Donald Trump is playing China at its own trade war game. This time, he's in the right

You may not like the crude way the US presidents asserts US economic interests, but it makes complete sense that he is doing so

Hamish McRae@TheIndyBusiness
Tuesday 07 May 2019 14:45
China demands US stop 'groundless' attacks as trade war tensions surface during Pompeo's Beijing visit

The markets do not like trade wars. That is the simple conclusion to be drawn from the reaction this week from the threat by Donald Trump of an escalation of the trade war with China. But while it is amazing how much the man can move the market with a Sunday afternoon tweet, I’m not sure that the immediate and obvious market fears are the ones we should really be worrying about.

This is classic Trump. There will be new negotiations on Thursday and Friday in Washington and the US president wants to tilt the playing field towards US advantage. But this does not mean that in the end the world’s two largest economies will accommodate each other. This is the art of the deal.

But in actuality, there are three other issues we should be aware of that are highlighted by the US/China trade tensions.

First, this is yet another signal that global trade will be more managed in the future – we are moving from a world where there was a general, if slow, movement towards freer trade generally, one where trade is governed more by a series of bilateral deals. In other words, the whole post Second World War movement towards free trade, under the General Agreement on Tariffs and Trade (GATT) and then World Trade Organisation (WTO) stewardship, has come to an end.

Does this matter? In theory, yes. The gradual freeing of trade after the dreadful protectionism of the 1930s has been the driver of the greatest burst of prosperity that the world has ever known. (I wish people who attack the WTO, the IMF and the World Bank were a bit more aware of the reasons why these post-war institutions were set up: to avoid a re-run of the 1930s.)

But in practice a series of bilateral trade deals may be an acceptable second best. That is partly because the multilateral movement has been blocked in many areas, including agricultural goods. It is also because the trend of global trade has been to shift from trade in goods to trade in services. And in any case, maybe our complex global supply chains have become too complex. Better to try to build locally rather than ship stuff backwards and forwards around the world.

So while we should certainly worry about any assault on free trade, we should not be purist about this. We should also accept that many countries have cheated on freedom of trade by erecting non-tariff barriers such as spurious safety issues. China of course has done so, but so too has the EU.

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That leads to the second issue highlighted by these US/China talks: fairness in trade. Why do US high-tech companies such as Facebook and Google find it so hard to get a foothold in China, while they operate just about everywhere else in the world? China has created clones of these companies and done very well out of them, but it has only been able to do so by protecting local developers.

This cannot be acceptable. It cannot be right for the world’s second largest economy to keep out companies from abroad. Economic nationalism is understandable, and there is an established procedure for developing countries to be able to protect infant industries. But you can see why the US feels that China cannot now claim it is a weak economy that needs to protect its struggling enterprises. You may not like the crude way Trump is asserting US economic interests, but you can see why he is doing so.

That in turn leads to the third point: US/China economic relations are being reset forever. The toothpaste will not go back in the tube. The next US Administration, whoever leads it, will continue to push US interests in a much more aggressive way.

Some will regret this; others will say “about time too”. Either way we had better get used to it.

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