It is not very difficult to know who the real target of President Trump's trade war is - it is undoubtedly China. During his presidential campaign, Trump, said, "There are people who wish I wouldn't refer to China as our enemy. But that's exactly what they are." Yet, China responded in a very measured way, expressing its dismay and promising to respond appropriately if injured.
The European Union (EU), Australia and Japan voiced their opposition in the loudest terms; but they are not the real target of Trump. Their loud voice and even the threat of retaliations are mere brinkmanship to extract maximum concessions for trade and investment deals.
Trump knows, they are America's allies; but he is a master 'dealer'; he brags his deal-making skills. With one hand dangling the carrot of exemptions and with the other hand brandishing the dagger of tariffs, Trump wants to solidify America's alliance against the rising formidable China.
But can he win? It seems very unlikely for several reasons.
First, tariffs will soon immensely cost the domestic economy. There will be more losers than the several hundred workers and a few factory owners in America's steel belt. For example, when President George W. Bush imposed a 30 per cent tariff on steel in 2002, again targeting China, American steelmakers' profits did rise; but profits of the American companies that depend on steel to make their products fell. As a result, they shed 200,000 workers. So trade protection harmed America much more than it helped, and Bush had to abandon steel tariff in less than two (2) years. Thus, tariffs are self-defeating.
Second, although China is a key player globally, producing no less than half of all steel made worldwide (10 times the US output), it is not a major supplier of steel to the US. China's share of America's steel imports in 2017, for instance, was only 2.0 per cent - equal to that of India, and less than Taiwan's 3.0 per cent. Thus, this will be a minor disruption for China. The top steel supplier to the US is Canada with a share of 16 per cent in 2017, followed by Brazil (14 per cent), South Korea (10 per cent) and Mexico (9.0 per cent). Canada and Mexico are America's partners in North American Free Trade Agreement (NAFTA), and South Korea is a strong ally as are Japan and Germany which together supply about 9.0 per cen to America's steel market. Thus, President Trump is already talking about granting exemptions to allies on 'national security' ground.
Third, even after winning tariff concessions, America's allies are unlikely to sign up against China, as all of them have significant trade and investment links with China. "In a world marked by great uncertainty and volatility, the international community is looking to China," Klaus Schwab, the founder of the World Economic Forum (WEF), said last year while introducing his guest, the Chinese president and general secretary of China's Communist Party, Xi Jinping. The allies will more likely reap benefits from both the US and China, playing one against the other. However, Trump may be able to shift some of US's global military burden to the allies as he often blames them for 'free riding' in his grand bargain.
Fourth and most importantly, Trump's tariff is an ancient weapon suited for another era. Tariffs were used in the 17th Century campaigns fought in the name of mercantilism. One can't expect to win a war with swords when the warfare is conducted with drones and robots. Even conventional nuclear weapons seem obsolete in the face of new 'invincible' nuclear weapons.
Even in the 20th Century, tariffs did not work and harmed the American economy. The Smoot-Hawley tariff bill, introduced in 1930, is among the most decried pieces of legislation in US history. It is blamed for turning a recession into the Great Depression of the 1930s. Some go even further to label it as one of the factors that triggered the Second World War. One hopes that Trump's tariffs do not trigger a major global depression, or worse, a catastrophic war.
On the other hand, China chose a much more sophisticated weapon, i.e., a worldwide investment strategy. The key to its brilliance is that it is eagerly welcomed. Thus, China's investment activity around the globe is rapidly growing. So far 68 countries embracing two-thirds of the world's people have signed up China's 'Belt and Road programme'. This signature economic war weaponry is designed to connect Asia to Europe by road, rail, ports and pipelines, potentially sweeping as far south as Australia and the South Pacific and as far west as Africa and Latin America.
'Belt and Road' is the most ambitious infrastructure project since the Roman Empire. China is spending about $US150 billion a year on it, with a total value estimated at up to $US8 trillion. This gives China a tremendous source of power over supplicant states.
Besides 'Belt and Road' investments, China is also belligerently engaged in commercial acquisitions across the world, especially in the West. With $US814 billion, China Investment Corporation (CIC), is one of the largest sovereign wealth funds in the world. In June, 2017, the CIC agreed to buy Logicor, a pan-European logistics company, from Blackstone for €12.25 billion (US$18.4b), defying an implicit ban regulators had put on deals over $US10 billion. The CIC joined a consortium of global investors in 2016 to buy a controlling stake in the gas distribution division of the UK's National Grid for £3.6 billion, one of the largest acquisitions of UK infrastructure in recent history, testing the UK's new rules on foreign investment into this sensitive sphere.
Many western countries have become anxious about China's aggressive acquisition strategy and are enacting tighter foreign investment rules. But with a vast portfolio, the CIC is already a major player in infrastructure, with projects like Heathrow Airport, serving London; Thames Water, which supplies the British capital; and the Port of Melbourne in Australia.
Some White House officials and lawmakers want to expand the power of the Committee on Foreign Investment in the US, a multiagency government panel that can effectively quash Chinese investment deals for national security reasons. But the US, living beyond its means, is hungry for money. It owed US$1.2 trillion to China as of November 2017. The US was the largest investment destination for the CIC, with more than US$90 billion, mostly in the financial sector.
If President Trump wants to keep his election promise of massive infrastructure investment, surely the CIC would be eager to lend a helping hand as Mr. Ding Xuedong, the then CIC Chairman, said in January 2017 that it wanted to invest in American real estate, infrastructure and technology.
So, as Mr. Trump wields an ancient weaponry, China will have the last laugh.
Anis Chowdhury, Adjunct Professor, Western Sydney University and the University of New South Wales (Australia); held senior United Nations positions in New York and Bangkok during 2008-2016.
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