The Chinese Government Outsmarts Itself

The Chinese Communist Party has a well deserved reputation, with the possible exception of its notorious “five year plan” mechanism it uses to guide its political and economic progress, of being an exceptionally patient adversary to perceived domestic and international threats. A hoard of puppet masters in the labyrinthine Chinese government tirelessly toils away at a number of national priorities; internal security, control of the domestic economy, suppression of Taiwanese influence, acquisition of foreign resources, international propaganda, growth of its military, and space exploitation, to name just a few. Progress is slow, but steady, and the results of the string pulling are undeniably fruitful. Chinese military, economic, and political prowess has been unchallenged for at least two decades–if not longer.

So when President Trump threatened to impose sanctions on Chinese imports as punishment for wanton intellectual property theft, Chinese bureaucrats closed ranks, officially issuing veiled insults and no-so-veiled threats against US imports if Trump ever had the temerity to the Chinese government’s forty straight years successfully playing chicken. Every president since Richard Nixon had fruitlessly tried to outmaneuver the Chinese in trade–Ford, Carter, Reagan, Bush, Clinton, Bush Jr., and Obama alike–all had not only failed, but had in some cases sold out the US’ research and development lead in exchange for access to the Chinese masses.

An entire generation–Baby Boomers–had gleefully exchanged their father’s and father’s father’s industrial and economic secrets for quick returns and short term profits to be had to the first-comers to the battered Chinese manufacturing landscape. That the Chinese government imposed onerous conditions on US executives–forced minority ownership, forfeiture of intellectual property, occasional imprisonment of personnel, censorship, etc.–in exchange for economic participation did not slow them down at all. Billions of dollars of US capital was poured into the Chinese economy in exchange for millions of dollars of profits–and generations of later US executives were left holding the bag. Too late the US government tried to reign in excesses and shrink trade deficits. But the damage was done and the Chinese Communist Party held an increasing amount of leverage.

Chinese bureaucrats and diplomats figured that Trump was just bloviating, both in his election campaign and during his term as US president. Except that he wasn’t. After providing ample warning of his intentions, he imposed tariffs in March of this year on steel and aluminum, much of which comes from China.

The Chinese were ready with carefully prescribed tariffs on US products from Republican districts central to Trump’s political base. Two weeks after Trump’s initial tariffs, the Chinese slap tariffs on $3 billion of a annual goods from these districts. The very threat of this tactic had been enough to stymie previous presidential administrations.

Not Trump. The US president, not amused by Chinese political antics, threatened in April to impose punitive tariffs on $100 billion of Chinese annual imports. In May the list of punitive tariffs is cut in half to $50 billion, and in June the tariffs are made official. Chinese bureaucrats quickly retaliate with a less discriminating set of tariffs aimed at bigger ticket US exports. Trump, unfazed, announces possible tariffs on an additional $200B in Chinese imports if he doesn’t get the results he wants. In July he raises that target to $500 billion. In September he follows through on his newer threat, and imposes punitive tariffs on $200B in Chinese imports.

The Chinese, privately aghast but publicly defiant, scramble to finds enough US imports on which to impose additional tariffs. They target another $60 billion in annual US imports shortly thereafter.

Who are the losers in this game? The biggest losers will be US companies that are saddled with large investments in China–those investments will quickly evaporate under the pressure of two-way tariffs. Next losers in line will be the pension plans and investment funds that hold equity in those companies–they will be scrambling to get out of those investments at a loss. And the third set of unfortunates will be US consumers–whose access to cheap Chinese imports will be limited as US importers and manufacturers scramble to fine cheaper alternatives.

Who are the winners in this game? The biggest winners will be other Asian exporters, as well as exporters from South American, Mexican, and African economies. Next in line of winners will be European importers, who will enjoy the sudden windfall in cheaper goods originally intended for US markets. And third in line will be world consumers, who will be the ultimate beneficiaries of the Chinese export machine unleashed outside of US borders.

Neither China or the US, or the Chinese Communist Party or President Trump, will come out as winners in this contest of wills. Nor will they come out as losers either. In this era of the integrated world economy, tit-for-tat tariff disputes end up as a zero sum game. Still–economic warfare is a darn sight cheaper than the real thing with guns and bullets. So it will remain a tempting tool for Trump as long as he is in office–leaving the bureaucrats in China gnashing their teeth while they build their fortress islands in the South China Sea.

 

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