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3 Subtle Ways China Is Beating Trump At His Own Trade War

May 17, 2019, 12:00 PM UTC

The most classic political blunder, as sages would tell, is never get involved in a land war in Asia. But only slightly less well known is to never wage a trade war there, either.

There are supposed to be no winners in a trade war in Asia or anywhere else, for that matter, on pure economics. And yet, Donald Trump has continued to try buck a long-held consensus by ratcheting up tariffs and filing criminal charges against networking equipment vendor Huawei in the U.S.’s ongoing trade dispute with China.

Perhaps permanently higher tariffs are part of Trump’s near-term economic and political goals. He left higher rates in place with Mexico and Canada, even after the two countries agreed to a new version of the old NAFTA. But there’s little winning in evidence.

China, however, plays by different rules—a long game with a focus on more than money. “It has no incentive to play a short game,” said Linda Lim, professor emerita of corporate strategy and international business at the University of Michigan. “They can afford to lose [economically] in the short run.”

China’s planning, options, and long-term goals have led some observers to a striking conculsion: that the U.S. has already lost this trade war. The administration just doesn’t know it yet.

Playing the long game

China would like to see the emergence of a multi-polar word in which multiple great powers balance one another, rather than in an age of U.S. hegemony, says William Hurt, a professor of political science at Northwestern.

“China hopes to paint Trump and the U.S. not so much as adversaries, but increasingly as outliers and antagonists in the international economic and security order,” he writes. “If the United States becomes more isolated and less trusted, this weakens any claim to American hegemony.”

On one hand, China has pursued its desire for greater prominence and influence on the international front. Officials appear at international conferences; invest in the Belt and Road initiative by building large infrastructure projects in Asia, Europe, and East Africa; and reduce dependence on technology and trade with the U.S.

Trump has played right into China’s goal of a shift in power and international trust; through this trade war he is turning the U.S. into a foil.

“The U.S. is making it easy to make more friends internationally,” said Linda Lim, professor emerita of corporate strategy and international business at the University of Michigan. “China is making friends and influencing people at the [same] time as the U.S. is making enemies and withdrawing from people.”

Nobody likes a bully

On the immediate economic face of things, both sides have been hurt. “The way the president and to some degree the Chinese see it is as a negotiation game, two people looking at each other over a chess board,” said Max Gulker, senior research fellow at the American Institute for Economic Research. “They’re destroying wealth in both of their countries.”

The U.S. has faced a $75 billion cost so far, in the calculations of Gulker and colleagues, or about the total annual household savings the 2017 GOP tax cut was supposed to deliver, from higher costs on imported goods. Although many companies have been slow to pass on the expenses to consumers, that will likely happen—possibly as soon as June.

China, on the other hand, has a lower bill because its imports from the U.S. are much smaller. It still is sensitive to a drop in trade. The International Monetary Fund forecasts a 6.3% rate of real GDP growth in China this year, but that number has been dropping since 2010 and will continue to in projections through 2024, when it reaches 5.5%.

But even in the exchange of monetary body blows, China is like a fighter that has toughened itself to take the hits while watching its opponent tire. The country is currently buttressing other trade relations to minimize the impact, especially with critical imported agricultural goods.

China could also allow its currency, the renminbi, to depreciate in value rather than prop it up as it frequently has done. That “would make the Chinese exports cheaper, thus undercutting the [U.S.] tariff increase,” according to Todd Lee, executive director of global economics at business research provider IHS Markit. That could reverse reduced exports to the U.S.

Most importantly, China has rallied domestic political support critical to maintaining the strategy. By holding its ground on issues of policy and “playing the patriotic nationalist card,” as Lim said, the country improves its standing and retains support of the populace. The goal is “to look like the good guy being bullied by the bad guy,” she said. “It’s not just for home, but for other countries,” and so provides additional benefit.

Quiet retaliation

China can also inflict subtler direct and indirect economic damage on the U.S. while retaining the appearance of non-aggression.

China could further frustrate and punish the U.S. by reducing the ability of its companies to compete in that country. “It can be more oversight or a changing of protocol, so your application gets held up a month and the European application goes through quickly,” said Thomas Prusa, professor of economics at Rutgers University. Companies will pressure the U.S. government

Although more aggressive actions may be unlikely, according to experts, they are also available. China holds about 8% of U.S. national debt. “It wouldn’t take much movement of them with public statements to have an effect on markets,” Prusa said. China could avoid truly endangering its own investment while rattling U.S. markets. Or officials could, if they were inclined, turn more of a blind eye to product counterfeiting, a practice that angers a number of industries here.

China can have more patience as it doesn’t face a major election next year. “[Trump is] so desperate for an agreement that he might agree to very little just so he could claim to his base that he achieved something,” Prusa said.

As a result of these strategies, China has obtained a stronger position in the immediate tariff impositions, promoted the view that the U.S. cannot be trusted as the world’s single superpower, improved relations with other countries, and retained the ability to inflict damage on corporations that will in turn pressure the administration.

Maybe you can win a trade war after all, even if in Asia.

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