Trade wars are neither good nor easy to win

IN BRIEF: Donald Trump’s initiation of a trade war with China in 2018 led to a decline in China’s share of US imports, but China’s global trade share and importance to the global economy increased. Despite attempts to diversify supply chains away from China and a surge in protectionist sentiment, China’s diverted — not reduced — trade suggests that the conflict was counterproductive. Further confrontations increasingly isolate the United States within the multilateral trading system. 

‘Trade wars are good, and easy to win’, US President-elect Donald Trump tweeted three weeks before he authorised tariffs on China under Section 301 of the Trade Act of 1974 in March 2018.

Trade wars are easy to start, for sure.

The US president enjoys extensive congressionally delegated authority to ratchet tariffs upwards. Courts will not second-guess this exercise of authority if its usage is based on an ‘intelligible principle’, allowing the president to enact measures bearing a ‘reasonable relationship’ to the proposed trade policy objective. The US consumer towers, too, over their international peers and tariff-regulated market access can be a useful source of leverage to instigate dealmaking on trade and non-trade concerns such as market purchase targets, shutting down illegal immigration and closing passageways for fentanyl trafficking.

But are trade wars ‘easy to win’ too, as Trump claims?

The Trump tariffs did lead to a sharp dip in China’s share of US imports. His campaign promise of 60 per cent tariffs could have punishing short-term effects on China’s macroeconomy and currency as it flirts with the familiar ailments of overcapacity, underconsumption, deflation and indebted local governments.

On the other hand, China’s overall market share of global goods exports has increased since 2018, meaning the country has become more — not less — important to the global economy. EU–China trade ties have also intensified, particularly in medium-skill and technology-intensive production. This intensification is set to deepen over the next decade, including in electric vehicles and battery storage systems, their trade friction notwithstanding. As for the US overall goods trade deficit, it is larger — not smaller — as a percentage of GDP in 2024 than it was in 2017. The decrease in Chinese exports to the United States has been deflected elsewhere.

While some producers have relocated production outside China to bypass the Trump tariffs, this diversification seems limited and shallow. Nearshoring to Mexico and friendshoring to Vietnam have dominated the trend. Final assembly in these countries is often dependent on China-sourced intermediate inputs. This ‘lengthening’ of the distance between suppliers in China and customers in the United States is counterintuitive to the logic of supply chain resilience which was the supposed reason — or excuse — to ‘derisk’ trade dependence on China.

Besides, the pandemic-era dislocations were likely not fundamentally the product of a supply shock. Supply chains were resilient but businesses could not adapt quickly to the extraordinary surge in demand for durable goods. This challenges the premise of nearshoring and friendshoring.

Much of the foreign direct investment (FDI) supporting supply chain diversification has arrived from non-Western sources. This suggests that East Asian — and most likely Chinese investors — provide the FDI driving trade diversification. So much for ‘decoupling’ from China.

Just as Japan. Inc.’s forced relocation of domestic production due to US badgering to revalue the yen four decades ago spawned remarkable Asia-Pacific-wide production networks, so too will the Section 301 tariffs come to be seen as a blessing in disguise — one that equipped Chinese firms to internationalise their supply chain operations and obtain valuable ‘learning by doing’ experience along the way.

Trump’s tariffs have turbocharged calls for protectionism within the US body politic. Like salted peanuts, the more they are dispensed to favoured industries, the more they are being demanded. The tariffs have also dislodged the Washington consensus on trade policy from its pro-liberalisation moorings, with trade policy shot through with streaks of populism and protectionism. At a time when the European Union, Japan, China and ASEAN continue to liberalise their trade policy frameworks, albeit at a slower pace since 2008, the US tariff play has accentuated the country’s relative isolation within the multilateral trading system.

The United States’ defence of its unlawful tariffs under the catch-all guise of ‘national security’ has resulted in successive losses at the panel stage of the dispute settlement mechanism of the World Trade Organization (WTO). US refusal to support the Appellate Body’s restoration may not perturb Trump. But Washington’s conduct has dented the country’s reputation. The United States’ invocations of ‘essential security interests’ is propelling its retreat too from trade rulemaking, as was the case at the WTO’s plurilateral e-commerce negotiations.

The United States was among the first countries to benefit from the imposition of the then-novel most-favoured-nation (MFN) principle through the ‘unequal treaty’ of 1844 with the Chinese Empire. In 1950, the United States walked away from the stillborn International Trade Organization due to broad domestic opposition to the Havana Charter. Business interests opposed the Charter’s retention of tariff preferences, weak investment protections, ample scope for discrimination against US goods based on current account adjustment grounds and other potential quantitative restrictions.

Like the post-war United Kingdom, the modern United States hankers for managed trade and discrimination against foreign goods, and threatens to impose reciprocal, not MFN, tariffs.

Trade wars will not extinguish the US trade deficit — driven by domestic macroeconomic factors and only secondarily by China’s industrial subsidies. Nor will broad protectionism deliver the return of well-paying manufacturing jobs to middle America — though selective deployment of industrial policy could yield a fighting chance. Trade wars may be easy to start but they are easier to lose.

This commentary was originally released by EastAsiaForum on December 17, 2024.