal that would bring China into the WTO system. While the figures are possibly misleading, in that they underestimate the extent to which Chinese industry has pushed down costs for Western consumers, they further promoted the Trumpian idea that globalisation benefits only the elite.

China’s role in redrawing the postwar settlement between capital and labour became increasingly emphasised as a causative factor in the decline in American workers’ living standards. Trump’s presidential victory demonstrated that such arguments had a greater force than incumbent centrist politicians had anticipated, and that they are likely to become more prevalent in European and North American electoral discourse.

What next?

Despite popular animus towards China among Trump’s electoral demographic, talk of a bilateral ‘trade war’ is misleading. The U.S. imports roughly four times as much from China as it exports to the PRC, in 2015 producing a record USD336.2 billion trade deficit. However, many of these goods are made in China on behalf of multinational companies based in the U.S., Japan and South Korea. In 2015, U.S. exports to China in were led by sales of commercial aircraft (USD15 billion), electrical machinery (USD13 billion), machinery (USD12 billion), soybeans (US11 billion) and vehicles (USD11 billion). Services added a further USD45.4 billion.

Trump has not articulated whether imports from China produced by non-China-based companies would be affected by his proposed tariff wall. If they were, it is certain to alienate powerful domestic constituencies as well as U.S. allies in Asia, already concerned over Trump’s pledge to abandon the Trans-Pacific Partnership (TPP) regional trade initiative, and to reverse the U.S. military ‘pivot’ re-deployment towards Asia.

Asian markets reacted negatively to the election result, but the trend was quickly reversed after U.S. markets, particularly the industry-heavy Dow Jones Industrial Average, rallied in the expectation that the benefits of the president-elect’s pledge to cut taxes and boost infrastructural spending would outweigh his anti-trade rhetoric. Asian currencies, including the Indonesian rupiah and Malaysian ringgit, fell against the U.S. dollar. The Chinese renminbi also weakened.

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