This month opened in typical Trump-fashion, with Washington imposing blanket tariffs on imports to the US. Following the announcement, markets from New York through Shanghai witnessed severe shockwaves. Subsequently, the internet was awash with Trump supporters celebrating the effect particularly on the Shanghai and Hong Kong stock markets; praising Trump’s ingenuity. However, a week later, Washington announced a 90-day pause on all tariffs above 10% for imports from all territories except China. Be this as it may, experts have continued to rank Trump’s trade policy as the least friendly in 100 years.
Whereas some commentators argue that the pause was a response please to negotiate, reciprocal tariffs quickly set ‘Trump’s genius move’ and the US economy on a crash course. Moreover, the escalation involving China-the supplier of nearly 40% of American’s imports would mean that: either the 125% tariff gets transferred on to the American consumer or a reliance on alternative sources creates gaps in supply elsewhere. More importantly, the emergent supply deficits would likely create new market opportunities for China while the US risks forfeiting the 1.4 billion strong Chinese market. However, regardless of how this goes, Trump doesn’t seem to have a winning hand, at least not in the short term.
In my opinion, China-US trade tensions are not about China but rather the US’ strong belief in its legitimacy as the sole global power. However, the foundations of this belief ignore the fundamental fact that growth isn’t always infinite or uninterrupted. Indeed, it is for this simple reason that global dominance has always switched hands throughout history. Therefore, from this we can infer that China’s legitimate right to development has always been seen as a threat to this privileged position. Further, this is exacerbated by the US’ deteriorating economic footing seen from a $295 billion trade deficit and close to a trillion dollars of US debt to China. Without the significant progression through time, Trump might have tried the method the British used in 1833 or in 1856 using battleships to enforce “fair trade”; luckily these methods are buried 192 years deep.
The innovation, learning curve theory synergy; China’s engine of growth. Trump during his second state of the nation address in 2019 blamed China of ‘stealing American jobs’ and intellectual property. But in a highly interconnected and interdependent world, how is this to be avoided? Besides, this has always been the way of development. Trailblazers lowering entry barriers for those that follow. History shows that even before Robert fortune went to China disguised as a native to steal the secret of Chinese tea making, corporate espionage was a crucial stage on the path to modernisation. Indeed, Germany would never have replaced Britain as Europe’s industrial power early in the 20th century. Not even the American industrial revolution would have been as successful without both European immigrant capital, skills and knowhow. But more key in China’s rapid growth has been the learning curve theory and innovation; its ability to master cost efficient production.
Away from that, not even the 90-day pause on tariffs on certain countries targeted in Trump’s economic aggression changes the general outlook. In fact, Bloomberg economics projects the general US tariffs to only come down from 27% to about 24%. Despite the three-percentage point reduction, this will still be the highest in 100 years. Moreover, this does not take into account the 125% tariff on China hitherto the source of over 40% of all US imports. However, this can have any or a combination of a number of implications. In one scenario, the tariffs are endured but the products arrive at a much higher price with the America consumer having to bear the burden or, targeted territories seek alternative markets. However, when this happened in 1982 with Japan reducing car exports, the domestic automotive industry produced even less cars making it even harder for the ordinary American to own a car as a result of high prices.
The other possible outcome is that a move is made to readjust supply-chains which might require intensive investment in infrastructure, skills development and new technology in the short to medium term. Some experts are already expressing concerns that it could take decades for America to produce all it needs domestically. In the meantime, this certainly creates a supply deficit. On the other hand, if the US is to source these products from alternative sources, the deficit could potentially emerge elsewhere, likely creating a market opportunity for China given China’s relations with much of the developing world where this deficit is likely to manifest.
Until this point, the discussion has been about China and the US but what does Trump’s economic McVeighism mean for the rest of the world. Normally in such economic conflicts, when a major power faces off with a smaller nation, the outcome is more certain unlike when two major powers face off. In the former, the smaller nation loses badly but in the latter, the whole world suffers. Moreover, when all other sorts of nations are tossed into the mix, the situation becomes even more complex and could have far reaching consequences. For example, as reciprocal tariff walls sprout in different targeted territories this phenomenon poses a significant threat not just to the US but also to global trade. This situation however seems to isolate the US signalling the potential for serious adversity for the domestic economy.
On the contrary, China has over the recent decades build strong and reliable logistic and infrastructure networks through the Belt and Road Initiative (BRI) cooperation. In addition, the Chinese have through innovation been able to master efficient production. These combined do not merely mean China’s supply-chains may not require much readjusting but rather making it more of a reorientation. The logistic and infrastructure network and efficient production methods also imply that China will be more ready to capitalize on any supply deficits should they occur, but what does this mean for the US?
White House data as of April 10 indicated that China’s share of total US imports had dropped sharply from 34% to just 13.4%. Moreover, with further hiking of the tariffs to 145%, one can expect this to regress even further. NVIDIA for example expects to take a 5.5 billion hit in charges on account of the limiting chip exports to China the company’s biggest market for AI chips. Indeed, economists concur that besides affecting American companies, consumers will also have to deal with soaring prices as firms pass on some all their extra costs not to mention the loss of jobs as was the case in 2018 when Trump first made this gamble. According to the WTO, the resulting contraction of bilateral trade between the world’s two biggest economies will certainly be felt in many places as well.
What is happening in the world today is a stark reminder of the potential damage that could arise at any time from the unchecked trade powers of the US president. President Trump’s free-range to gamble not just with the US domestic economy but also the entire world economy underscores the urgent need for resilient trade systems that will shield global trade when God’s diplomacy becomes weaponised like it is being used against China, Canada, Mexico and others. Further, whereas China has done significant work in this direction, there is a need for Africa and the global south to do more in this regard. Albeit not being proof against trade uncertainties, relative economic peace can be guaranteed through building resilient regional ecological supply systems that that are self-sufficient to counteract instances of economic McVeighism and bullying from without.
George Musiime is a research fellow at the Sino-Uganda Research Centre.
