[Big read] Tariff wars: Can Chinese traders outsmart US hawks?

“No trade is free.” 

The title of a 2023 book by Robert Lighthizer, a staunch American advocate of extreme trade protectionism, is a direct reflection of his views on trade.

The 77-year-old is best known for his role as US trade representative during Donald Trump’s first term as US president, and as the chief architect of the Sino-US trade war. Some Chinese think tanks have called him the “Voldemort” of Sino-US trade.

The full title of Lighthizer’s book is No Trade Is Free: Changing Course, Taking on China, and Helping America’s Workers. The book is divided into five parts and 18 chapters, with Part Two specifically focusing on how to handle China across its seven chapters.

Lighthizer believes that China is not just a trade partner taking advantage of the US, but also a “perilous adversary”. He advocates an “America First” policy, arguing that high tariffs should be used to bring manufacturing back to the US, with the long-term aim of “strategic decoupling” from China.

To implement this strategy, Lighthizer has proposed measures including stripping China of “most favoured nation” (MFN) status, imposing extra tariffs on Chinese imports, tightening and expanding the scope of controls on exports to China, halting cooperation between the US and China in security and technology, and demanding full reciprocity from China in market access.

It is rumoured that Trump is considering bringing this hawkish trade adviser back as US trade representative. It is generally believed that even if Lighthizer does not return to this post, he would be a key adviser in Trump’s team. Under his leadership, Trump’s trade policy 2.0 is likely to take on even more pronounced nationalist economic tones, exacerbating the Sino-US trade war.

Lighthizer subtly hinted in his book that he has unfinished business, claiming: “If… China had not lied about the plague that came from its lab… it’s possible the Phase One agreement could have formed the foundation for a more balanced, sustainable, and less contentious relationship between the United States and China.”

The phase one trade agreement refers to the deal signed between China and the US back in 2020 during Trump’s presidency. Under the agreement, China was required to purchase an additional US$200 billion worth of US goods and services over two years in the manufacturing, services, agriculture, and energy sectors. However, Trump lost the presidential election in November 2020, and the deal came to nothing.

Trump has long harboured resentment over his loss in that election, blaming it on the “China virus”. Four years on, with the Republican wave sweeping across the US, Trump has returned, and like Lighthizer, he remains fixated on high tariffs. The imposition of steep tariffs on Chinese goods and services by the US is now all but certain.

During his campaign, Trump threatened to impose a 10-20% tariff on all imported goods, with at least 60% tariffs on Chinese goods.

Scholars and importers interviewed by Lianhe Zaobao mostly believe that Trump’s mention of a 60% tariff is more of an election slogan — partly to rally support and also to strengthen his bargaining position in future negotiations with China, giving the US more room to bargain.

How high Trump’s team will set the tariffs will depend not just on the president’s personal preferences and objectives, but also on the dynamics between him, his cabinet, and his inner circle.

At the opposite end of the spectrum in stark contrast to Lighthizer’s extreme conservatism is Elon Musk, the world’s richest person and CEO of Tesla.

Musk not only invested nearly US$200 million in Trump’s campaign, but also actively campaigned on his behalf. After the election, Trump’s granddaughter posted a video on social media showing Trump inviting Musk and his son to join in a family photo, showing that he considered Musk one of his people. Musk also received a government position, co-leading the newly established Department of Government Efficiency with Indian-American entrepreneur, Vivek Ramaswamy.

For China, Musk could serve as a valuable ally in its contest with Trump. Musk has plenty of business ties to China, since it is Tesla’s second-largest market globally, and more than half of Tesla cars are manufactured there.

Over the past two years, Musk has visited China twice and even met with Premier Li Qiang. During a meeting with then Foreign Minister Qin Gang in May last year, Musk voiced his opposition to the decoupling of China and the US. When the Biden administration announced in May this year that tariffs on Chinese electric vehicles would be raised to 100%, Musk opposed the move and called for zero tariffs.

The key question is whether extreme trade protectionism espoused by Lighthizer or Musk’s push for free trade will have the greater influence on Trump?

Zhu Feng, executive dean of the School of International Studies at Nanjing University, said: “Lighthizer will definitely take the lead, with Musk playing more of a supplementary role”.

Zhu noted that Lighthizer is a “symbolic and key figure in US trade protectionism theory and practice” and shares Trump’s “America First” trade philosophy.          

Zhu said if Trump were to appoint Lighthizer as his trade negotiator, he would not only become Trump’s most powerful ally in opposing the globalised free trade system but would also play a critical role in policy design. To Zhu, tariff wars would not only affect US-China relations but could “mark the end of globalisation during Trump 2.0”.

However, Sung Wen-ti, a non-resident fellow with the Atlantic Council’s Global China Hub, offers a different perspective. He believes that in Trump’s second term, Musk will have a greater influence on Trump than Lighthizer. To Sung, Musk could serve as a mediator or coordinator between the US and China.

With four years of presidential experience behind him, Trump will likely place more value on loyalty and alignment in his appointments, while reducing his reliance on policymakers. This means Musk’s personal relationship with the president would give him more sway. As a result, Sung predicts that in the medium to long term, “the US-China trade war will not worsen as much as many expect”.

Lye Liang Fook, a senior fellow at the ISEAS-Yusof Ishak Institute, is of the view that Trump is basically a businessman who will not be bound by institutions or personalities, but only consider “what he thinks is right for him” in making decisions. It is hard to predict what deals Trump has in mind, but what is certain is Trump “doesn’t care whether there’s actually concrete results”, but what is in it for himself.

Lye felt Trump and Musk are two businessmen making use of each other — Musk is just one individual, while Trump has to look at “what is in it for himself and his empire and his family business, business people”.

After Trump’s victory, the Macquarie Group predicted that if the Sino-US trade war escalates, China’s exports could fall by around 8% the following year, with GDP dropping by two percentage points.

China’s economy has yet to fully recover from the pandemic. Issues such as the real estate crisis, local government debt, weak consumption, foreign capital withdrawal, rising deflation concerns, and high youth unemployment are all contributing to a lack of market confidence and preventing the economy from entering a positive growth cycle.

As the second round of the Sino-US trade war looms, does China have enough economic ammunition to face its unpredictable old opponent Trump?

Tommy Xie, head of research for the Greater China region at OCBC Bank, shared his analysis that “it’s not particularly difficult” for China to offset the 1% loss in GDP caused by the 60% tariffs through fiscal stimulus measures.

He noted that China’s current economic struggles are largely internal — “the body is weak, and suddenly it starts raining outside, while there are leaks in the roof at home”.

Thus, Xie believes that China’s recent policy measures, such as making available resources worth ten trillion RMB (US$1.4 trillion) for its local governments to prevent a debt crisis, are a step in the right direction. “By strengthening internal capabilities — fixing the body and the roof first — China will be better equipped to weather the storm ahead. Otherwise, the upcoming impacts could be severe.”

During the last trade war, China responded with retaliatory tariffs on US goods and allowed the RMB to depreciate, making Chinese exports relatively cheaper. Between 2018 and the end of 2019, the RMB lost about 10% against the dollar.

Xie noted that if the US increases tariffs to 60%, China may not have much room to hit back with tariffs of its own, as it enjoys a bilateral trade surplus of over US$300 billion with the US, meaning any retaliatory measures would not be equal. The expected depreciation of the RMB would be easier to manage, as the scale of private sector external debt is not significant.

While the Chinese government has yet to implement expansionary measures like stimulating consumption, its state media has pointed to this direction. On 11 November, the Economic Daily published an article from China’s National Development and Reform Commission highlighting that “the domestic market will play a more dominant role in its economy” for some time.

It is widely believed that in response to US pressures, China will focus on strengthening ties with the global south, and emerging markets in Asia and Africa, and through the Belt and Road Initiative (BRI). At the same time, it could also take more drastic measures like selling the US Treasury bonds it holds.

ISEAS’s Lye anticipates that China will also seek to court Europe to counterbalance US power, and may even resort to non-administrative countermeasures, such as imposing export controls on strategic rare earth metals or ordering searches of US consultancies operating in China.

Sung Wen-ti of the Atlantic Council feels that it is not difficult for China to “handle” Trump since what he seeks is “a sense of victory rather than substantive success”. According to him, Trump cares more about making deals and publicising them. So, satisfying Trump’s domestic political needs would lessen the intensity of US tariffs directed at China.

Sung suggested that the Chinese government could encourage its companies to invest and establish factories in the US or procure US agricultural products, with the latter likely to be more direct and impactful. With such news reported every few days, Trump could publicise that under his leadership, US industries are conquering the Chinese market.

However, Li Mingjiang, an associate professor at the S. Rajaratnam School of International Studies (RSIS) at Nanyang Technological University (NTU), pointed out that any new wave of Chinese procurement from the US will be harder to navigate than in 2020. Aside from agricultural products, China’s real need lies in technological goods, but the US’s “small yard, high fence” strategy means it is unwilling to sell these to China.

A trade war is bound to result in a lose-lose situation. A report by the United Nations Conference on Trade and Development (UNCTAD) pointed out that nobody really wins in the trade war initiated by the Trump administration in 2018.

Should a Trump 2.0 version of this ensue, it will undoubtedly result in a situation where both sides inflict significant harm on each other. The key question is: who will be worse off?

This year, China’s exports returned to pre-pandemic levels to account for nearly 20% of its GDP, making it a crucial pillar of its economy. Both NTU’s Li and OCBC’s Xie assessed that if the US imposes tariffs of 60% on Chinese goods, China would face even greater economic pressure.

Xie explained that a 60% tariff would certainly strangle China’s exports and the GDP loss would be tangible. While US consumers would have to bear higher prices, “the impact may not be as direct since there are more transmission channels involved”.

Li also noted that Trump has repeatedly stated his goal to “Make America Great Again”, aiming to bring manufacturing back to the US. While Trump would not mind a partial decoupling from the Chinese economy, the Chinese economy would be hit hard. “Just look at who is opposing a trade war more loudly.”

On the other hand, ISEAS’s Lye argued that from a political standpoint, the costs for the US will be greater than for China. American consumers are undoubtedly the biggest losers since they have to bear the brunt of higher tariffs, but four years later, the ruling party could pay the price if voter sentiment shifts. “The political cost is lower for China since the population is entirely within the control of its government”.

Meanwhile, Nanjing University’s Zhu feels that if Trump were to launch an aggressive trade war, it would worsen China’s international business environment. However, there could also be a positive side to this. “It could provide an important window of opportunity for China to push forward with domestic institutional reforms and enhance the global competitiveness of Chinese products”.

“You can’t put all your eggs in one basket, right?”

Zhang Xinguo, a 56-year-old Chinese trader, has been selling baby wipes to the US for many years. He helplessly tells me that after Trump threatened to impose a 60% punitive tariff on Chinese goods, he had no choice but to explore other markets. He is now planning to expand into BRI countries, as well as promote his products in Saudi Arabia and Europe, instead of focusing solely on the US market.

Zhang explained that although baby wipes are considered non-sensitive products, they have still been impacted by the trade war. Several years ago, tariffs were imposed on them and the price hikes were passed on to American consumers. According to him, under normal circumstances, a 10% profit is considered good in foreign trade, but if tariffs suddenly rise to 60%, it would be like incurring a 50% loss. “There’s no way to make it work, so we would have to give up.”

Another trader, Liu Chaoyang, 54, told me that his company was not significantly affected by the previous Sino-US trade war since only a small portion of his dehydrated vegetables and spices was exported to the US.

Liu found out from American importers that despite the heavy tariff blow, there is leeway in the US tax system for its local or state governments to offer subsidies, meaning that “after subsidies, a 30% tariff could be reduced to below 20%”.

There are two reasons why Liu feels that Trump is unlikely to impose a 60% tariff. First, he may simply want to use the threat of tariffs to pressure China into fulfilling the phase one deal it signed in 2020. Second, the global manufacturing supply chain cannot bypass China.

After Trump launched the trade war during his first term, many businesses coped through “China+1” or bypass trade. This involved relocating factories to Southeast Asia or Mexico, or rerouting and slightly processing goods further, in order to avoid the punitive tariffs imposed by the US on Chinese products.

Liu noted, “Although they changed the label, the goods are still from China. China offers the lowest prices for components, small goods, chemicals, heavy industry and steel. Trump wanted to bring manufacturing back to the US but it ended up in Mexico instead. The US didn’t really benefit.”

In May, South Korean media outlet Chosun Ilbo reported on a study carried out by the Korea International Trade Association Institute for International Trade on the trend of Chinese exports to the US via detours. The study found that China’s exports to the US via Mexico nearly doubled from US$5.3 billion in 2018 to US$10.55 billion in 2022. During the same period, Chinese exports routed through Vietnam increased from US$1.57 billion to US$3.02 billion.

This “origin-washing” strategy quickly caught the attention of the US government. During his campaign, Trump threatened to impose up to 200% tariffs on Mexico to prevent Chinese car makers from manufacturing in Mexico and exporting to the US. Bloomberg also reported that Robert O’Brien, national security adviser of the first Trump administration, told Vietnamese leaders that they needed to curb the illegal rerouting of Chinese goods during his visit to Hanoi at the end of 2020.

NTU’s Li said that if Trump were to go all out, he can theoretically use policy measures to block these loopholes. One option would be to increase the required percentage of a product’s origin to be from the country it is being exported from; another would be to raise tariffs on goods from countries like Vietnam and Mexico; a third and more targeted approach could involve imposing tariffs on Chinese brands based in those countries.

ISEAS’s Lye analysed that while it is theoretically possible to close these loopholes, the US would also need to consider its political interests, such as its desire to bring Vietnam closer as a partner against China’s influence in Southeast Asia.

Liu, with nearly 30 years of experience in foreign trade, believes that blocking rerouted trade is too difficult, and in the end US officials can only turn a blind eye.

“How is it possible? Always remember: merchants will always seek what is the cheapest.”

This article was first published in Lianhe Zaobao as “迎战美国鹰派内阁 中国制造如何突围？”.

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