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April 14, 2018
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Trump’s strategic game

Opinion

April 14, 2018

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Donald Trump may have a chip on his shoulder. But his decision to unleash a trade war with China is a strategic move made with a two-fold objective: to keep Beijing’s global economic and political ambitions in check and win over domestic constituencies that deem themselves to be on the losing side in free trade.

While running for the presidential office, Trump had made no bones about his distrust of America’s ‘open-door’ policy, which manifested itself in a fairly generous immigration regime and a commitment to trade liberalisation. His logic has been simple and appealing to the layman. The US imports far more from the world than it exports. This is because America has a more liberal trade regime and tends to plays by the rules more conscientiously than its trading partners do. In case the adverse trade balance is allowed to persist and pile up, Americans will continue losing jobs to other nations. By being a cheaper source of labour, immigrants tend to depress wages and, thereby, add to the plight of the native workers.

Trump’s logic is not altogether faulty. A country’s high trade deficit results in the loss of jobs to foreigners as well as the accumulation of public debt. Between 2008 and 2017, the US has run a cumulative trade deficit of $7.68 trillion, of which $3.31 trillion has been contributed by China. The public debt-to-GDP ratio has gone up from 67.7 percent in 2008 to 104.5 percent in 2017. Close to half of the total debt consists of external borrowing. As reported by the US Bureau of Labor Statistics, the country’s manufacturing sector lost six million jobs between 1999 and 2011. Although trade is not the only factor that has hobbled employment generation – automation being another powerful factor – it is convenient to blame the major trading partners.

Trump isn’t the first US president who is alive to the perils of running a high trade deficit. His predecessors would also complain from time to time that America’s trading partners, particularly China, thrived on unfair trade practices. These include ‘currency manipulation’; the subsidisation of exporting enterprises; and the ‘violation’ of intellectual property rights. They were only more circumspect in responding to such complaints for one reason or another.

In China, US consumers have had a cheap source of imports and any additional duties on Chinese products would substantially bring down consumer spending and, thereby, slow down the economy. In addition, the companies that make use of relatively inexpensive imports as intermediaries would also see their cost of doing business go up. Then there was the possibility that China could hit back by imposing additional duties on American products.

Setting aside such apprehensions, the Trump administration went ahead with slapping 25 percent punitive tariffs on the import of steel from China and some other countries, which was the first shot fired in the trade war. A few weeks later, it announced $50 billion worth of duties on specifically Chinese goods, and has threatened to impose $100 billion worth of tariffs on some more imports from China. Beijing has retaliated by levying up to 25 percent worth of tariffs – $3 billion – on American imports, and is considering further punitive measures. The trade war between the world’s two largest economies and the trading nations that the world feared is on and is set to intensify.

In an oligopolistic market, the players either collude with one another to the detriment of the consumer or they indulge in strategic behaviour. In the latter case, each player sets out to maximise its payoffs at the expense of others and employs its best strategy to counter their anticipated actions. Washington is playing a strategic game with Beijing. It has calculated that any trade-restrictive measure that it adopts will prompt a similar, though not necessarily equivalent, measure from China. Although the Chinese, and many others, claim that America has cut its own throat by starting the trade war, China is likely to pay a higher price.

The realisation of China’s economic and political ambitions rests to a large extent on its export performance. Over the last decade, China has cumulatively run a trade surplus of nearly $3 trillion. An economy running a trade surplus is a net lender. China has invested its massive surplus funds in different countries, with the US having the lion’s share. It has set its sight on becoming the world’s top economy and is keen on assuming a political role that is commensurate with its growing economic strength. The Chinese leadership’s flagship One Belt One Road (OBOR) initiative – of which CPEC is a part – is an index of the country’s global economic goals and, by implication, its political ambitions.

In order for China to carry out huge investments abroad, it must continue to run a high trade surplus. The US is not only China’s largest trading partner and the largest source of its favourable trade balance, it is also the world’s largest importer. By restricting the import of a product, the US can cause its price to go down steeply. This means that a fall in Chinese exports to the US is likely to create a gaping hole in the country’s pocket. By imposing punitive tariffs on Chinese imports, Americans have played their trump card by striking at China’s status of being a global export powerhouse, which is the mainstay of the country’s economic and political strength.

In this strategic game, the US doesn’t hold all the aces and China is in a position to retaliate. It can block US exports, which it has already done – albeit in a small way. Beijing can also disinvest part of its investment worth billions of dollars in the US bond market. However, both these options have a limited scope. While China is an export-driven economy, the US is not. Therefore, the tit-for-tit import restrictions are likely to sting China far more than they will the US. Beijing is painfully aware of this fact, which accounts for its measured response to Washington’s trade restrictive measures.

Owing to the size of its economy, its political stability, and predictable regulatory regime, the US provides the safest place for overseas investment in the world. In the event that China chooses to partly withdraw its investment from the US, it will have to either put these funds in another country or invest them at home. The use of the latter option will shore up domestic demand, which will make for higher living standards for the Chinese – though at the expense of exports. Alternatively, China may put the bulk of its surplus capital in another country.

But in which other country would the Chinese consider their investment to be safer? For some analysts, Russia, which is also having a tiff with the West, can be that country. Russian military might and China’s riches can collectively put up a credible challenge to Washington’s hegemony. The problem, however, is that Putin’s Russia is not an economy that China will trust with its hard-earned foreign exchange. So the Chinese, in all probability, will continue to look at the US market as the preferred destination for their surplus capital. This suggests that Beijing doesn’t have a matching capability to smite Washington.

The US-China trade war does not bode well for Pakistan, which is counting on the substantial Chinese capital inflows over the next 10 years under CPEC. Any dents in China’s export revenue will cast a pall on its expected investment in Pakistan and other countries, which are part of the OBOR initiative.

The writer is a freelance contributor.

Email: [email protected]

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