Word this week that the United States and China had agreed to substantially reduce their respective punitive tariff rates for 90 days was met with exuberance by global markets. Yet, the reaction of pundits and investors alike is short-sighted. Tariffs of 30 per cent (U.S.) and 10 per cent (China) remain. All that has really been agreed upon is a framework for continued haggling.
In the meantime, the imposition of sweeping tariffs and other measures by the Trump administration against almost every U.S. trade partner has already set this country on a path to a weaker economy. This is unfortunate, especially given America’s economy was doing so well, while China’s economy was already experiencing significant problems.
This is also a problem for U.S. grand strategy. Since the first Trump Administration, there has been a bipartisan consensus that China is America’s “pacing threat”. Expert opinion increasingly sees China as the preeminent military challenge to the United States.
Military power is ultimately a product of economic power. Weaken America’s economy and you’ll weaken its military. There are other factors, of course, but big economies support big armies that defend nations and threaten adversaries.
To be clear, there are reasons to enact selective tariffs and other measures designed to punish China in particular for its many economic excesses. There are also reasons to pursue a form of re-industrialisation that is designed to — carefully, strategically — ensure America has the manufacturing capability to sustain its military in the coming decades.
But there is no rationale for picking a fight with almost every other country in the world simultaneously. That is just about the most foolish foreign policy action a nation could adopt. Even if they all have it coming (and they do not), a policy of “divide and conquer” is surely better than a policy of “attack in every direction at once.”
Tariffs might weaken China even more than they harm the United States. In any contest, military or economic, both sides cannot do equally well (or poorly). One side will prevail, eventually, even if not as fully as it hopes. It could be that the United States does better in this bilateral trade war than China, as U.S. Treasury Secretary Scott Bessent has argued.
Picking a fight with almost everyone at once … has reduced American leverage at precisely the wrong time
But the United States is not engaged in a trade war just with China. Indeed, there are tariffs pending against other countries that are comparable, or in some cases greater, than those facing the Chinese. Again, picking a fight with almost everyone at once is counter-productive. It has reduced American leverage at precisely the wrong time. A major element of American power in previous conflicts has been our network of allies and partners. Other countries that benefited from their ties to the United States were willing to help. Not now.
In addition, as experts Robert Powell and Duncan Snidal demonstrated mathematically in the early 1990s, the real beneficiaries in a trade dispute are third-party nations. Both sides in a trade dispute lose, at least in relative terms, compared with everyone else.
Again, China was already in the economic doldrums. Excesses of China’s export-oriented growth model have emerged with a vengeance. China sacrificed domestic consumption (i.e. the welfare of its own people) through fiscal, monetary, and other policies to facilitate its rise as the world’s preeminent manufacturer. But now China is too big to grow through exports and must transform itself economically to grow further.
But China is having difficulty implementing the needed changes. Indeed, its leaders and key industrialists have resisted reforms. China is stuck in the so-called “middle income trap.” A combination of factors — those who benefited from China’s economic rise don’t want to change, debt has accrued on bad bets about China’s future, the leadership is also ideologically opposed to stimulating consumer demand — has set China on the path of economic stagnation. If this pattern continues, China may well fall behind the United States economically, as Japan did in the wake of its deflationary cycles in the 1990s.
One way that China might avoid relative decline is if the United States were also to face economic stagnation. This looked extremely unlikely until the past month or so. America was set to sail past China economically, as it had with Japan and then the European Union.
Now the United States has alienated its allies in the economic fight that must underpin its military posturing vis-a-vie China. America used to have a strong economic rapport with most other nations. Our trade partners were beginning to turn against China, as they too recognized that Beijing was attempting to establish an unequal economic playing field. It was far from clear how China could right itself, given the growing sense of global animosity.
Plot twists are interesting in a movie. They are less attractive when they appear in the form of unforced errors committed by the nation’s leaders. After cultivating partnerships for decades that could be used to contain China’s economic expansionism, the White House instead repudiated America’s goodwill at precisely the moment when it was needed most. We can only hope that the damage will not in fact be as severe as it appears, and that in time America will reassert itself as the world’s reasonable alternative to economic excess.
