President Donald Trump shocked the world when, in 2018, under the banner of “America first”, he lashed out at foes and friends alike with punitive import tariffs on anything from solar panels to washing machines. Starting in 2018 he and his economic team of protectionists levied tariffs of between 30 and 50 per cent on imports, ostensibly to protect American jobs.
Economic adviser Peter Navarro, trade representative Robert Lighthizer and Secretary of Commerce Wilbur Ross, a corporate investor, had a close understanding of the coal and steel industry, but a muddled understanding of the workings of tariffs. Their unorthodox idea was that a chronic trade deficit was bad for America and they would come out with guns blazing.
The centrepiece of their policy was a shift away from international agreements to be replaced by more narrow bilateral protocols and a levy on all steel (25%) and aluminium (10%) imports. To the bafflement of everyone at the receiving end was not only southeast Asia, but also the EU, Canada and Mexico. Central foe in Trump’s trade war was, of course, China, which he tried to bring to heel with ever-escalating waves of tariffs which he threatened to scale up if China wouldn’t cave in as demanded.
While some demands were rather peculiar ‒ linking, for instance, Mexico’s tariffs with border control ‒ the grievances expressed towards China were real and shared by most US industries: intellectual property theft, forced know-how transfer in exchange for market access, and distortive state subsidies.
Most countries alienated by America First would have been on board in addressing such malfeasance, if perhaps not with tariffs alone but through regulatory processes like WTO rules – a multilateral body long stymied by the US. China retaliated where it hurt most, levying counter-tariffs worth $34 billion on US agricultural products like soybeans, leaving US producers in a precarious situation. To keep farmers afloat, many of them Trump-supporters, Trump had to subsidise their losses to the tune of $28 billion. China meanwhile went shopping for beans elsewhere, with Brazil being a main beneficiary.
Trump’s concept that tariffs will punish competitors into submission proved shaky. This extended beyond the damage caused by counter-tariffs. Tariffs levied on washing machines might boost the few remaining US producers, but consumers would have to pay for this minor “advantage” with higher prices overall. US Steel and aluminium producers might rejoice, but all other manufacturers using such materials will suffer, from agricultural machinery producer Deer and construction equipment manufacturer Caterpillar, to Boeing.
More jobs were suddenly endangered than resurrected. Companies using tariffed Chinese parts were cheaper off transferring their production to China lock, stock and barrel. Calculations soon showed that overall losses far outweighed very limited gains. Tariffs are essentially a tax on consumers of the tariff-imposing country. The harm done to foreign exporters is ephemeral, particularly when losses of market share can be substituted.
It can be argued that trade deficits – essentially the import of stuff exceeding exports of a country – are a blessing in disguise. The trade-surplus country is willing to give away goods for IOUs issued by the importing country, which receives goods unearned. A fridge is exchanged for a claim – a piece of paper, government obligations, or a credit note.
When President Joe Biden assumed office in January 2021 it was hoped that the Trumpian tariff madness would come to a swift end. This was not the case, alas. Not a single of Trump’s tariffs was removed, quite to the contrary. Attitudes towards China have turned to the worse. China is now not only admonished for unfair trade practices, but singled out as an adversary. China is perceived to endanger America’s desired, unchallengeable supremacy in war.
To achieve its aim of containing China militarily and to enhance US security ‒ policies shared by both US political parties – America is battling on various fronts. Chinese telecommunication companies for one, which have not only marketed well-received smartphones, but also major telecom infrastructure (5G) in many developed countries, is considered a security threat now.
Big Chinese players like Huawei and ZTE are the main targets. New telecom equipment made in China is barred, existing infrastructure is dismantled at great cost. The fear is that China will spy on us while we cannot quite figure out how.
The US has nudged its allies to follow suit. The export of advanced semiconductors is sanctioned as is the equipment to manufacture them. ASML, the Dutch company that makes 90 per cent of the state-of-the-art machines used to produce ever smaller microchips, is also now not allowed to export to China.
Ratcheting up economic and military pressure is neither rewarding nor good tactics- Andreas Weitzer
It was certainly a setback when Huawei presented its ‘Mate 60 Pro’ smartphone last month, studded with the most advanced 5G-capable chips. It looked as if China was gaining technological independence with speed regardless.
Meanwhile, the EU has opened an inquiry into unfair subsidies for China’s EV car industry. This is guided less by defence-strategic considerations, but by fear for its endangered car industry. Fourteen million jobs in Germany and elsewhere in Europe are tied to car making. Chinese electric vehicles have started to make inroads into the European market.
EVs made in China, like BYD, SAIC Motor, Nio, or Tesla, producing half its cars in China, are under the unfair-competition microscope. They’re cheap and well built. Europe’s car manufacturers have a difficult balancing act, as China is the largest market for EV laggards like VW.
Meanwhile we can observe a permanent build-up of defence threats. Congresswomen and high-ranking US officials travel to Taiwan with the loud promise to defend its integrity. China unfailingly answers with menacing military manoeuvres.
At risk in Taiwan is not only the country’s semi-independence, but TSMC, the biggest producer of advanced chips in the world, a company we all depend on for our future. Gone is the ambivalent silence about “one nation, two systems”, which after what had happened in Hong Kong did not look very plausible anyhow.
Meanwhile we can observe an ever-growing breakdown of communication channels.
China’s minister of defence is sanctioned by the US. Chinese officials do not communicate with foreigners freely anymore. Foreign consultancy firms are raided, western financial analysts threatened, academic research muzzled, revealing economic data is not published.
Foreign direct investment as a result shrank by 94 per cent when compared to 2021, visitor numbers to China dropped 75 per cent since 2019, US group tourism fell by 99 per cent. Chinese students are returning from the US in scores. The Bund Summit, an economic forum in Shanghai had hardly any foreign guests this year. We all seem to prepare for a conflict nobody wished for.
There’s a lot we might not like in China: Its chequebook diplomacy; China’s extending geopolitical reach in central Asia, Africa and southern Europe; ethnic cleansing of its Muslim Uyghur population and the suppression of other ethnic minorities; China’s dystopian surveillance state; propaganda and misinformation abroad; intelligence infiltration of Western lawmakers and government officials; its drumbeat of stupefying nationalism. Yet ratcheting up economic and military pressure is neither a rewarding strategy nor good tactics.
We are speedily heading into a cul-de-sac. Economic “de-coupling” from China is costly and has to be paid for by us all. Global problems, like the war in Ukraine, or, ever more important, the fight against climate change, become mere tokens in an unwinnable confrontation.
If China becomes a green superpower exporting sustainable energy solutions, why not embracing it? Why on earth do we have to reverse engineer and self-tinker essentials like solar panels and batteries, when we can buy them cheaply from the shelf in China?
If we do not rebuild trust and open all possible avenues of communication speedily, de-escalation becomes impossible. Russia 2.0 on a global scale anyone?
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.