Han Dieperink: China's staying power in the trade war
This column was originally written in Dutch.
By Han Dieperink, written in a personal capacity
At first glance, the recent escalation in the trade war between the United States and China looks like a victory for President Trump. With import duties of up to 145% on Chinese products – compared to only 10% for goods from other countries – he has dealt the Chinese economy a heavy blow. Yet it would be premature to label China the loser in this economic showdown.
China has considerable room for economic stimulation. Unlike the US, the country is not struggling with inflation concerns and has one of the lowest bond yields in the world. This allows Beijing to take fiscal and monetary measures without additional inflationary pressure, which is essential to cushion the shock of US tariffs.
Interestingly enough, China and the US seem to be switching roles. Where China limited domestic consumption and had a strong focus on exports for years, Beijing is now stimulating domestic consumption. Meanwhile, America is moving in the opposite direction with a stricter fiscal policy and import duties that actually act as a tax on its own consumers.
The declining American influence
American dominance in world trade has declined significantly. In 2000, the US was still the destination for approximately 20% of world exports. This has now dropped to approximately 13%, while China has doubled its share. Significantly, China currently exports more to Southeast Asia than to the US.
This shift means that the loss of the American market, although painful, is no longer as catastrophic for China as it was a decade ago. The regional trade ties in Asia, strengthened by initiatives such as RCEP and China's Belt & Road initiative, offer a substantial buffer against American pressure.
Tariff evasion
The huge gap between the 145% tariffs on Chinese goods and the 10% on products from other countries creates powerful incentives for tariff evasion. Chinese exporters can still reach the US market through transit through third countries, or by cooperating with companies in those countries.
Furthermore, the limited inspection capacity of American customs makes effective enforcement virtually impossible. With 70,000 containers arriving every day in the western ports alone, the possibilities for evasion are endless.
China's strategic options
By responding directly with reciprocal tariffs, China has sent a clear warning to other countries: those who follow the American line risk similar retaliatory measures. The weakening of the renminbi underlines this message – a signal that China is prepared to use currency devaluation as a weapon against countries that join in American isolation attempts.
China also owns over 800 billion dollars in US treasury bonds, which could potentially be used as a means of applying pressure. The recent underperformance of US bonds, despite the stock market crash, suggests that China has already begun to gradually reduce these positions.
Weaknesses in the US strategy
The US tariffs act as a tax on American consumers and businesses. They can fuel inflation at a politically sensitive time and increase costs for American companies that depend on imported components.
This weekend it became clear that Trump has decided to temporarily exclude electronics, including smartphones and computers, from the new tariffs – a sign that even the 10% tariff would cause too much pain for American consumers.
The long term
The confrontation between the US and China is likely to continue. Both parties see weakness in the other and are therefore reluctant to compromise. However, China's ability to stimulate the economy, increasing regional integration and the inherent limitations of US tariff policy give Beijing excellent cards for the long term.
The Chinese autocracy also has the advantage that Beijing does not have to justify itself to the electorate every four years, while Trump is likely to lose the Mid-Terms within two years and with it probably his political clout.
Ultimately, the winner in this economic battle will not be the one who can cause the most damage, but the one who can best adapt to the changing economic reality. China's ability to adapt strategically, its focus on domestic consumption and regional integration suggest that Beijing, despite short-term pain, could gain the upper hand in this trade war in the long term.