Trade war, or American self-sabotage?

Donald Trump is actively preparing phase 3 of his retaliation plan against China now that the latter has just reacted to his last wave that came into force this week. According to his own statements summarising his approach to China, he began by imposing an extra tax of 50 billion dollars on the country for tech components – that was phase 1. Then came phase 2 (in force since 24 September) which comes to 200 billion dollars. This was in the knowledge that China’s – logical and predictable – response would easily lay the foundations for a phase 3 that the US President himself has chalked up at 267 billion dollars.

How are US companies going to be able to maintain their competitiveness against their foreign competitors in a globalised world and in a climate where fortifying customs barriers increases their own costs and expenses? Also, how will the American consumer react to being directly penalised by a – easily predictable – climb in inflation caused by the increasing price of day-to-day products following phase 2 and soon phase 3?

So, while phase 1 ($50 billion) consisted of a list of a little over 1,000 products taxed more upon their arrival onto US soil, phase 2 ($200 billion) includes around 6,000 import items! Having (temporarily) left 300 products out of phase 2, these will inevitably be counted in phase 3 ($267 billion) including everyday consumer items such as bedsheets and gloves. In fact, Trump’s “tariffs” are an extra tax levied on, you guessed it, the American consumer!

A very recent study by the Center for Automotive Research has warned that no less than 2 million fewer vehicles will therefore be sold in the US, leading to a loss of more than 700,000 jobs in the automobile industry with a negative impact of 60 billion dollars on the country’s GDP. These three phases (totalling roughly 500 billion dollars), amounting to an approximate increase of 10% in import prices (that being $50 billion), might be able to offset no less than a third of the tax cuts ($150 billion) doled out by the Trump administration. In other words, the American President – who hasn’t stopped bragging about the increased revenue that will come from the heightened customs duties – is absolutely right…except that it’s his own citizens and consumers who will cover the costs! These three phases will therefore surely damage American businesses operating in China, or that use Chinese components, and will favour their competitors – the icing on the cake – and help fan the flames of uncertainty and instability on global trade relations.

As for the Chinese government, its reaction to increase taxation on imports from the US is merely tit-for-tat, even if they don’t make any more sense than America’s decisions… Nevertheless, since a trade war is both political and economic, the leaders of China cannot let themselves be cornered by Trump without reacting in turn, if only to save face and not be humiliated on the world stage. It’s simple: every extra increase and every height reached by the US worsens this conflict even more by making any concession impossible from China which is (understandably) worried about its image. As for the Chinese economy, it is not weak to the point of being forced to accept Trump’s terms…

At the end of the day, the Chinese know all too well that this trade war has more of an impact on US citizens and their democracy than it does on their own country, a country dominated by an authoritarian regime. With midterms next November and presidential elections in 2020, these events should serve as a reminder that Xi Jinping’s mandate is, in fact, for life. The truth is – and has always been – that China has a long-term vision. It’s preparing for post-Trump.