The trade war between the United States and China: this is just the beginning

The US-China trade war is heating up in a battle that could last for years. Last week, President Trump imposed new tariffs on Chinese exports of $ 200 billion to the United States. The Chinese government reacted with tariffs on $ 60 billion worth of US goods. The economic effects of this trade war between the two largest economies in the world (the United States at $ 19 trillion and China at $ 12 trillion) are emerging. While many people in the world do not know this, recent damage is just the beginning.

This trade war between the United States and China was mainly due to confusion. The Chinese government does not understand Donald Trump's business objectives because they are not primarily business goals. Donald Trump has the bit between his teeth. He wants both victory and public adulation, to feed his ego and keep a promise to his constituents of 2016 to renegotiate unfair trade deals between the United States. He also fantasizes that he teaches China who is the boss. What is really happening is that China is gaining ground in the United States in key strategic areas, such as military power, economic influence, and scientific achievements, and that the United States is now turning its back a new rival.

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In 2015, Chinese President Xi Jinping launched a "Made in China 2025"Plan, which clearly aims to overcome the US industrial dominance in information technology, advanced machinery, aerospace and new energy vehicles, coupled with similar efforts in the fields of quantum computing, artificial intelligence and biotechnology. This poses an explicit threat to the US's historic industrial and scientific pre-eminence, a supremacy that has underpinned US global influence and military might since the Second World War.

Similarly, the Chinese government has recently established a military presence on the Mischief Reef, near the Philippines, with the aim of creating an area over the South China Sea, an area that the United States and the international community refuse to recognize. of principle.

President Xi can not give this public victory to Trump, otherwise he would lose politically at home. It is not about steel or agriculture, but about the beginning of an open geostrategic confrontation between two of the most powerful countries in the world, one seeking to win the title of the current champion and the another struggling to maintain his dominion.

Today, Wall Street, Frankfurt and Tokyo, among other stock markets around the world, seem jaded in the face of the trade war. Financial markets in Japan, Germany and South Korea all rose last week. In China, where equity markets fell by 20% in 2018, the Shanghai benchmark rose by around 2%. In the United States, the Dow Jones Index and the S & P 500 Index have reached new highs last Thursday. But this strong confidence of Dow / S & P reflects the strength of the US domestic market, while overcoming the unstable business environment. According to many macroeconomic measures, the US economy has reached its highest level in decades. Unemployment is also low as it has been in almost twenty years and the United States corporate profits increased by more than 20 percentage in the first half of 2018. In the second quarter of 2018, the United States GDP growth reached 4.1%, This is the third time it has exceeded four per cent growth since 2011. This domestic market is fueling this expansion of US equity markets.

The opinion among other countries is perhaps that the conflict between the United States and China will pass, insofar as it currently concerns only 2.5% of world trade. Even if Trump applies tariffs on every Chinese export, it will only reach 5.2 percentage of world trade. They can also see a moment of opportunity. The tariffs make Chinese products more expensive for US consumers, so that China's foreign competitors competing for the US market can benefit. For example, In 2017, China exported $ 147 billion worth of electrical machinery in the United States, compared to $ 62 billion in Mexico. With these tariffs, Mexico could possibly engulf the market share left by the United States. Conversely, with regard to the Chinese market, European and Japanese builders without WE. physical presence could replace US suppliers in China selling vehicles, planes and chemicals.

In the end, everyone should be worried. The United States, China and all trading countries will face real economic difficulties as a result of this trade war. Chinese government officials have already admitted. Vice President of China's securities regulator, Fang Xinghai, pointed out that tariffs could reduce China's annual economic growth of 0.7 percent.

China's recognition of the seriousness and sustainability of this schism is reflected in multiple channels. Jack Ma, the CEO of China's Alibaba, the world's largest retail company and one of the world's top ten largest companies, was one of the most important public cheerleaders in business cooperation between United States and China. When he met Donald Trump on January 9, 2017 at the Trump Tower in New York, Ma promised to create a million new jobs in the United States by helping small US companies to sell goods in China. Last Wednesday, Jack Ma abandoned the American ship. In an interview with a Chinese newspaper, he said that he thought this current trade dispute would last 20 years and that he has no longer felt committed to creating these jobs in the United States. He also announced his imminent resignation as CEO of Alibaba. Given Ma's exceptionally close relationship with the Chinese government, this equates to an official broadcast in Chinese.

Maintaining strong economic growth to maintain a high employment rate among China's 1.4 billion people is perhaps China's central political goal, and the Chinese government will adapt to it because he must do it. They will roll out other national stimulus efforts, such as easing recently tightened banking restrictions and possibly setting up more national infrastructure and other investment programs.

This is not without sacrifice and has, in rare cases, forced China to adjust its domestic policy because of a foreign power. The main internal goal of President Xi is to reduce the debt of the Chinese economy to avoid a financial crash similar to that of the United States in 2007-2008. The current trade war has already forced it to pull out of this goal and allow banks and other drivers of economic growth to continue on an aggressive path that will support high employment rates. Xi can not afford to look weak at home, especially in the United States, so China is moving away from the fray.

This clash of economic titans threatens all multilateral trade standards and replaces them with rising tariff and non-tariff barriers around the world, putting pressure on multiple economies and eliminating the winners of this process. More worryingly, this volatility of trade triggers a race of global dollar assets to global investors, exacerbating pressures on countries with unstable currencies already preoccupied with inflation and depreciation.

The conflict with China is also hurting America at home. As a result of this tariff battle, Wal-Mart indicated that prices would rise for US consumers and businesses. At least 11 million WE. jobs are threatened by the tariffs of China.

US agriculture may have been the hardest hit by Chinese tariffs as US soybean prices reached their lowest level in a decade. Instead of negotiating with China, the Trump Administration has authorized the US Department of Agriculture to pay up to $ 12 billion to these affected farmersin the form of subsidies to producers of certain basic commodities (soybeans, maize, cotton, dairy products, hogs, cereals, sorghum and wheat) and direct purchases. Since farmers are part of Trump's political constituency and, according to Mark Muro of the Brookings Institution, rural and sparsely populated people are extremely vulnerable to such global economic upheaval, Trump and the Republican Party are keen to improve their suffering.

Even if the United States is harmed, there is no chance that Trump will back down. He thinks that he alone can change the global trading order, make trade relations between China and the United States fair and, more importantly, he wants a personal victory. This position is reinforced by several Trump officials and even by external forces, for very different reasons.

For example, the US Trade Representative, Robert Lighthizer, also wants a victory, but a strategic victory. Lighthizer focuses more on addressing key future industries (such as artificial intelligence, electric vehicles, software and technology) as agriculture, automotive and steel. He is trying to use this confrontation to protect advanced American businesses and intellectual property in the future, rather than roll back the industrial clock.

It is unlikely that the United States will change its trading position in the future. Even if Democrats take control of the House of Representatives after the mid-term elections in November, as is expected with 80% probabilitythey are more likely to support this aggressive stance against China than Republicans, the traditional free trade party. Democrats have traditionally been suspicious of modern multilateral trade treaties, fearing that labor, civil rights and environmental issues will be reduced in favor of business growth concerns. Democratic Party figures such as Senator Sherrod Brown (D-OH) fiercely oppose Chinese business practices in the United States, saying thatChina persists in cheating [trade] system."

In previous exchanges with America, the Chinese relied on the WE. adopting a traditional position of free trade and multilateralism, which resulted in the sending of contentious cases to the World Trade Organization. It has worked well for China over the past 20 years, but it was another time.

Current trade negotiations between the US and China or other well-meaning proposals will not end this cycle of tariff retaliation, as both countries claim relative dominance through economic competition. Donald Trump will pursue ambitiously with the long-standing American goal, put pressure on China for it to abide by the international rules (and the international hierarchy) established by the United States there are more seventy years old. China clearly has other plans for the 21st century. And neither party wants to back down, leaving no clear path to resolution.