As a Chinese economist, I usually refrain from commenting on the internal affairs of other countries, particularly in political matters.
However, the economic ramifications of the tariff war initiated by US President Donald Trump are astonishing.
While China and the United States reached a preliminary agreement to reduce tariffs during negotiations in Switzerland in May, the idea of the tariff war coming to an end seems far-fetched.
The superficial reduction of tariffs did not satisfy the strategic objectives of either nation, especially those of the US.
In the medium to long term, it is likely that disputes and conflicts regarding trade will persist until the US midterm elections next year.
It is crucial to dissect the rationale behind the tariff war and the ensuing consequences for both countries.
One particularly bewildering proposal came from White House trade adviser Peter Navarro, who suggested calculating the tariff rate based on the US trade deficit divided by the total bilateral trade volume.
This approach defies basic economic principles and lacks presence in reputable economics textbooks.
Contrary to the prevailing perception, China possesses vital leverage in this ongoing conflict.
Trump’s significant tariff rates made it prudent for Chinese President Xi Jinping to refrain from engaging directly with Trump; he was fully aware of the nature of such a discourse.
China currently holds nearly $800 billion in US Treasury bonds.
In negotiations, Trump could potentially pressure China into converting these bonds into 100-year interest-free bonds or demanding a sharp devaluation of the renminbi, while also expecting policies to support the dollar’s global supremacy.
Both of these demands are utterly unacceptable to China.
In response to the US tariff strategies, China has begun strategic preparations including cuts in oil imports from the US, redirecting its purchasing to Canada, and sourcing beef from Brazil, soybeans from Argentina, and pork from Spain.
Essentially, China is substituting American goods with products from alternative sources.
Moreover, China’s leverage might be significantly augmented through export controls on rare earth materials.
These strategic resources are not scarce but suffer from technological constraints in refining.
China monopolizes the most advanced rare earth refining technologies and holds the majority of global patents.
Other nations would require a decade and hundreds of billions of dollars to establish a complete rare earth supply chain, thereby making China’s restrictions potentially devastating for key American industries, including military sectors, where components like the F-35 fighter jets necessitate rare earth elements.
Columbia University economics professor Jeffrey Sachs criticized Trump’s approach, suggesting that as a real estate developer, Trump lacks the necessary understanding of trade nuances.
After the tariff announcements, global stock markets faced staggering losses, amounting to $10 trillion in just two days.
If tariffs truly brought benefits to the US, one might expect stock markets to surge; however, the opposite occurred as they plummeted following the announcement.
Trump’s failure to recognize the mutual benefits of trade has led to an artificial division in the global economy, marking a clash between the US and the rest of the world.
A significant adverse effect of this policy was noted in late April, when global investors divested approximately $200 billion in US Treasury bonds.
Japan and the UK were notable contributors to this selling spree, and while there are indications that China may have also sold bonds, no concrete data is available.
Should this trend persist, the likelihood of declining US asset prices grows, potentially leading to a substantial slowdown in the American economy.
It is vital to recognize that US Treasury bonds are predominantly held by domestic financial institutions, such as securities firms, mutual funds, and commercial banks.
If the value of these assets were to collapse, it would inevitably drive the US stock markets into further decline.
Consequently, this financial strain compelled Trump to pause new reciprocal tariffs for 90 days in late April, and he later extended tariff negotiations with the EU until July 9, signaling a shift towards a less aggressive approach.
The fallout from Trump’s tariff policy has triggered widespread protests across America.
An array of leading economists, including Nobel laureates, have reached out to the government advocating for the cessation of these policies.
California, among other states, has even initiated legal action against the Trump administration.
Prominent figures, including Treasury Secretary Steve Mnuchin, Elon Musk, and several Congressional members, have publicly criticized the imposed tariffs.
As the pressure mounts, Trump faces escalating challenges ahead of the midterm elections, with many Republicans fearing significant losses.
An increasing number of party members anticipate that the Supreme Court may even declare these tariffs illegal.
In contrast to the US political climate, China operates without the constraints of a democratic system.
President Xi does not contend with electoral pressures, providing him the flexibility to adopt a long-term perspective while Trump’s immediate actions are often dictated by political expediency.
Trump’s unrestrained remarks, including comments that belittled other countries, have further sullied the US’s global reputation, pushing nations closer to China.
China has increasingly been perceived as the standard bearer for global trade norms in the current geopolitical landscape.
Echoing a Chinese proverb, it is generally easier for a society to transition from frugality to luxury than vice versa.
If the cost of bottled water spikes from $1 to $2, Americans might express dissatisfaction through protests.
Conversely, should a Chinese worker’s income dip from $800 to $400 a month, public sentiment is less likely to oppose the government.
The Chinese populace has endured considerable economic hardships for decades and thus has developed a level of resilience.
Americans, on the other hand, heavily depend on affordable goods from China, making sudden price increases due to shifted trade relationships potentially intolerable.
China’s political framework has the capacity to absorb greater domestic challenges in comparison to the US.
Notably, the tariff war presents several unexpected advantages for China.
The US’s intention to disentangle its economy from China by rejuvenating a global industrial framework without it fails to recognize China’s evolution from a low-end manufacturing hub to a competitive force challenging US preeminence.
While Trump aims to redirect investment toward other developing nations, like Vietnam and India, the transition does not occur overnight.
As the tariffs have accelerated the process of decoupling, China has discovered a newfound leverage in its negotiations with other countries still reliant on its supply chains.
Strained supply chains in the US also raise concerns of hyperinflation, creating mounting political pressure on Trump’s administration.
For years, China has exchanged goods for US dollars, yet found difficulties in utilizing those dollars for necessary imports such as advanced technology.
Today, China is increasingly settling transactions with other countries in renminbi rather than US dollars, solidifying its position in global trade.
Through bilateral agreements anchored on stable commodity prices, China reinforces the stability of its currency.
In Africa, for instance, China extends renminbi loans against natural resource collateral, fostering trade with the exchange currency.
To maintain this trade system, the renminbi must remain stable, necessitating careful management of China’s relationship with its trade partners.
The tariff war has inadvertently facilitated China’s trade with various nations and has kindled a surge of anti-American sentiment that serves as a catalyst for attracting foreign investments to China.
Additionally, China has actively reduced its own market access barriers, recently resulting in a significant pork export deal following the visit of the Spanish prime minister.
As the scenario unfolds, the tariff war may diminish China’s trepidation regarding potential US punitive actions related to Taiwan.
If China opts for a full economic decoupling from the US, the potential consequences of tariff penalties weigh less heavily on its economy.
From a geopolitical vantage point, this dynamic expands Beijing’s operational latitude.
Historically, the US has, at various junctures, rendered unintentional support to the Chinese Communist Party during crises.
Notably, President Harry Truman’s sanctions against the Kuomintang inadvertently aided Mao Zedong, while President Jimmy Carter’s recognition of Deng Xiaoping marked a critical turning point for China.
Whether Trump’s actions, given his Republican affiliation, will ultimately present another opportunity for the Communist Party’s survival is an unfolding narrative worth closely observing.
image source from：https://www.fairobserver.com/economics/china-turns-tariff-war-into-strategic-opportunity-against-united-states/
