China’s Smart Trade Moves
China has already shown itself to be handling US trade pressure in a much more savvy way than Japan did in the 1980s. Far from laying the groundwork for a protracted recession, China’s response – increasing imports and accelerating domestic structural reforms – will support high-quality long-term growth.
SHANGHAI – US President Donald Trump’s announced plans to target China with trade tariffs represent a significant departure from his predecessors’ approach. China is now seen primarily as an economic adversary, rather than an economic partner. That may be a difference of degree rather than kind: Trump’s policies are the culmination of a decade of US trade frustration.
The sources of US frustration are well known. Since joining the World Trade Organization in 2001, China has been accused of failing to meet its market-access obligations, and even of having regressed in some areas. Moreover, China is believed to have long used state intervention, including industrial policy, to limit US businesses and investment in the domestic market, while enabling Chinese enterprises to achieve rapid technological progress.
More fundamentally, however, the US is concerned that China’s rapid economic development now poses a real challenge to America’s global influence. This has fueled a sense that China must be “contained.” In Trump’s view, part of the solution is trade protectionism.
In the 1980s, protectionist US policies successfully contained the growth of Japan, which, like China today, maintained a large trade surplus with the US. But those policies’ success was rooted partly in Japan’s problematic policy choices, including slow fiscal and monetary responses. In order to reduce the bilateral trade surplus, Japan introduced so-called voluntary export restraints, which hollowed out its real economy, while providing excessive protection to its non-tradable sectors. The result was a decades-long recession.
But trade patterns have changed so much since the 1980s, particularly owing to the emergence of regional and global supply chains, that the very notion of a bilateral trade imbalance – one of the main sticking points for Trump – seems outdated. After all, the added value China actually derives from its exports is not nearly as large as its trade surplus.
In fact, over the last decade, China’s global current-account surplus has shrunk at an unprecedented rate, falling from 10% of GDP in 2007 to a mere 1.4% today. Meanwhile, there has been little change in the US trade imbalance, indicating that America’s massive deficit is not China’s fault at all. In fact, the blame lies squarely with US macroeconomic realities, namely a low rate of domestic saving and a high rate of federal borrowing, which Trump’s tax cuts will cause to increase further.
China recognizes the absurdity of the Trump administration’s obsession with forcing it to reduce the bilateral trade surplus. But it also knows that a trade war would not be good for anyone. To ease trade frictions, unlike Japan’s voluntary export restraints, China’s leaders have promised to increase imports and open up the domestic market, with President Xi Jinping predicting $8 trillion worth of merchandise imports within the next five years.
This is a smart move, and not just because it will help appease the US, as well as European countries that have complained about limited access to the Chinese market, not to mention international financial institutions. As underscored in a joint statement of the US and China regarding trade consultations, “significantly” increased Chinese purchases of foreign – in particular, US – goods and services will also enable the country “to meet the growing consumption needs of the Chinese people and the need for high-quality economic development.”
China imported $2 trillion worth of goods in 2017, of which consumer goods accounted for only 8.8%. Expanding the share of consumer goods might significantly improve the welfare of Chinese citizens, who, because of existing tariffs and non-tariff barriers, now often travel abroad to make purchases. In fact, international purchases by Chinese are now equivalent to the value of all of the consumer goods China currently imports, even without taking into account fast-rising online overseas purchases.
Shifting those purchases to China would help propel the shift toward a more consumption-driven economy, particularly as the middle class – and its purchasing power – grows. The impact would be even greater if US and European countries responded to Chinese calls to export high-tech products more freely.
Similarly, greater openness to investment is crucial for China as it seeks to ensure continued technological progress. As it stands, even if China’s economy is the same size as America’s, China will maintain a competitive advantage in manufacturing, because its per capita GDP is only one-quarter that of the US.
Yet China remains in a low position on global value chains, despite recent improvements. And, so far, its technological advancement has depended largely on greater openness to direct investment, which has supported progress in research, development, and application of advanced technologies.
If China is to continue upgrading its economy, this process must continue, supported by initiatives to promote entrepreneurship and protect intellectual property rights. Fortunately, China knows this well. The authorities are hoping for foreign direct investment of $600 billion in the coming five years, and expect Chinese outward direct investment to reach $750 billion five years later.
Already, China is backing up its words with action. To promote expanded consumer imports, the country will hold its first import expo in Shanghai in November. To spur financial investment, China will raise foreign-ownership limits to 51% within three years, on the path toward ultimately removing restrictions altogether. By 2022, it will scrap foreign ownership limits on local auto firms, boosting companies like Tesla, which could then fully own a subsidiary in China.
To be sure, more must be done, and China needs to go further to clear institutional barriers to manufacturing and financial reforms. But China has already shown itself to be handling US trade pressure in a more savvy way than Japan did in the 1980s. Indeed, far from laying the groundwork for a protracted recession, China’s response – increasing imports and accelerating domestic structural reforms – will support high-quality long-term growth.
America’s Collision Course With China
In the future, historians will lament that America’s long-term policy toward China was not a result of calm calculation. Instead, they are likely to focus on how America’s political polarization and simplistic ideology – shared by many who should know better – drove it into a highly damaging and utterly pointless conflict.
SINGAPORE – The world’s most important bilateral relationship – between the United States and China – is also one of its most inscrutable. Bedeviled by paradoxes, misperceptions, and mistrust, it is a relationship that has become a source of considerable uncertainty and, potentially, severe instability. Nowhere is this more apparent than in the brewing bilateral trade war.
The key assertion driving the current dispute, initiated by US President Donald Trump’s administration, is that America’s trade deficit is too big – and it’s all China’s fault. US Treasury Secretary Steve Mnuchin has gone so far as to demand that China unilaterally cut its trade surplus vis-à-vis the US by $200 billion by 2020.
But most sensible economists agree that America’s trade deficits are the result of domestic structural economic factors, especially low household savings, persistent government deficits, and the US dollar’s role as the world’s main reserve currency. According to Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, if the US wants to reduce its trade deficit, it should start by reducing its massive fiscal deficit.
Yet it is not even clear that America’s trade deficit urgently needs to be cut. While the external deficit is certainly large, the US can live beyond its means in a way other economies cannot. Thanks to the dollar’s reserve-currency status, the US can absorb most of the rest of the world’s savings, which finance its saving shortfall. Moreover, as Trump’s own Council of Economic Advisers noted in February, the US enjoys a services surplus with the world, including with China.
But it is not just the Trump administration that shuns rational economic argument. Trump’s approach to trade with China enjoys more mainstream support in the US than most of his policies, because most Americans – including many who otherwise oppose Trump – are convinced that China is not playing fair. The political commentator Fareed Zakaria, for example, has stated that “on one big, fundamental point” Trump is right: “China is a trade cheat.”
What all this China-bashing leaves out is that cheap Chinese imports have drastically improved the quality of life of American workers, whose median income has stagnated for 40 years. According to the consultancy Oxford Economics, buying Chinese imports saves American families around $850 annually. Given that 63% of American households do not have even $500 saved for emergencies, this is not an insignificant amount.
Of course, open trade with the US and the rest of the world has enabled China to achieve the fastest poverty reduction in human history. But that does not mean that China is reaping most of the economic benefits. For example, the Chinese manufacturer Foxconn earns just $7.40 for every $800 iPhone that is sold; most of the value goes to Americans.
Chinese policymakers now put their faith in what was arguably the West’s most important export: modern economic theory. Yet they remain subject to damaging decisions made by a US plagued by misperception. The question is whether China will bow to US pressure.
China’s leadership is, ultimately, pragmatic. If a few symbolic concessions (like the voluntary export restraints to which Japan agreed in the 1980s) could prevent a collision, China may make them. But, when it comes to bigger – and economically unjustified – demands, China is likely to hold the line.
Here, the most obvious example is Mnuchin’s demand that China abandon its “Made in China 2025” plan. China has already been subjected to American export controls on high-tech equipment (including the recently imposed seven-year ban on the sale of software or components by US companies to ZTE Corporation). It is not about to give up its quest for high-tech development, a critical element of a clear long-term strategy for moving its economy up the global value chain.
In short, however rational China tries to be, a trade war remains a real possibility – one that will hurt both Americans and Chinese. And this outcome is made all the more likely by a deepening disquiet in the bilateral relationship.
A three-month sabbatical at two leading US universities has underscored for me the extent to which attitudes toward China have soured in recent years. If Chinese policymakers were aware of the intensity of this shift – and I have informed a senior figure among them – they would realize that their calm and rational policies toward the US during the past 20 years may well not work in the next 20.
It would take an entire book to explain why America’s opinion of China has turned so negative. But some reasons are obvious. Within the next decade, China will overtake the US economically, despite not being a democracy. Several thoughtful Americans have told me that they could live with a larger China, if it was democratic.
Here, again, there is some irrationality at play: a democratic China would be far more susceptible to populist and nationalist pressures, and thus would probably be a pricklier partner for the US. Yet the US remains blinded by ideology, and thus is unable to see the benefits of a China guided by economic rationality.
In the future, historians will lament that America’s long-term policy toward China was not similarly a result of calm calculation. Instead, they are likely to focus on how America’s political polarization and simplistic ideology – shared by many who should know better – drove it into a highly damaging and utterly pointless conflict.
A Bilateral Foil for America’s Multilateral Dilemma
The May 19 deal between the US and China seems to have reduced tensions between the two countries. But, given the global nature of America's trade deficit, any effort to impose a solution focusing on one country will likely backfire.
NEW HAVEN – The good news is that the United States and China appear to have backed away from the precipice of a trade war. While vague in detail, a May 19 agreement defuses tension and commits to further negotiation. The bad news is that the framework of negotiations is flawed: A deal with any one country will do little to resolve America’s fundamental economic imbalances that have arisen in an interconnected world.
There is a longstanding disconnect between bilateral and multilateral approaches to international economic problems. In May 1930, some 1,028 of America’s leading academic economists wrote a public letter to US President Herbert Hoover urging him to veto the pending Smoot-Hawley tariff bill. Hoover ignored the advice, and the global trade war that followed made a garden-variety depression “great.” President Donald Trump has put a comparable spin on what it takes to “make America great again.”
Politicians have long favored the bilateral perspective, because it simplifies blame: you “solve” problems by targeting a specific country. By contrast, the multilateral approach appeals to most economists, because it stresses the balance-of-payments distortions that arise from mismatches between saving and investment. This contrast between the simple and the complex is an obvious and important reason why economists often lose public debates. The dismal science has never been known for clarity.
Such is the case with the US-China debate. China is an easy political target. After all, it accounted for 46% of America’s colossal $800 billion merchandise trade gap in 2017. Moreover, China has been charged with egregious violations of international rules, ranging from allegations of currency manipulation and state-subsidized dumping of excess capacity to cyber-hacking and forced technology transfer.
Equally significant, China has lost the battle in the arena of public opinion – chastised by Western policymakers, a few high-profile academics, and others for having failed to live up to the grand bargain struck in 2001, when the country was admitted to the World Trade Organization. A recent article in Foreign Affairs by two senior officials in the Obama administration says it all: “(T)he liberal international order has failed to lure or bind China as powerfully as expected.” As is the case with North Korea, Syria, and Iran, strategic patience has given way to impatience, with the nationalistic Trump administration leading the charge against China.
The counter-argument from multilateral-focused economists like me rings hollow in this climate. Tracing outsize current-account and trade deficits to an extraordinary shortfall of US domestic saving – just 1.3% of national income in the fourth quarter of 2017 – counts for little in the arena of popular opinion. Likewise, it doesn’t help when we emphasize that China is merely a large piece of a much bigger multilateral problem: the US had bilateral merchandise trade deficits with 102 countries in 2017. Nor does it matter when we point out that correcting for supply-chain distortions – caused by inputs from other countries that enter into Chinese assembly platforms – would reduce the bilateral US-China trade imbalance by 35-40%.
Flawed as it may be, the bilateral political case resonates in a US where there is enormous pressure to ease the angst of the country’s beleaguered middle class. Trade deficits, goes the argument, lead to job losses and wage compression. And, with the merchandise trade gap hitting 4.2% of GDP in 2017, these pressures have only intensified in the current economic recovery. As a result, targeting China has enormous political appeal.
So, what can be made of the May 19 deal? Beyond a ceasefire in tit-for-tat tariffs, there are few real benefits. US negotiators are fixated on targeted reductions of around $200 billion in the bilateral trade imbalance over a two-year time frame. Given the extent of America’s multilateral problem, this is largely a meaningless objective, especially in light of the massive and ill-timed tax cuts and federal expenditure increases that the US has enacted in the last six months.
Indeed, with budget deficits likely to widen, America’s saving shortfall will only deepen in the years ahead. That points to rising balance-of-payments and multilateral trade deficits, which are impossible to resolve through targeted bilateral actions against a single country.
Chinese negotiators are more circumspect, resisting numerical deficit targets but committing to the joint objective of “effective measures to substantially reduce” the bilateral imbalance with the US. China’s vague promise to purchase more American-made agricultural and energy products borrows a page from the “shopping list” approach of its earlier trade missions to the US. Unfortunately, the big-wallet mindset of a deal-hungry China reinforces the US narrative that China is guilty as charged.
Even if the stars were in perfect alignment and the US was not facing a saving constraint, it stretches credibility to seek a formulaic bilateral solution to America’s multilateral problem. Since 2000, the largest annual reduction in the US-China merchandise trade imbalance amounted to $41 billion, and that occurred in 2009, during the depths of the Great Recession. The goal of achieving back-to-back annual reductions totaling more than double that magnitude is sheer fantasy.
In the end, any effort to impose a bilateral solution on a multilateral problem will backfire, with ominous consequences for American consumers. Without addressing the shortfall in domestic saving, the bilateral fix simply moves the deficit from one economy to others.
Therein lies the cruelest twist of all. China is America’s low-cost provider of imported consumer goods. The Trump deal would shift the Chinese piece of America’s multilateral imbalance to higher-cost imports from elsewhere – the functional equivalent of a tax hike on American families. As Hoover’s ghost might ask, what’s so great about that?
China’s Weapons of Trade War
China exports more to the US than the US exports to China, and that makes Donald Trump furious. But with the Communist Party’s 19th Congress set to take place in Beijing this year, Chinese leaders are unlikely to yield to US pressure.
BEIJING – China exports more to the United States than the US exports to China. That makes US President Donald Trump furious – so furious, in fact, that he may be willing to start a trade war over it.
Trump has leveled tough protectionist threats against China. As he attempts to consolidate his presidency, he is unlikely to back away from them. And with the Communist Party of China’s 19th National Congress set to take place in Beijing in November, Chinese leaders are unlikely to yield to US pressure.
A trade war would undoubtedly hurt both sides. But there is reason to believe that the US has more to lose. If nothing else, the Chinese seem to know precisely which weapons they have available to them.
China could stop purchasing US aircraft, impose an embargo on US soybean products, and dump US Treasury securities and other financial assets. Chinese enterprises could reduce their demand for US business services, and the government could persuade companies not to buy American. The bulk of numerous Fortune 500 companies’ annual sales come from China nowadays – and they already feel increasingly unwelcome.
Beyond being America’s second most important trading partner, China is America’s main jobs supplier. A trade war could thus cost the US millions of jobs. If China switched from Boeing to Airbus, for example, the US would lose some 179,000 jobs. Reduction in US business services would cost another 85,000 jobs. Soybean-producing regions – for example, in Missouri and Mississippi – could lose some 10% of local jobs if China halted imports.
Moreover, though the US exports less to China than vice versa, it is China that controls key components in global supply chains and production networks. Consider the iPhone. While China provides just 4% of value added, it supplies the core components to Apple at low prices. Apple cannot build an iPhone from scratch in the US, so it would have to search for alternative suppliers, raising its production costs considerably. This would give Chinese smartphone businesses an opportunity to seize market share from major players.
Today, 80% of global trade comprises international supply chains. Declining trade costs have allowed firms to splinter their production lines geographically, with goods processed and value added in multiple countries along the chain. If China threw a handful of sand in the gears of these chains, it could disrupt entire production networks, doing serious damage to the US (and, indeed, all the countries participating in such networks).
An escalating trade war, with each side erecting symmetric import barriers, would fuel inflationary pressure in the US, potentially driving the Federal Reserve to raise interest rates higher and faster than it would otherwise. That, together with diminished growth prospects, would depress equity markets, and declining employment and household income could lead to a sizeable loss of GDP in both the US and China.
A more likely scenario, however, is that both countries would initiate disputes in specific sectors, particularly traditional manufacturing industries like iron and steel production. Meanwhile, Trump will continue to accuse China of manipulating its exchange rate, ignoring the recent downward pressure on the renminbi (which indicates that the currency was actually overvalued), not to mention the simple fact that many governments intervene to manage their exchange rates.
Both Japan and Switzerland have engaged in outright currency intervention in recent years, and the US itself may well join their ranks, when the strong dollar’s impact on US export competitiveness becomes untenable. In any case, China can probably forget about achieving “market economy status” under World Trade Organization rules until after Trump is out of the White House.
The trade confrontation between the US and China will also affect bilateral investment flows. The US may cite national security concerns to block Chinese investments. It may also stop government purchases from Chinese companies like Huawei, and force Chinese firms and wealthy individuals to reduce investments that have hitherto bolstered US asset prices.
A high-quality US-China bilateral investment treaty would create a level playing field for American companies, giving them better access to China’s large market. But those talks will invariably be pushed back, while disputes over intellectual property rights and cyber security will be reinvigorated.
For now, China’s leaders seem convinced that they have little reason to bend to US pressure. For one thing, Trump seems more concerned with other priorities, such as repealing the US Affordable Care Act, reforming the tax system, and investing in infrastructure.
Even if a trade war does happen, China’s leaders assume, it probably would not be sustained for long, given the income and job losses that both sides would suffer. In any case, they have no intention of sending any signal of weakness to a leader so intent on testing other’s limits.
For the past five years, China has sought to establish a growth model that is less reliant on exports and more reliant on domestic consumption. But China often needs a crisis or an external shock to drive reform. Perhaps Trump is that shock. While his policies will be bad for China in the short term, they may also provide the impetus China needs to stop subsidizing exports and perpetuating distortions in the domestic economy. If this happens, China may actually emerge from the era of Trump better off than before.
Managing China’s Global Risks
In addition to structural and cyclical risks, China must address the “gray rhino” (highly likely, but often ignored) strategic risks arising from the intensifying Sino-American geopolitical rivalry. Here, the emerging trade war is just the tip of the iceberg.
HONG KONG – The world economy and international system are now characterized not only by deep interconnectedness, but also by intensifying geopolitical rivalries. For China, the situation is complicated further by US President Donald Trump’s evident view of the country as a strategic competitor, rather than a strategic partner, not to mention massive domestic social change and rapid technological disruption. The only way to mitigate the risks that China faces is with a tough, continuous, and comprehensive reform strategy.
A key risk is financial. At least four “mismatches” lay at the root of past global financial crises, and three of them plague China today. First, with its bank-dominated financial system, China (along with Europe and many emerging economies) suffers from a maturity mismatch, owing to short-term borrowing and long-term lending. Yet, unlike many emerging economies, China does not struggle with a currency mismatch, thanks to its large foreign-exchange reserves and persistent current-account surpluses, which make it a net lender to the rest of the world.
But China has not avoided the third mismatch, between debt and equity: The credit-to-GDP ratio doubled over the last decade, from about 110% in 2008 to 220% in 2017, highlighting China’s under-developed long-term capital and equity markets. Nor can policymakers afford to ignore the fourth mismatch – between ultra-low nominal interest rates and the relatively higher risk-adjusted return on equity (ROE) for investors – which has contributed to speculative investment and widening wealth and income inequality.
These structural risks are largely a result of China’s transformation from an agriculture-led economy to one driven by manufacturing exports. As technology continues to progress, with robotization becoming more accessible, companies that once relied on cheap labor and manufacturing exports increasingly need to produce goods and services closer to domestic consumers in open and globally competitive markets.
In this context, China’s only option is to abandon its low-cost manufacturing export model and move up global supply chains. To that end, the government has already introduced industrial strategies – “Made in China 2025” and “Internet Plus” – to support technological development, adoption, and innovation. The US, however, has taken these industrial policies as evidence of mercantilist state intervention that justifies punitive trade tariffs and other sanctions.
Complicating matters further for China, the rush to create an open, market-oriented economy has fueled corruption and rent-seeking. And, as recent European post-crisis experience has shown, it is politically very difficult to carry out structural reforms when vested interests have captured the regulatory system. That is why Chinese President Xi Jinping has been engaged in a comprehensive anti-corruption campaign – often misrepresented as a power grab – since assuming office in 2012.
Yet China’s problems extend beyond structural imbalances to two types of cyclical macroeconomic risks. The first risk stems from the business cycles in advanced, market-based economies, where interest rates, inflation rates, and growth rates rise and fall together.
The second type of risk reflects the cycle experienced in underdeveloped, non-market-based economies as they make the transition to a market-oriented economy. In this fast-moving cycle, housing and fixed-asset prices (as well as the currency’s value) will increase faster than productivity growth in the tradable sector, owing to supply constraints. As households and investors borrow cheaply to invest in rapidly appreciating housing and fixed assets, bubbles form and then burst, spurring crises. Yet, because the usual response – socialization of bank losses, with a privileged few keeping the profits and bonuses they accrued while the bubble was growing – creates moral hazard, the cycle is likely to be repeated.
Abandoning the distorted and imbalanced incentive structure, and ensuring that both creditors and debtors share and manage risks, would help break the cycle. China could create a system in which broad equity stakes – held by pension, social security, or sovereign wealth funds – are professionally managed, thereby guaranteeing not only that the long-term risk-adjusted ROE is higher than the real (inflation-adjusted) GDP growth rate and the nominal interest rate, but also that the gains are shared widely among the population.
A widely shared positive real ROE would mean less financial repression and a fairer income and wealth distribution. Meanwhile, with more skin in the game, venture capital would be more accountable to investors and savers.
In addition to structural and cyclical risks, China must address the “gray rhino” (highly likely, but often ignored) strategic risks arising from the intensifying Sino-American geopolitical rivalry. Here, the emerging trade war is just the tip of the iceberg. The US and China are set to become immersed in a long-term competition for technological and strategic supremacy. To stay ahead, they will use every kind of leverage and instrument at their disposal. If this competition is left unchecked, it will surely have far-reaching spillover effects.
Risks are normally mitigated through avoidance, hedging, insurance, and diversification. But the Chinese and US economies are both too big and too interconnected to fail, making avoidance and hedging far too dangerous and costly. Insurance would also be impossible, owing to the lack of markets. Diversification may work, if both countries pursue a variety of low-cost, high-return, cooperative win-win options. These include technological innovation that addresses social problems and promotes inclusive growth; further market opening; tough measures against rent-seeking speculators and interest groups; and tax reforms to improve income and wealth distribution.
The fact that trade negotiations are being pursued in tandem with talks over North Korea’s nuclear program suggests that China and the US understand that, in today’s interconnected global system, cooperation is necessary for managing multiple global risks. But if China is truly to build a balanced, resilient, and anti-fragile real economy and financial system, it will need to go further, developing a comprehensive set of risk-sharing mechanisms. It is a task that can no longer be ignored or postponed.
The Gift that Keeps on Giving – to China
By abandoning the thoughtful policymaking of his predecessors in favor of a presidency modeled on reality TV, US President Donald Trump has failed to articulate anything resembling a credible national strategy. Trump’s threatened trade war with China, which is already benefiting that country at America's expense, is a case in point.
ATLANTA – All bad management, a business guru once remarked, is taught by example. Donald Trump is teaching a master class on how not to serve as America’s chief executive. By abandoning the thoughtful policymaking of his predecessors in favor of a presidency modeled on reality TV, Trump has failed to articulate anything resembling a credible national strategy.
Instead, what Trump has delivered during his first 16 months in office is a blow to American influence, most notably in Asia. Trump’s misguided economic nationalism – embodied in new sanctions, tariffs, and scuttled trade deals – has weakened the United States in the Pacific Rim, and created fresh opportunities for America’s adversaries. Trump’s threatened trade war with China is a case in point.
To be sure, China’s predatory economic practices must be challenged. In reneging on promises of reform and further market opening, President Xi Jinping is reinforcing the state sector against foreign competition while ignoring intellectual property theft. But confronting China will require allies; Trump’s approach will only leave the US more isolated.
Even a cursory examination of China’s economic ties with America’s Asian allies illustrates just how ineffective Trump’s attacks on free trade will be. China is the economic heart of Southeast Asia, accounting for 21% of the region’s exports in 2015. China is also the region’s largest importer, with much of the trade from neighboring countries comprising electronics and machinery, underscoring China’s role as Asia’s “processing hub.”
Compare these numbers to Southeast Asia’s trade with the US, Europe, and Japan: in 2015, imports from these economies accounted for over 25% of the region’s total – only slightly more than China’s share. Elsewhere in the region, 25% of South Korea’s exports go to China. For Australia, which counts China as its most important trade partner, the share is 28%, compared to just 7% for the US, Australia’s third-largest export market.
The political implication of these figures is obvious: China is now Asia’s playmaker, and the US is taking a seat on the bench. Seven of the 11 countries that signed the Trans-Pacific Partnership – the Obama-era initiative to expand trade with Asia that Trump rejected during his first month in office – are now participating in the Regional Comprehensive Economic Partnership, China’s rival trade pact. All ten members of the Association of Southeast Asian Nations are at the table, along with Australia, New Zealand, South Korea, Japan, and India, which have free-trade agreements with ASEAN.
Australia is a good example of a US ally whose leaders share America’s concerns about China’s rising power but also understand the economic imperative of staying in China’s graces. Exports of natural resources, like iron and coal, account for roughly 20% of Australia’s GDP and dominate its economic relationship with China. Australians rightly worry about becoming collateral damage in Trump’s bilateral trade dispute.
The consequences of Trump’s trade strategy aren’t confined to Asia. In Latin America, Trump is not only harming American competitiveness; he is also helping Chinese players establish themselves. While the US remains the region’s leading trade partner, its rising protectionism is allowing China to leverage its economic clout to expand its presence and influence. China now ranks in the top-five export markets for 12 of Latin America’s 20 countries, and is the region’s biggest customer for raw materials. And Latin America is second only to Asia in terms of Chinese investment. Over the past decade, China has committed $140 billion in loans to the region, and Xi has pledged $250 billion in direct investment by 2019.
Trump seems oblivious to the fact that his protectionism has only made China’s work easier. As Trump threatens to renegotiate NAFTA “forever,” slashes foreign aid, and plans border walls, his counterpart is emerging as the global champion of free trade and multilateral cooperation. Xi has visited Latin America three times since 2014, and in January, China announced that Latin America will be included in China’s massive Belt and Road Initiative. The message to the region is clear: China is here, and it intends to stay.
Whatever Trump expects from his trade bluster, the effect on American influence around the Pacific Rim – and beyond – should not be underestimated. While China’s authoritarian regime faces major challenges in translating its economic might into soft power, its leaders are clearly benefiting by advocating for open global trade.
Previous US presidents have worked hard to craft an integrated economic and strategic approach to America’s relationship with Asia. In contrast, Trump is pitting the US against its Asian allies. Closing this rift will not be easy. Ironically enough, when the time comes to repair the damage, Trump’s campaign vow – “America First” – will point to where American leaders need to begin.