In the U.S./China Trade Scrap, No One Gets the Throne

In the U.S./China Trade Scrap, No One Gets the Throne
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Whatever happens in the U.S.-China trade war, whatever deal is forged or escalation ensues: uncertainty is the only certain outcome. Market participants in both countries and beyond will rightly think twice before doing business or investing in the other country’s economy. From simple import/export deals to moving production facilities to the entire universe of digital trade: The consequences are going to be felt everywhere. The hallmark of this uncertainty is how freely and abundantly tariffs have been employed as a negotiation tactic on both sides. With tariffs now deemed an appropriate tool for negotiation, the postwar reluctance to impose them as part of a trade dispute seems to be defenestrated. That’s a genie that will be hard to get back into the bottle. Companies and investors will be rationally wary.

The first U.S. companies are already rethinking their supply chains – something President Trump incidentally considers a positive outcome. The Trump executive order limiting Huawei’s access to American technologies (Android), while it has many loopholes, foretells the future: a future where every cross-border transaction involving the U.S. and China – at least! – is presumed guilty until someone ‘proves’ that no national security interests are threatened. Even if plenty of deals will still go through, each and every step will be held up by government studies and political interference.

A leading alternative for getting those goods – generally simpler commodities several rungs below the complexity of cell phones – that American consumers like to buy is Vietnam. That’s actually old news. Vietnam has been an alternative for inexpensive labor and low-end goods for years. American discount stores are full with stuff “Made in Vietnam." Incidentally, that’s the natural direction for China’s economy to evolve in, as it moves towards higher-value good and services while its population swiftly outgrows the worst woes of poverty. This transition, never to have been an easy one, will only be accelerated by the Trump tariff pressures and national security strictures on outsourcing.

The word on K Street has long been that the actual goal behind Trump’s reset of the U.S.-China economic relations is a hard split of world markets into two spheres of influence, with the U.S. leading one, China leading the other, and little interaction between the two. The Huawei case seems to bear that out, but it is still a foolish notion writ large. Can the U.S. possibly want to forgo China buying U.S. debt? Or China closing their markets to American direct investment? Or deprive Patriot Farmers of America of sales of soybeans and sundries to Chinese consumers? (No taxpayer payout will make up for the losses endured by those farmers.) None of this furthers the stated goal of Trump’s trade policies, which is to increase, not decrease, access to China by U.S. producers of all kinds. Breaking up the market into separate segments would hardly get the job done.

You can't open up a market if you are trying to break it into two huge, separate segments. Game of Thrones may end with two kingdoms and two thrones, but in the U.S.-China battle no one gets the seat of power.

Instead, economic activity between the two megastates will slowed by volatile tariff moves and security vetting, with every deal having to be hammered out on its own terms and subject to ongoing friction between the two governments. Friction costs money, which means fewer growth opportunities and lost. It’s hard to envisage a scenario in which that would benefit American workers or consumers in any real or psychological way. Or anyone in China, for that matter. Instead, it will simply mean a great expansion of State power on both sides over economic relations. The result would not be a bifurcated global economy, but a slower-moving and poorer one. In this scenario, the U.S. would shift closer to the Chinese model of State control over the economy, rather than China moving closer to the Western model of truly free markets.

Amid endless reports of which negotiating team is headed which way this week and which industry is getting a quota or special deal in the latest round of deal-making, and whether Trump or Xi is softening or toughening rhetoric today, think about this: The big picture is endless turbulence and unsettled markets being baked into U.S.-China relations. In fact, there are those who would suggest that that is Donald Trump’s real objective here.


George A. Pieler is a lawyer and free lance writer on public policy. Jens F. Laurson is Editor at Large of the International Affairs Forum.

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