The United States drags China into a trap with the tariff war, not to restructure the global order but only to sustain it by making China lose more than the U.S. in a negative-sum game. It can be said that the tariff war is a continuation of the U.S. hegemony by other means. In the longer term, the hegemon will reassure its position, and the challenger will be weakened and isolated. Although China is aware of this trap, it is not in a position to yield to protect its prestige as a challenger. There is a four-step mechanism behind: repowering the American eagle, weakening the Chinese dragon, isolating Beijing and reducing the Chinese saving rate.
The U.S. has benefited most from the current international order economically and diplomatically, despite some costs, since World War II. The postwar international economic order has depended upon the Bretton Woods institutions and free trade of goods and money. By taking advantage of its huge economies of scale and low labor costs, China has become the world’s factory and evolved into an export-led economy. This attracted manufacturing industries from the West to China during the 1990s. This change of gravity in the global economy has reached a point where the U.S.’s global ascendancy has been hurt and China has emerged as a challenger. It is time for the hegemon to tame the challenger before it gets stronger. In this sense, the tariff war is neither for restructuring the global order nor about U.S. President Donald Trump’s policies; it is only to maintain the American hegemony.
The first step is repowering the American eagle by boosting the industry. With higher tariffs, the U.S. will urge companies to produce in the U.S. Thus, the American industry will revive as U.S. founding father Alexander Hamilton would love to witness. This will reinvigorate the manufacturing industry and improve the country’s position in the physical value chains. Hence, the $918 billion foreign trade deficit of the U.S. will drop, and various determinants of the U.S. economic strength will start healing. In this step, politically and technically the most difficult aspect of conducting tariffs can be preventing not only Chinese final goods, but also Chinese content used in the third countries’ exports to the U.S.
The second step is weakening the Chinese dragon by reducing its foreign trade surplus, which is converted into military and other types of power. Positioning itself as the world’s factory by utilizing its competitive advantages and free trade, China achieved a $1 trillion foreign trade surplus. This feeds the dragon against the eagle and should be stopped. If China’s exports to the U.S. and the EU can be diminished, Beijing will have much less financial resources available for military buildup. Borrowing from the relative loss conception of realists, it is more important to consider who will ultimately lose more, even though the tariff war may evolve into a negative-sum game. Compared to China’s 18.5% trade/GDP ratio, the U.S. is less dependent upon international trade, with 12.5%. Therefore, this trade war will curtail the growth of China more than the U.S., and if China’s relative losses are higher, American power will be expanded relatively, and the balance of power will be reassured.
The third step is isolating Beijing in world politics by exploiting its possible economic aggressiveness. Behind its position as a global exporter lies an overcapacity in China relative to its domestic demand. Hit by tariffs, China will redirect its overproduction to other markets and distort foreign trade balances of those countries, too. While protecting themselves with economic countermeasures, these countries will antagonize China and make it even more aggressive, trying to sustain its export-oriented economy. At this point, Washington can take advantage of these disturbances to isolate Beijing from its possible partners. Without allies, it will be much harder for a challenger to rise.
The fourth step is decreasing the saving rate in China. China saves 45% of its GDP, more than $7.7 trillion, according to the World Bank. Several factors, such as a lack of a reliable retirement system and a savings culture, underlie this extraordinary saving rate. With a huge sum of savings and weak domestic demand, China can easily finance its investments in and out of the country and sustain an excess supply of everything. If overproduction cannot be exported elsewhere after losing the U.S. market, China will have only one option to sustain economic activity: increasing the domestic demand by making households spend more. This will undoubtedly reduce China’s ability to finance its economic boom. Thus, in order to undertake new investments and keep the economy vibrant, Beijing will need to resort to global money markets in which the U.S. has structural power. In other words, China will be switching its dependence upon the U.S. market to dependence upon the U.S. finance. Furthermore, with shrinking savings rates, Chinese society will gradually become accustomed to consumerism. If increasing consumerism and expansion of the middle class trigger demands for more human rights and democracy, this may pressurize the Chinese Communist Party to undertake some reforms even in the longer term.
Still, if this is a trap to reassure the U.S. dominance, why does China walk into the trap? Obviously, Chinese leaders have their pride, too. China has the rising challenger status and has to sustain its claim by standing against the hegemonic moves of the U.S. If Beijing blinks first, then it will lose prestige. Being aware of this, Washington compels Beijing to play this lose-lose game in which the U.S. is calculated to lose much less than China. Thus, even though both the U.S. and China lose in absolute terms, the U.S.’s relative power against China will be fortified, and the hegemony will be secured for some more time.