China syndrome?

Donald Trump has, of course, threatened a far broader trade war against China, claiming he would impose 100 per cent tariffs on Chinese products, but, as we’ve suggested before, this looks more like the opening round in a negotiating position than a firm commitment. 

Certainly his senior advisors and others close to him, but also more obviously connected and aligned with big business, have been stressing that Trump intends the big threats today to act as the first move in a negotiation that begins, not quite tomorrow, but when he re-enters office in January. 

Capitalism

China, for its part, has treated the Trump announcements with some public concern, understandably, stressing correctly the likely costs to US consumers – but the country’s ambassador to Washington has, for example, been keen to underline that they know full well Trump is intending to negotiate on final tariff positions. 

The broader strategy here is something Trump’s pick for Treasury Secretary, Scott Bessant, laid out in a speech over the summer – that if the international economic order is being reshaped, and it is, the US should be using all the levers it has to bend this reshaping to its own advantage. 

Leveraging the sheer size of the US economy, with its 350 million or so consumers and their dollar purchasing power, is one obvious play. How does this work? 

For example, Trump has pledged a 10 per cent additional tariff on all Chinese goods if China doesn’t reign in the supply of fentanyl to the US – something China says it has no part in, incidentally, but here you can see how the threat of a tariff is supposed to win some other policy goal.

Much of what the Trump administration does is likely to be fundamentally reactive – under the guise of “America First”, it will be responding to a world that it perceives as increasingly hostile to the interests, as the administration sees them, of US capitalism. 

Centrally-planned

Chief amongst those are its military strength, and, allied to that, its technological lead in critical sectors. China has moved with impressive speed to at least threaten the US’ edge here, and so starting with the first Trump administration, extended under President Biden, and now quite likely to deepen still further in Trump’s second term, we see some increasingly aggressive trade moves aimed at preventing China gaining that advantage. 

Stepping back, and the overall impact contains a significant historical irony. China has a form of capitalism far more closely organised around a central economic plan, which includes its intentional, long-term focus on supporting high-tech industries. 

In responding to the outcomes of this plan, first with counter-tariffs and then with investment and industrial strategy, the US state is introducing its own forms of planning and intervention. 

The process of competition between capitalist states is reproducing planning inside capitalism: planning begets planning, via the process of capitalist competition. 

Bessant himself thinks the Biden administration introduced too much “central planning” into the system, but for as long as the US government is reacting to China, the ratchet effect will operate: China’s central planning will dictate increasingly centrally-planned responses from the US. 

Competitive

This is one of the key drivers now moving the world out of neoliberalism into a form of more state-led capitalism – typically also with greater authoritarianism.

Those tariffs may not work as intended: the evidence so far suggests that China has, in turn, responded by putting more resources into its domestic industries, so that the much-tariffed high tech supplier Huawei can now build phones with home-grown semiconductors not far off the cutting edge that TSMC in Taiwan works to. 

Restrictions and tariffs have created something of a hothouse for Chinese innovation, in other words – precisely not what was intended. By charging hard at its supposed interests, the American state is actually undermining them – but this will tend, in practice, to reinforce the argument in Washington for further tariff restrictions.

Obviously this isn’t particularly rational. There is, in theory, a route through this – that if America is concerned about China’s trade undermining its own manufacturing concerns, it could (for instance) use the threat of tariffs to win a more favourable general position with China – agreeing to a controlled devaluation of the dollar, making US exports more competitive across the world, something the Vice President in-waiting, JD Vance, has argued for. 

Back in 1985, this was the deal the US arranged with Japan – the so-called “Plaza Accords”, in which, under the threat of worse tariffs for Japanese exports, Japan agreed to a revaluation upwards of the yen, making its own exports less competitive but easing the pressure on the US. 

Rebalancing

This would, in turn, allow the US to regain some initiative and rebalance the world economy – breaking the ratchet towards central planning, something Scott Bessant, who has floated a second Plaza Accord, would appreciate. 

Sahin Vallee, writing in the Financial Times, argues the US under Trump could be about to achieve the same deal in parallel circumstances with China. Vallee believes that the macroeconomic entanglements of China and the US will force a kind of economic rationality reassert itself. 

Both sides will recognise a mutual interest in backing down from dispute – if, as in 1985, the US is prepared to use its capacity to threaten wisely and set up a “grand bargain” with China: the dollar is allowed to fall in value, China allows the yen to rise, and tariff restrictions dialled back. 

I think this is far too optimistic. One wrinkle is Vallee’s call for spending cuts in the US – necessary, in his global rebalancing, to prevent the US demanding to borrow more and more effectively from the rest of the world. 

Sabre-rattling

The first Trump administration was very careful not to touch most American’s welfare benefits, and Trump himself was associated with significant (for the US) generosity in covid. 

Whatever the chatter about cutting the “administrative state” now, and Elon Musk’s grandstanding, actually getting politically unpopular spending cuts past this President and this Congress will be fiendishly difficult.

However, the primary difference between the 1985 deal and today is that whilst Japan was politically and militarily subordinated to the US, China very much is not. 

And so whilst Japan would, in the end, buckle relatively easily and accept a deal that, as it turned out, was not particularly good for its own economy, China has absolutely no reason to do this. 

So even if some side-deals can be pulled together around some consumer goods, for example – military or even dual-use components like advanced semiconductors will be subject to a different logic: of cut-throat competition, with the growing threat, behind the economic sabre-rattling, of actual war.

This Author

Dr James Meadway is an economist and former political advisor. This article is based on a transcript of an episode of Meadway’s podcast, Macrodose.