Trade War: game over or next round? | DW News

Key Concepts

• Decoupling: The attempt by both the US and China to reduce reliance on each other's supply chains, particularly in sensitive sectors.
• Tariffs: Taxes imposed on imported goods, used as a tool for trade negotiation and protectionism.
• Non-Tariff Barriers: Trade restrictions that are not tariffs, such as procurement rules, regulations, and subsidies.
• Purchase Commitments: Agreements to buy specific quantities of goods, often used in trade deals.
• Transshipment: The practice of rerouting goods through third countries to avoid tariffs or trade restrictions.
• Industrial Policy: Government strategies to promote specific industries or sectors.
• Self-Reliance: A policy of reducing dependence on foreign suppliers and promoting domestic production.
• Consumption Rate: The proportion of a country's economy devoted to private consumption.
• Gig Economy: A labor market characterized by short-term contracts or freelance work.
• Household Registration System (Hukou): A system in China that restricts access to social services based on place of origin.
• Sectoral Tariffs: Tariffs applied to specific industries or sectors, often related to national security.

China's Response to US Tariffs

• China's retaliation to Trump's tariffs was not surprising, given their perception of Trump's "bullying" posture.
• The current tariff situation is similar to pre-"liberation day," but with added disruption.
• Chinese goods now face a manageable 30% tariff, better than potentially higher levels (over 100%) that would constitute a trade embargo.
• China's export orders in April dropped to their lowest levels since the COVID slump, threatening jobs in coastal provinces.
• Both sides wanted to de-escalate to avoid dangerous economic and security consequences (e.g., Taiwan, South China Sea).

Negotiations and Concessions

• Purchase commitments are a key element, reminiscent of the unfulfilled "phase one" deal.
• Fentanyl is another critical issue, with the US seeking Chinese cooperation to restrict the flow of precursor chemicals.
• The US wants China to open its service industries to American firms.
• Other potential negotiation points include the valuation of the yuan and market access for foreign firms.
• American financial firms want to expand their asset management and investment banking operations in China.
• 90 days may only be enough to sketch an outline of an agreement, with complex issues requiring more time.
• Non-tariff barriers, such as procurement rules and below-market borrowing, will be difficult to address quickly.

Tariffs and Containment

• Mainstream economics is generally hostile to tariffs, but sectoral tariffs (e.g., on semiconductors, AI) are viewed differently.
• Sectoral tariffs are more acceptable than generalized tariffs like Trump's 10% baseline tariff, which is seen as overtly protectionist.
• Many countries have adopted trade defense measures against perceived unfair Chinese trade practices.
• The US aims to have high tariffs on China, lower tariffs on Europe and other countries.

Global Trade Reordering

• China uses countries like Vietnam, Indonesia, Mexico, India, and Thailand to transship products to the US and other Western countries.
• Chinese exports to the US have fallen, but exports to third countries have been robust.
• Trump's reciprocal tariffs aim to pressure countries to favor the US over China in trade and investment.
• The US is negotiating trade arrangements with various countries, with the UK being the only one with announced details.
• The US might offer tariff reductions to countries that restrict imports of Chinese components or finished products.
• Some countries may be willing to reach trade agreements that are slightly more partial to the US and less partial to China.
• Supply chain integrity is a key consideration in these negotiations.

US-China Trade Deficit

• The US deficit with China has decreased during Biden's term, lower than when Trump left office.
• However, China's overall surplus and America's overall deficit are increasing.
• Tariffs shift the regional distribution of surpluses and deficits but don't change the big picture.
• Overall trade balances depend on domestic policies in the US and China.
• Goods reach their destination through more complicated routes (e.g., Apple assembling iPhones in India).

China's Consumption and Economic Model

• China's private consumption rate is around 40%, lower than peer countries (60-70%).
• Proximate causes include inequality and declining high-wage jobs in manufacturing and construction.
• The fundamental reason is the high investment rate, driven by China's industrial policy and export-oriented model.
• Changing this requires redistributing economic and political power to households and private firms, which Xi Jinping is unlikely to do.
• The Chinese Communist Party is opposed to welfare as understood in Europe.
• China has a ubiquitous pension system, but it's not very generous.
• Out-of-pocket healthcare expenses are high.
• Many migrant workers lack access to social welfare in urban areas.

Local Borrowing and Fiscal Policy

• Local governments are heavily indebted and struggle to borrow more.
• The central government is reluctant to bail them out.
• Local governments need new revenue sources due to declining property market income.
• The central government is hesitant to use its balance sheet to bail them out.
• China's tax system is regressive, with low income tax and high value-added taxes.
• Only about 5% of China's tax revenues come from income tax.
• Comprehensive tax reform is needed.
• China's economic model has a modern, dynamic sector (EVs, AI), but the bulk of the economy is not in such good condition.

Meaningful Reform in China

• Root and branch changes are needed to address the low consumption rate and restricted service industry openness.
• This includes changing ownership structures, improving funding for local governments, and abandoning the household registration system.
• These changes involve a redistribution of power, which the government is unwilling to embrace.
• Empowering people economically leads to a transfer of political power, which the CCP opposes.

US Economic Policy and Tariffs

• Erratic tariff policy poses a risk to the US economy.
• The manner in which the Trump administration has implemented tariffs erratically and randomly adds to uncertainty for businesses.
• Very high tariffs are not good for consumers.
• Financial damage from tariffs can impact consumer confidence and spending.
• Pulling back from extreme tariff positions has helped financial markets recover.
• The US right wing sees tariffs as a tool to exercise leverage, generate revenue, and re-industrialize the US.
• The re-industrialization argument is tenuous.
• The revenue side of the argument is weak.
• The main goal is to recalibrate global supply chains away from China.
• The Chips and Science Act and Inflation Reduction Act are attempts to become more self-reliant.

Global Trend Towards Self-Reliance

• The world is likely to become more Chinese in its economic policy, with a focus on self-reliance.
• The goal is to de-Americanize Chinese supply chains and de-Sinicize American supply chains.
• The main concerns are energy, technology, dual-purpose products, and national security.
• The struggle is for the US and China to have spheres of commercial influence.

Decoupling and Adversarial Relationship

• The reordering is a necessary response to the adversarial relationship between the US and China.
• China wants to change the global governance system to increase its influence.
• The US and the Western world also want to shape the global order.
• This adversarial standoff is the root of why the US and China are separating.
• Decoupling is about trying to achieve long-term dominance.

Synthesis/Conclusion

The US-China trade relationship is undergoing a significant reordering driven by strategic competition and a desire for self-reliance. While tariffs have been a prominent tool, their effectiveness is debated, and the focus is shifting towards recalibrating supply chains and establishing spheres of influence. China's economic model faces internal challenges, including low consumption and local debt, requiring significant reforms that involve redistributing power. The future will likely see a more fragmented global trade landscape with both countries seeking to reduce dependence on each other in critical sectors.