Brynn O’Connell is a third year War Studies student with an interest in political economy. In this article, she discusses how the US-China trade war is driven by a link between geopolitics and economic growth.

 

As the effects of the trade war between China and the United States (US) continue to be felt worldwide, it is still framed as an exchange of tariffs and a battle of macroeconomic policies. However, there is also an important geopolitical context. Crucial to Trump’s rationale for taking on the Chinese economy is China’s growing economic and political influence in developing countries. During his tenure as secretary of state, and at the start of the trade war, Rex Tillerson likened China’s expansion in developing countries to that of an ‘Imperial Power’.^[1] Simultaneously, Trump’s nationalistic economic policies are driven by the aim to put ‘America First’. China’s advance into the developing world threatens American economic hegemony, placing the trade war in a context much more tangible than the esoteric volleys of tariffs.

 

It was no secret President Trump was going to pursue a policy of economic nationalism with his dual slogans of ‘Make America Great Again’ and ‘America First’. It came as no surprise when he removed the US from the Trans Pacific Partnership (TPP) and insisted on renegotiating the US-Mexico-Canada Trade Agreement. Perhaps the best example of Trump’s economic nationalism is his ‘Buy American and Hire American’ Executive Order.^[2] Although arguably misguided, these policies are born out of a well-founded concern for the sustainability of the American economy. Scrutinizing Gross Domestic Products (GDP) growth offers a snapshot of a country’s economic health. GDP consists of consumption, government spending, investment, and net exports. In 2018, consumption made up between 68 and 69 percent of GDP leading to analysis that the US is a consumption driven economy. ^[3] To Keynesian economists this is nothing to be concerned about, but to the Robert Solows and Paul Krugmans of the world this is a very serious issue. Krugman and Solow consider extensive and intensive growth. Extensive growth is generated from expanding the quantity of output and intensive growth is generated from using inputs more efficiently. Solow identified that as countries transition from economies of extensive growth to economies of intensive growth they will encounter diminishing returns. Krugman applies this idea to modern day. Key to avoiding diminishing returns is ensuring there is more capital than consumption. Essentially, GDP should be composed of more investment and net exports than consumption. High consumption does come with economic benefits though. Gita Gopinath, Chief Economist of the IMF, sees the durability of consumption as the reason why the US is ‘winning’ the trade war; however, she also cautions the longer the trade war goes on, the more likely it will lead to macroeconomic instability in the US.^[4]

 

The tension between extensive and intensive growth has immediate geopolitical consequences. Extensive growth translates to expanding to new markets so there is enough demand for the increasing outputs produced. This is the source of US tension with China. China has encountered a relative slowdown from over 12 percent annual average GDP growth in 2010 to 6.7 percent in 2018.^[5] To counter the slowdown, President Xi Jinping began to implement in 2013 what is now known as the Belt and Road Initiative (BRI). The goal is to connect underdeveloped border provinces with developing countries to generate extensive growth by facilitating the incorporation of new markets. Thus far, China’s growth has been based off exporting labour intensive manufacturing goods. This is no longer sustainable. The emerging delicacy is apparent from ‘overproduction by a number of China’s industries, including coal, steel, and cement along with excessive foreign exchange reserves’.^[6] Having foreign currency reserves is a good thing up to a point. However, when there is too much foreign currency circulating in an economy this leads to ‘dollarisation’ and the relative decrease in value of the country’s own currency making trade less profitable.

 

There are sixty-eight countries ‘under the scope of BRI based on reports from Chinese quasi-official organisations and BRI’s geographical representation’.^[7] Twenty-three of these are ‘at risk of debt distress’^[8] and thirty-three are below investment grade according to Moody’s, Standard and Poor’s, and Fitch’s credit ratings. To the Trump administration, it appears China is deliberately targeting countries that are unlikely to be able to service the debts they take on from these large infrastructure projects which China will then use to gain influence within that country. These fears are not totally unfounded. Through the BRI, China established their first overseas military base in Djibouti when Djibouti was unable to service the loans for its multiple infrastructure projects. In a similar situation, China gained control of the deep-water Hambantota Port for 99 years when Sri Lanka was unable to service its debts. China’s pursuit of extensive growth is ringing geopolitical alarm bells for the US. Concerns of maintaining intensive growth in the US – conflicting with Chinese expansion – have contributed to the idea that the US needs to decouple their economy from China.

 

The US and Chinese economies are linked by consumption and American fuel exports. In this light, the strategy of employing tariffs to reduce incentives to buy Chinese goods is not inherently misguided. Tariffs are a tax paid by companies that import foreign goods, meaning the consumer is the one who takes the hit. However, the pain felt by tariffs on Chinese goods may be worthwhile if it enables the US to acquire greater agency over the economy rather than letting consumption take the wheel. Yet such a strategy requires more grace and precision than the Trump administration has exhibited thus far. Rather than targeting shoes and clothes, [9] the US should focus on the heart of China’s growth strategy – technology. Tariffs targeted at technology frustrate China’s ability to get returns on high value-added industries. Placing tariffs on textiles and shoes is a misguided policy as it is highly unlikely textiles will return to the US and be cheap enough to compete with Chinese goods. Instead, President Trump should be looking at alternative countries to meet American demand. By placing tariffs on Vietnamese and Japanese goods^[10], President Trump is reducing the industry alternatives and placing further grief on the American consumer. Theoretically, American consumers could shop for these alternatives while domestic industry developed. For areas where American industry cannot compete with China, Chinese goods could be replaced with Vietnamese goods meeting American demand for lower value added products and Japanese manufacturing supplementing higher value added tech products. If the Trump administration considered the trade war in a greater geopolitical context, their strategy would be more informed and more effective. At the very least, it would strengthen the American negotiating position if there is any real attempt to come to an agreement. Geopolitics got the US into this trade war; it may offer a way out.

Sources:

^[1] https://www.wsj.com/articles/tillerson-raps-russia-china-as-imperial-powers-in-latin-america-1517525936

^[2] https://www.uscis.gov/legal-resources/buy-american-hire-american-putting-american-workers-first

^[3] https://www.thebalance.com/components-of-gdp-explanation-formula-and-chart-3306015 ; https://fred.stlouisfed.org/series/DPCERE1Q156NBEA

^[4] https://www.bloomberg.com/news/videos/2019-09-05/imf-chief-economist-gopinath-on-trade-war-global-economy-policies-video

^[5] https://tradingeconomics.com/china/gdp-growth-annual

^[6] https://www.jstor.org/stable/pdf/j.ctv1rmjm7.9.pdf?ab_segments=0%2Fl2b_100k_with_tbsub%2Fcontrol&refreqid=search%3Ae0d7f87b1abf9ee4db5a61f0becc2696

^[7] https://www.cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf

^[8] Ibid

^[9] https://www.scmp.com/week-asia/politics/article/3025557/us-using-trade-war-stop-china-overtaking-it-ex-singapore

^[10] https://www.scmp.com/economy/china-economy/article/3022152/donald-trumps-real-threat-vietnam-tariffs-sends-ripples; https://www.japantimes.co.jp/news/2019/05/22/business/economy-business/japan-u-s-odds-auto-farm-tariffs-quotas-not-raised-talks/#.XXhQSOhKiUk