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The Trump administration wrongly assumed China would capitulate in a trade war. What happens now?

- September 24, 2018

The United States and China are at war over trade. The Trump administration and the news media are focused on tactics — what tariffs are imposed on what goods?

Like many wars, the United States has entered this conflict with optimism. Barbara Tuchman’s “The Guns of August” is a classic study of the spiral into World War I, a flight of optimism in which all combatants expected to be victorious quickly — until they got bogged down in trench warfare. In Iraq in 2003, the United States defeated Saddam Hussein’s army within days, and President George W. Bush declared “mission accomplished” only weeks later.

President Trump has taken a similar approach. Trade wars are “easy to win,” he said in the opening salvo. As the trade war drags on, it appears as though the administration’s expectation of a quick capitulation by Beijing was naive. Here are the more important questions:

1. What does the U.S. hope to accomplish? 

Trump has said his aims are to open the Chinese market, reduce the trade deficit and save American jobs, especially in traditional manufacturing industries. His strategy is to bludgeon China with tariffs on its goods and then to hit them with more tariffs when they retaliate. The idea is to take advantage of the unequal trade between the two countries to hurt China more than it can hurt the United States — and thereby win the war.

2. But will the U.S. public support a costly fight? 

With China digging in for a protracted fight, does the American public have the commitment to stay the course? The Trump administration has played down the costs of the trade war, saying the robust economy can absorb marginal increases in costs to consumers, and expecting other manufacturers at home and abroad to step in quickly to replace Chinese goods. The administration has rallied its base around the prospect of saving traditional industries from Chinese competition but misled the rest of the country about the true costs of higher-priced goods and inputs.

As U.S. export industries, industries that use intermediate products from China, and consumers begin to feel the pain, they are already pressing the administration to reverse course. As in any war, resolve matters. Public support is likely to fade as costs mount.

3. How is China likely to respond?

China, too, will have to bear some pain from this war, but its nondemocratic leadership is more insulated from public pressure. China exports more to the United States than vice versa, so it cannot match U.S. tariffs 1 to 1. But China is likely to redouble its efforts to build a stronger internal economy and seek new export markets in countries where it has an economic advantage and political influence, as in its Belt and Road Initiative. Chinese exports could increasingly displace U.S. exports to those same countries.

The main economic threat from China to the United States is not really in steel, cars and consumer electronics. Higher U.S. tariffs on Chinese goods are likely to simply shift production to Southeast or South Asia, regions where labor is still relatively abundant and can out-compete U.S. workers. Indeed, Trump administration officials already are attempting to soften the pain from tariffs by claiming that China’s production will be replaced by expanded imports from Vietnam and elsewhere. But it’s unclear how this will save U.S. jobs.

The real economic competition between the United States and China is in industries of the future — robotics, artificial intelligence, biotech and more. The Trump administration appears to believe that the trade war will prompt Beijing to abandon the Made in China 2025 initiative — aimed at upgrading its technology to compete with the United States. The opposite is more likely. Losing access to the U.S. market and U.S. technology, China will aim to build out its own technological base even more rapidly, and will then start subsidizing and selling its products to markets the United States previously dominated.

4. How will this trade war play out … and end? 

Even if the United States “wins” the trade war in the short term with China making some concessions that allow Trump to declare victory, the United States is likely to lose over the longer term as China works to reduce its dependence on the U.S. market and upgrade its technological capacity.

But the United States could still change course. The Trump administration has insisted upon waging this war solo. As in most wars, a more effective strategy might be to rally our allies — in this case, all those other countries that have legitimate complaints about Chinese economic policies. With a united front, China will find it harder to compensate for exclusion from the U.S. market by turning to others.

The United States and China also have effective procedures for resolving disputes and avoiding the costs of war. The World Trade Organization, for all its flaws, has clear rules on trade and a mechanism for adjudicating complaints of unfair practices. The WTO mechanism makes it possible for the U.S. government to respond to China’s violations of international trade rules.

Other issues, especially investment and forced sharing of technology, are not covered by current WTO rules and will have to be negotiated directly with China. Having demonstrated its willingness to confront China on trade, the Trump administration could declare a cease-fire, do the diplomatic work necessary to form a coalition of like-minded states that oppose China’s unfair practices, and then submit the dispute to the WTO and open negotiations on investment issues not covered by current agreements.

This seems like an opportunity — or the last chance — to pull back from the brink of a major war that will not only be costly in the short run but, if fought as presently planned, is unlikely to lead to U.S. victory over the long run.

David A. Lake is the Gerri-Ann and Gary E. Jacobs professor of social sciences and a distinguished professor of political science at the University of California at San Diego. 

Jessica Chen Weiss is an associate professor of government at Cornell University. Find her on Twitter at @jessicacweiss.