Economic warfare: Four takeaways from being in China when the trade war started

Dennis Shea (R) U.S. Ambassador to the WTO talks with Xiangchen Zhang, Chinese Ambassador to the WTO before the General Council meeting at the World Trade Organization (WTO) in Geneva, Switzerland, July 26, 2018.  REUTERS/Denis Balibouse - RC1E0D3C5680

Content from the Brookings-Tsinghua Public Policy Center is now archived. Since October 1, 2020, Brookings has maintained a limited partnership with Tsinghua University School of Public Policy and Management that is intended to facilitate jointly organized dialogues, meetings, and/or events.

I found myself in Shenzhen, China on July 6th, the day the Trump Administration fired the first shots in the U.S.-China Trade War. This was not planned. I had accepted an invitation months ago to speak at the Qianhai Cooperation Forum on the importance of integrating regional transportation and infrastructure planning and operations to promote smart growth. I had also begun a research project on the Chinese payment system which is evolving into a new system based on phones and QR codes, leapfrogging cards, magnetic stripes, and possibly the banking system. My trip was supposed to be a combination of this talk and payments research. However, instead, I found myself in China exactly when the Trump Administration imposed tariffs, which felt a little bit like being behind enemy lines the first day that shots are fired. 

Even in China, I found conversations that were supposed to be on infrastructure, economic development, and payments instead focusing on President Trump’s latest tweet, his attempts to disrupt the existing global economic order, and the start of a trade war with China (and maybe others). From those conversations, four themes quickly emerged. Here they are:

  1. China is very focused on the ‘trade war’. This subject was raised repeatedly, including in settings where it had no direct impact, such as internal Chinese coordination or discussions on Chinese financial technology. The line between economics and military language was blurred, not in the sense of actual force being used, but in terms of words. The terminology was strong with war, attack, mutual cost, suffering, all being used. This reinforced my belief that the next war will be fought with bonds not bombs. If warfare in the 20th century was often cold, then in the 21st century the struggle between major nations will be fought on the field of trade, capital markets, and finance. By this metric China and the U.S. have already been in conflict for years, with China pegging its currency to the dollar, which gave it a trade advantage at certain periods. The tariffs are an escalation, but the fighting has moved into the economic battlefield.
  2. Is China the dominant force trying to preserve the global economic order? As President Trump moves the United States into a position that opposes existing global trade agreements and international bodies, this raises doubt about the U.S. commitment to the existing world order and positions China as the largest economic power committed to preserving the status quo. China—which surpassed Japan in 2010 as the second largest nation by GDP— can now assert that it is the global leader supporting existing institutions as President Xi stated at the World Economic Forum in Davos, that China should “guide economic globalization”. This is coupled with the subtle or not so-subtle idea that China is rising as a global political power and an alternative pole to the United States, opening the door for China to take a greater leadership role in the world as the U.S. makes itself a less reliable partner. 

Why is the U.S. upset now? This was a question I was asked repeatedly in various forms. The premise from the Chinese side is that our two nations have had the same economic deal for almost two decades. It held through the global financial crisis—which started as a result of problems in the American market, my friends in China frequently pointed out— and it held as the U.S. economy recovered and returned to prosperity. Given America’s current high levels of employment, strong economic growth, relative global peace, and general prosperity, the Chinese are perplexed as to why the Trump Administration would actively be seeking to upset the apple cart, questioning everything from trade to NATO. I was frequently asked: What changed? Why now? What happened over the past 24 to 36 months that has made America think that is somehow ‘losing’ in the global economic world order when from the Chinese perspective America is continuing to win? Perhaps the conclusions found by economist David Autor in his 2016 paper, The China Shock, need to be better internalized among Chinese (and some American) policymakers: “employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.”
Prices still do not make sense. Shopping in China, I was struck at how expensive certain things are. For example, I looked at a few pairs of Air Jordans, the high end sneakers made by Nike. In the U.S., the newest pairs can sell for around $150-190. Being that they are made in China my assumption was they would be cheaper nearer the source. In fact, I found that those shoes cost around $250 in shops in Beijing. This seems illogical, as it should be cheaper in China with less transportation and logistics to account for. In reality, export subsidies, domestic consumption charges, and other government policies allow Chinese companies to sell goods abroad cheaper than they sell at home. I found similar price differences in some electronics. Trade between the U.S. and China is not just the invisible hand of comparative advantage operating in an idealized free market. It is the byproduct of two major industrialized nations with a host of different governmental programs, environmental and social preferences, and competing economic and political objectives.

China’s economic miracle is evident in Qianhai and Beijing, two areas that have experienced major booms. Being on the ground when the Trump Administration announced tariffs and began this recent exchange in economic warfare was fascinating, and a sharp reminder of the differences in the battlefield between military and economic conflict.