Knife-point punch: the failure of the trade war against China

Since the online conversation between Joe Biden and Xi Jinping on 09/09, something has changed in the increasingly less friendly relations between China and the US. In recent weeks, a string of events has pointed to a tactical retreat by the White House. On September 24, the withdrawal of the extradition request of Meng Wanzhou, head of finance at Huawei, who was detained in Canada at the behest of the US for alleged violation of US sanctions against Iran. Beijing has always considered this a low blow from Washington and the topic has been part of negotiations between the countries over the past three years. In a September 28 Financial Times interview, Gina Raimondo, US Secretary of Commerce, quoted a surprising Biden as saying that “we have no interest in a cold war against China”.

On October 6, China’s top foreign policy official, Yang Jiechi, met for 6 hours with US National Security Adviser Jake Sullivan in neutral Switzerland. Apparently, it was a milder meeting than the historic rumble in Alaska in March. Official communiqués from both sides maintained critical tones, but also acknowledged the “constructive” character of the encounter. In addition to hinting at a possible meeting between Xi and Biden by the end of the year, new rounds of negotiations on Phase 1 of the China-US Trade Agreement, which had been suspended for months, were opened.

Since then, the leaders of the trade negotiations, Vice President Liu He and US Trade Representative Katherine Tai – from Taiwanese family and fluent in Mandarin – have held two virtual conversations. While Tai said the US does not want “ignite commercial tensions”, but voiced his concerns about Chinese policy on industrial subsidies and demanded that China comply with the agreement to purchase US goods, Liu claimed that the US suspend tariffs and sanctions imposed on Chinese products and companies.

While beckoning with commercial dialogues, the White House has not stopped making offensive moves against China. To name just the two most significant in the past three weeks: 1) the new agreement to sell US nuclear-powered submarines to Australia, inaugurating a new military alliance named AUKUS, which also includes the United Kingdom and clearly aims to provoke the Chinese, and 2) the announcement of the creation of a new CIA center specializing in China, considered as the “most important geopolitical threat of the 21st century” to the US, according to its director William Burns, institutionally recreating a typical apparatus of the anti-Soviet cold war.

The great American contradiction, recognized by the CIA itself in its last statement, is clear: unlike what happened with the USSR, the US economy is highly connected to the Chinese economy. More than that, it depends on China’s economy. The truth about this relationship was also recalled by Gina Raimondo in the same interview mentioned above: “it makes no sense to talk about decoupling (…) we want access to their economy, they want access to our economy”. That’s the reason for the White House’s tactical retreat in recent weeks. By virtually any scrutiny, the “trade war” that former President Donald Trump launched against China in 2018 is simply a failure.

This has been announced by members of the Biden government in recent months. In July, for example, Treasury Secretary Janet Yellen claimed that tariffs do not adequately respond to US interests and that, in some cases, they “harmed American consumers”. Katherine Tai herself admitted in a recent speech that the tariffs did not get the desired result. We only need to look at some of the studies published since last year to reach the same obvious conclusion.

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The main target of the “trade war” proposed by Trump was the huge US deficit in the balance of trade with China. But after decreasing between 2018 and 2019, the deficit rose 7.1% year-on-year, reaching US$316.9 billion in 2020. In the first quarter of 2021, the US deficit reached US$ 72.6 billion, 78% higher than the same period in 2020 (US$ 40.7 billion) and 16.6% higher than in 2019 (US$ 62.5 billion). Trump’s other goal was to bring jobs back to the US, but according to Oxford Economics’ study in January of this year, commissioned by the US-China Business Council, the tariff war against China cost about 245,000 American jobs.

At the end of last year, Bloomberg Economics estimated that the trade war had already cost $316 billion for the US economy, while a survey by the Federal Reserve Bank of New York in conjunction with Columbia University revealed that US companies had lost $1.7 trillion in stock values since the implementation of tariffs on Chinese imports until May 2020. No wonder that more than 3,500 US companies they are suing their government for such losses and, just over two months ago, for the first time in history, more than 30 business associations, such as the Chamber of Commerce, the Semiconductor Industry Association, the Business Roundtable and representatives from retail, agribusiness and industry came together to pressure Biden to cancel tariffs and resume negotiations with China. Add to that the huge pressures coming from Wall Street – which hopes to make mountains of money in the trillion-dollar Chinese financial market in the process of opening to foreign companies – and it becomes easier to understand the movements of the White House in recent weeks.

The trade war bill has also been paid by American consumers. They disbursed most of the $100 billion in taxes resulting from the new tariffs, but mainly began to pay more for durable goods. 25% of the $2 trillion of durable goods imported annually come from China, so tariffs inevitably generate inflationary pressure. After dropping 25% between 1997 and 2020, the durable goods price index has soared 15% since the pandemic (which includes other cost increases, such as freight).

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However, the Biden government finds itself in a tight spot. On the one hand, it knows that the biggest casualty of the trade war is the US economy and consumers, and that tariffs have proved useless as a pressure mechanism against Beijing. This can cost you votes. On the other hand, it fears attacks from vigilante Republican opposition and loses popular support if it appears to be retreating and failing to be “firm against China.” This can also cost you votes in the legislative elections November 2022, in a country where anti-Chinese hysteria has become a matter of principle in the corridors of Washington and the media, overriding economic rationality. One of the compromise solutions that Biden should bet on is the increase in tariff exemptions — as mentioned by the Tai representative in last week’s speech — which have been in operation since the Trump administration and created a new niche for the powerful lobbies industry Washington, often benefiting large companies, while smaller ones struggle to survive on import tariffs.

It is very likely that the US offensive against China will grow from now on. The list of actions should be long: sanctions against companies and individuals, banning access to cutting-edge technologies (especially chips, China’s biggest weakness), deepening military alliances, multi-level media campaigns based on fake news, among others. But the failure of the trade war provides an example of how the US will face numerous difficulties in its attempts to contain Chinese development. China’s market socialism has been creating increasingly consistent economic, political and ideological resilience mechanisms, strengthening its role in the global scenario. Going forward, the Empire will not have an easy life.

Edition: Thales Schmidt

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