Consequences of a U.S.-China Trade War
In the wake of a uniquely unpredictable U.S. election, international relations scholars are now trying to predict how a Donald Trump administration will affect American foreign policy. The president-elect’s repeated criticism of Chinese trade policy during the campaign has brought even more attention to the crucial U.S.-China relationship. Regardless of the president, a fragile Chinese economy is entering a tense phase, and Trump's election suggests that American domestic economics are likely to further raise the stakes.
Until recently China had been alarmed at the possible passage of the Trans-Pacific Partnership, or TPP, which could put them at a trading disadvantage compared to member states. Trump -- who pledged to abandon TPP during his campaign -- has no doubt eased more than a few minds in Chinese policymaking circles. Unfortunately, the real estate mogul’s willingness to abandon the TPP reflects lower support in the United States for free trade, which is just as bad for China.
China's economy is still heavily reliant upon exports, especially exports to the United States. Diminished returns from free trade will put increased pressure on China's already weakened economy, and the likelihood of civil unrest in the country will increase. China is a large economy, mostly by virtue of its population. GDP per capita remains just below $8,000, and that GDP is not equally distributed, meaning the common Chinese has little wiggle room before economic contraction becomes catastrophic. Put simply, China can ill afford to reduce exports.
Trump's victory reflects dissatisfaction with globalization in the United States. Such dissatisfaction has manifested itself around the world, and consequently was likely to find home in America eventually. While on balance free trade has been good for the United States, not everyone has benefited equally. Additionally, globalization has imposed unwelcome changes to domestic social structures. Support from free trade skeptics has freed the president-elect from some constraints to renegotiate free-trade agreements, and puts pressure on him to do just that.
China is thus faced with a "Hobson's choice." If Beijing attempts to accommodate American demands, it risks domestic unrest as its economy contracts. If China refuses to accommodate changes, then it risks a punitive American response, potentially producing a trade war it cannot afford. China cannot even threaten to cut off production access in the long term, as Washington could simply return to the TPP to fill that need.
The United States, for its part, is similarly positioned. Domestic pressure demands adjustment of the Sino-American trade relationship, but any attempts to put direct pressure on China risk blowing up that relationship, destabilizing China and imposing significant costs on the American consumer. Importantly, no change in global trade is guaranteed to return American manufacturing jobs, either.
The status of the Chinese and U.S. domestic political economies imperils the Sino-American relationship. China cannot accept significant revision in the trade relationship with the United States. The incoming U.S. administration is unlikely to maintain the status quo. As such, these two countries seem to be inexorably on a collision course, with possibly disastrous consequences.
This bleak outlook may be an unavoidable facet of institutional and economic change in the international system. The United States deliberately established the liberal international trade regime because it believed trade was unambiguously beneficial. China joined that regime hoping global trade would bring prosperity without domestic political reform, thereby avoiding the Soviet Union's fate. Both countries got what they wanted out of trade, but trade also changed both countries, creating the dilemma we see now.
While conflict may be unavoidable, disaster is not. Each country must remain mindful of the pressures the other experiences and negotiate in good faith. If Washington and Beijing can work to resolve this conflict in the least destructive way possible, it will set a precedent for future cooperation under conflict, even when stakes are high. If, on the other hand, China and America are unable to work together to solve this conflict, it bodes ill for future prospects in Asia and the world. Donald Trump has made himself out to be the master of "the deal" in the business world, but this will be a deal unlike -- and more important than -- any he has negotiated before.