Trump prepares for ‘economic warfare’ with China

At a recent Harvard University lecture, former Trump administration trade representative, Ambassador Robert Lighthizer, grasped the podium and pitched his urgent imperative for U.S. policy toward China.

“We must continue to strategically decouple our economy” from China, the trade lawyer told the student audience. “This,” he stressed in his raspy voice, “is the key economic policy battle of patriotic Americans in the upcoming generation.”

Today, Mr. Lighthizer is widely seen as the man who will mastermind the incoming Trump administration’s trade policy. And he is preparing to advance his plan to pry apart the world’s two largest economies – with vast and uncertain impacts on global commerce.

Behind this aim are iconoclastic, protectionist views that break with decades of mainstream U.S. free-trade doctrine. Concepts such as comparative advantage – when each country makes what it does best and everyone benefits – no longer work, the protectionists assert, because China is subsidizing its companies to the tune of billions of dollars a year.

That, argues Mr. Lighthizer, means that the United States must work to eliminate its trade deficit with China and force a trade balance between equal imports and exports. “This would stop the annual wealth transfer and ensure American money is not disproportionately padding the profits of Chinese companies,” he told his Harvard audience.

The overarching goal is a broader and more lasting reordering of the world trade system than took place during Mr. Trump’s first term. It would involve more curbs on the outflow of U.S. technology and investment, as well as steeper trade tariffs. Toward that end, Mr. Trump and Mr. Lighthizer have endorsed the extreme step of ending China’s favorable trade status – called “permanent normal trade relations” (PNTR) – with the United States.

“We’re headed for a pretty full-on battle in the first few months” of the Trump administration, says Arthur Kroeber, head of research at Gavekal Research and author of “China’s Economy: What Everyone Needs To Know.”

If Mr. Lighthizer is paving the way for Congress to revoke China’s PNTR status, Mr. Kroeber says, “that is pretty much a declaration of economic warfare.”

Are trade deficits really so bad?

The United States’ goods trade deficit with China has ballooned since China was awarded PNTR by the U.S. in 2000 and joined the World Trade Organization in 2001. It soared from $80 billion in 2001 to $367 billion in 2022, contributing to heavy job losses in U.S. factories.

Today, officials in the United States, Europe, and around the world are warning of more China shocks as Beijing’s top-down industrial policy favors the country’s high-tech manufacturing sector. This leads Beijing to overproduce goods such as electric vehicles and green energy equipment, making far more than its domestic consumers buy.

Overall, “China accounts for 30% of global manufacturing, but only 18% of consumption,” says Scott Kennedy, a researcher with the Center for Strategic and International Studies, a Washington-based think tank.

But that’s not the whole story, and trade deficits aren’t necessarily bad, some American economists say.

“When a plant closes, everybody says, ‘Ah hah, this is China,’” says Mary Lovely, a senior fellow at the Peterson Institute for International Economics. But cheap Chinese products have also kept prices low for American consumers and helped companies such as Apple create jobs in the United States, she says. “A lot of the gains from engaging with China just weren’t seen.”

Indeed, the complex reality of U.S.-China trade is clear from Mr. Trump’s first trade war, launched in 2018, when his administration imposed 25% duties on $34 billion worth of Chinese imports. China retaliated with tit-for-tat tariffs. By the height of the trade war, in September 2019, three-quarters of Chinese imports to the U.S. carried new tariffs, averaging nearly 21%, which President Biden largely maintained. And China had slapped new tariffs averaging nearly 17% on two-thirds of U.S. imports.

The result? Imports on both sides have fallen, slowing economic growth for both the United States and China. Chinese exports to America, made more expensive by tariffs, have fallen by roughly a fifth, and U.S. consumers paid for those tariffs in the form of higher prices.

And one 2024 study found that tariffs on Chinese goods actually reduced the number of U.S. manufacturing jobs by 2.7%. That’s because the 0.4% jobs boost from protectionism was swamped by job losses associated with rising input costs and retaliatory tariffs.

Can a martial arts expert beat a brawler?

On the campaign trail, Mr. Trump called tariffs “the most beautiful word in the dictionary,” proposing duties as high as 60% on Chinese goods, and 10% to 20% on all other imports. He has promised that such tariffs will help create jobs by bringing manufacturing back to the United States.

But the risk of significant damage to the U.S. economy – and political fallout – could constrain the Trump administration, some experts say.

Such massive tariffs could significantly raise prices in the United States, hurting American businesses and consumers alike. One study estimates that a 10% tariff would act like an annual consumption tax increase of about $1,500 per U.S. household. That would be “quite inflationary, and will get in the way of the reindustrialization of the U.S.” says Mr. Kroeber.

Beijing’s scope for tariffs of its own is more limited than America’s, given that China imported $147 billion in American goods and exported $427 billion worth of goods to the U.S. in 2023.

But China could use tariffs to inflict political damage on Mr. Trump in sensitive areas – perhaps targeting U.S. agricultural products so as to hurt American farmers, Dr. Lovely says.

Or Beijing could let its currency weaken, making its exports cheaper. Or the authorities could step up export controls, curbing sales of graphite to the United States, for example. Graphite is essential to making batteries for electric vehicles, and China is the world’s top producer.

Chinese experts have voiced confidence that China could cope with Washington’s reversion to protectionism. A prominent nationalist scholar quoted in the blog Sinification was dismissive.

President-elect Trump “is a turtle boxer,” meaning a brawler, Jin Canrong, a prominent analyst of U.S. affairs, was quoted as saying. “He has no stamina,” unlike a skilled martial artist. “You just need to withstand the first wave.”