China will struggle to win the trade war with the US

The words might be vitriolic and laced with Communist Party dogma, but there is a growing feeling that China cannot win a trade war with the United States.

At the weekend, Beijing threatened to impose retaliatory tariffs on US$60 billion of US imports after Washington announced plans last week to up the ante with additional 25% duties on Chinese goods worth $200 billion.

Foreign Minister Wang Yi stressed that the response by the world’s second-largest economy was “fully justified and necessary.”

“As to whether China’s economy is doing well or not, I think it is all too clear to the whole international community,” he said, adding that China contributed a huge amount to global economic growth.

Wang then took a swipe at President Donald Trump’s economic advisor, Larry Kudlow, who ridiculed the “weak” decision. “I don’t see why he would come to the conclusion that China’s economy is not doing well,” he added.

Typically, both comments illustrate how quickly this tit-for-tat trade conflict has escalated in the past few months.

Yet behind the rhetoric, a pattern is starting to emerge which highlights the problems Beijing is facing.

The economy has been showing signs of cooling since the end of March amid slowing factory activity and the squeezing of cheap credit as the battle against corporate and local government debt is ramped up.

Artificial intelligence

At the same time, President Xi Jinping’s administration is in the process of realigning from “high-speed growth” to “high-quality growth.” This, in turn, is part of the “Made in China 2025” program, which has its focus on cutting-edge manufacturing linked to artificial intelligence, or AI, technology.   

Still, Trump’s policies have thrown a spanner in the works and triggered consternation.

“Washington has lost its mind on trade,” Global Times, which is run by the CCP’s official newspaper, the People’s Daily, pointed out in an editorial on Monday.

Maybe, but analysis and economists are convinced that this is a dispute that Beijing will end up losing.

A quarterly review of China by the Asia Policy Society Institute underlined the challenges for Xi’s government as it grapples with a myriad of internal and external issues.

“President Trump is signaling that he is willing to disrupt not just bilateral trade but also investment and people flows if China does not change course,” the global think tank, which specializes in the Asia-Pacific region, stated.

“The United States is not only seeking increased US exports but also fundamental, systemic changes in the Chinese economic system, including the curtailment of industrial subsidies and industrial policy more generally.

“[But] ironically, it is not US trade and investment policy pressures that are behind China’s present macroeconomic dynamics but policy choices made in Beijing years ago,” it added.   

Panos Mourdoukoutasm, a professor in the department of economics at the LIU Post in New York, was more direct in his assessment.

He flagged up the nation’s shrinking “reserve army of labor,” which has pushed up manufacturing costs, along with what he described as the “middle-income trap.”

“China will lose the trade war with America. And that will benefit its citizens,” Mourdoukoutasm, who also teaches at Columbia University, said in an op-ed for Forbes. “China isn’t well prepared to fight a trade war with America. For a couple of reasons. One of them is that its economy is slowing, as it faces the ‘middle-income trap,’ and the Lewis turning point.

“The income trap is a situation where a country’s growth rate slows down as it reaches middle income. The Lewis point is a situation where the ‘reserve army’ of labor shrinks, pushing [up] wages and eroding the country’s competitive advantage in labor-intensive industries,” he continued.

“Chinese labor becomes expensive vis-à-vis India, Vietnam and Indonesia. And that places additional pressure on the country’s growth. Meanwhile, China has yet to develop a robust domestic consumer market that will accommodate its growing production capacity. That [is] why China will have to give in to American demands,” he added.

A similar view was expressed by Cheng Li, the director of the John L. Thornton China Center, and Diana Liang, a research assistant and communications coordinator, at the Brookings Institute.

While the economy is going through a transitional period, Beijing is still forging ahead with the “Made in China” plan, as well as expanding its global reach through the epic-in-scale Belt and Road Initiative.

‘Driven to compromise’

“Although a trade war would hurt both countries, the country with the trade surplus is usually hit harder and thus is more likely to be driven to compromise,” Li and Liang said in an opinion piece for the Washington-based think tank.

“This was true of Japan in the 1980s, for instance. China’s ability to inflict pain through tariffs alone is limited,” they added.

Pain has become a reoccurring theme in China’s media, as well as key CCP officials.

Zhao Changmao, the former deputy head of the Central Party School, which is the leading academy of the Communist Party of China, laid out the options that appear to be on the table.

Speaking to the Study Times, a weekly newspaper affiliated with the Party School of the Central Committee of the CCP, Zhao said:

“China only has two options: Give in to America’s bullying … or let the other side know that Chinese people are not easily pushed around. This trade war is different. It’s a strategic game concerning the country’s fate.

“[We] have no reason to compromise. [We have to] take the moral high ground, further open the economy and make more friends internationally. [We should also] take targeted measures to hurt the US, [but we] need … to be prepared to accept a heavy cost for fighting with the world’s number one country.”

At this rate, a summer of hot air could turn into a winter of discontent until Washington and Beijing finally get around to talking again.