The US trade deficit in the non-oil sector, with China and Mexico, the two largest trading partners, reached its highest level in 12 months in December. This creates a rather awkward situation for the Trump administration, which has repeatedly promised to protect the US industry by raising trade barriers.
However, the growing deficit, backed up by a falling US dollar, could strengthen the Trump administration’s policy response to the trade agenda.
According to the Wall Street Journal, the White House is preparing a combination of tariffs and quotas to counter the growing economic threat from China. Although this confrontation could prove potentially damaging to the global free trade system, it could potentially lead to the collapse of the WTO.
WSJ Andrew Brown notes that the last time the United States got involved in a trade war was under Reagan. And the enemy was the closest US ally – Japan. At that time, the Japanese economy was much smaller than the US economy. Today, the Chinese economy has overtaken the United States by some standards. And such a trade gap between the US and China can have far-reaching consequences.
If a trade war begins, it will be very different from trade wars in the 1980s. This time, the forces are distributed more or less evenly. The United States has never had a clash with a rival such as China, in terms of size of the economy, economic opportunities and global ambitions.
Japan remained an ally of the United States, China became a rival to the United States. This poses a threat of an “eye for eye” struggle, especially because Beijing’s support is falling in the US political spectrum and in the US business community, which has traditionally been a strong proponent of trade in China.
Antitracking rhetoric was approved by both sides after US President Trump approved the America First Strategy and Xi Jinping's China Dream scenario.
In this battle, each side experiences an exaggerated sense of self-importance. The trade war is taking place against the backdrop of ideological fanaticism and completely contradictory assessments of who has the largest leverage, "said Scott Kennedy, an expert at the Center for Strategic and International Studies in Washington.
According to WSJ, global markets are not ready for a full-blown Sino-US trade war. Earlier this month, the Eurasia Group called protectionism one of the biggest geopolitical risks of 2018. One of the reasons, according to the Eurasia Group, is that developed economies have a wider range of measures aimed at protecting trade, including subsidies and bail-outs.
Governments are not just trying to maintain comparative advantage in traditional sectors such as agriculture, metal processing, the chemical industry and technology, protecting them from job losses. They also intervene in various innovative industries, as the protection of intellectual property becomes a priority.
But instead of traditional measures such as import tariffs and quotas, selection tools include measures such as bail-outs and domestic acquisitions to strengthen local companies and industries.
These measures do not necessarily violate WTO obligations; they will rely on a collective inability to strengthen existing global trade rules.
WSJ notes that one day the consequences of a trade war will begin to be felt far beyond the countries participating in the war. US friends and allies in the Asian supply chain will be harmed by this.
China remains the ultimate gathering point for high-tech components from Japan, South Korea, and Taiwan.
Moving complex global supply chains would be very problematic for enterprises in different industries.
Moreover, if everything escalates, a trade war could destroy the entire world trade architecture. This may be Trump's goal.
Many in his administration believe that the biggest mistake the United States has ever made is to enter China into the WTO in 2001.
In the past, Trump suggested that Chinese aid in North Korea could impede US trade. In a telephone conversation with the US president on Tuesday, Xi suggested that trade issues be resolved through "enhanced cooperation."
Trump, in turn, expressed disappointment that the US trade deficit with China continues to grow, and made it clear that "the situation is unstable."
However, senior Chinese officials believe that Beijing has many tactical advantages, some of which relate to mental issues: the Chinese people are more prepared to deal with economic difficulties.
The need to counter American bullying will rally the Chinese population around the Communist Party, while in the United States, opinions among voters can be divided into pros and cons of trade.
American production giants like Boeing and General Motors are likely to throw a fit and refuse to support Trump and his agenda. Both companies consider the Chinese economy, which is fairly open compared to Japan in the 1980s, to be the most important market growth factor.
If the United States wants to start a trade war, China has a detailed plan to fight back, and enough flexibility to put it into practice. For example, the Chinese government will abandon Boeing in favor of European Airbus.
Another option is to diversify soybean supplies.
Brown notes that the United States should rely on China to come up with a very targeted response that will result in the maximum loss in US work.
Many US trading experts say quite frankly: they believe that China will win the US trade war and that the US economy will suffer losses.
Nicholas Lardi, a senior fellow at the Peterson Institute for International Economics, believes that "the political losses for the Trump administration from protectionist measures will outweigh the costs of measures aimed at combating the C regime."
Derek Sayzers, trade expert at the American Enterprise Institute, argues that the main advantage for the United States is that China is much more dependent on trade to maintain its financial health: "A shorter, less widespread trade conflict will benefit China because of its relatively higher flexibility. "
In the 1980s Japan had to back down, agreeing to voluntary export restrictions and relocating a significant portion of its US auto base to create jobs and reduce tensions.
Similarly, China will be difficult to intimidate.
Nevertheless, China has other levers of influence: rumors that China is dropping the treasury show that the NBK may want to use its balance against the United States.
And as central banks in Europe are more and more inclined toward the renminbi, the United States may become increasingly vulnerable to higher interest rates, as their share in world reserves is falling.