China has already trade-war-proofed its economy

A common maxim of trade wars is that the best retaliation is not to retaliate at all. That’s the case with most economies — but China, which has announced a 34 per cent import tax against all US goods in response to President Donald Trump’s tariff blitz earlier last Wednesday, may be a rare exception.

By David Fickling

A common maxim of trade wars is that the best retaliation is not to retaliate at all.

Such conflicts, after all, are counterproductive in the first place. Raising levies on imports simply increases costs for domestic consumers, more than offsetting the benefits that local producers may enjoy from the higher prices they receive from the shift in spending. The best solution is just to stand aloof from this contest of economic self-harm, however much you’re provoked.

That’s the case with most economies — but China, which has announced a 34 per cent import tax against all US goods in response to President Donald Trump’s tariff blitz earlier last Wednesday, may be a rare exception. That’s because the world’s biggest manufacturer has spent decades building an economy that’s already largely war-proofed against blowback from its own trade practices.

Credit: Bloomberg

Consider the main items the nations trade with each other. The major products that the US imports from China are mostly things you’ll find in a Walmart Inc., at a shopping mall, or on Amazon.com Inc.: smartphones, computers, games consoles, furniture, toys and clothing. Slap a 54 per cent tariff on these items, as Trump has done, and American consumers are going to notice pretty soon.

The flow in the opposite direction couldn’t be more different. Most of China’s major imports from the US are intermediate goods for its manufacturing industry, which would be almost impossible for an ordinary consumer to get their hands on, such as LNG and crude oil, silicon chips and chip-making machines, aircraft jets and plastics. The only real exception is cars — and, given the parlous competitive position of the US auto industry in China, wiping out the remnants of Buick, Chevrolet and Ford’s mainland markets might almost be a mercy killing.

Credit: Bloomberg

An important thing to note in the charts above is the relative size of the white, gray and blue bars. China tends to have quite a dominant role in US merchandise imports, making it hard for American consumers to switch to alternative suppliers. The US, by contrast, is a relatively minor supplier to China in almost every major product category except jet engines and, to a limited extent, soy. China, meanwhile, has broad and diverse markets for its exports if the US market ends up closed off, as demonstrated by the relatively large blue bars in the first chart.

This is an important consideration when you start thinking about each country’s ability to sustain a prolonged trade war. Trump’s tariffs fall mainly on ordinary American citizens and voters who’ve already suffered four years of above-target inflation and are seeing interest rates around their highest levels in nearly two decades.

Credit: Bloomberg

The tariffs imposed by China will hurt quite a different group — businesses who are into their third year of producer price deflation, with the benchmark loan prime interest rate at its lowest level on record. Even consumer prices are falling right now.

That means that China already has a decent amount of slack to accommodate the supply-side shock from tariffs, whereas the US economy is already busting at the seams.

Even if Chinese businesses start to feel economic pain as the tariffs squeeze their margins, they’re less likely to complain. Alibaba Group Holding Ltd. founder Jack Ma disappeared from public life for nearly five years after a speech in 2020 criticizing international financial regulations, which local officials appear to have interpreted as a veiled attack on their handling of Alibaba’s payments platform Ant Group Co.

For President Xi Jinping, Trump’s self-inflicted wound is an opportunity. China can present itself as a better representative of the rules-based international order than a US that did so much to establish that system, and a friendlier trade and investment partner for the 85 per cent of the global economy that’s not within America’s borders. That would put dreams of supplanting the US as the world’s hegemonic power well within reach.

Credit: Bloomberg

Both countries have been decoupling from each other since the start of Trump’s first trade war in 2018, but China has done so more effectively. As a share of its exports, the US has slipped 6.6 percentage points to 17.2 per cent, whereas China as a share of US imports is down only 4 percentage points, to 18.5 per cent. Xi, moreover, is using this moment to build ties with other trading nations, while the Trump administration is punishing its allies with tariffs barely less savage than those it’s imposing on Beijing.

If you want to avoid a future where China cements its rise with tighter links to other countries and crucial roles in blocs such as the Regional Comprehensive Economic Partnership, which includes most of east Asia’s other large economies, then the US tariff plan is the worst possible outcome. China’s economy has problems right now, but international commerce isn’t one of them. If the world is settling in for a long trade war, Trump’s most formidable rival has already fortified itself.