Quick Bite – The Trade War between the US and China
President Trump’s global tariff campaign has proceeded in fits and starts, and while his ultimate strategy remains opaque, there is one constant: he wants disengagement from China. Ever since his first term in office, and as foretold by VP Mike Pence in his 2018 speech to the Hudson Institute, Trump believes that we are in “a new era of great power competition. Foreign nations have begun to reassert their influence regionally and globally, and contesting America’s geopolitical advantages and trying in essence to change the international order in their favour.”
Mike Pence: “After the fall of the Soviet Union, we assumed that a free China was inevitable. Heady with optimism at the turn of the 21st Century, America agreed to give Beijing open access to our economy, and we brought China into the World Trade Organization.”
Pence’s speech added “Previous administrations made this choice in the hope that freedom in China would expand in all of its forms – not just economically, but politically, with a newfound respect for classical liberal principles, private property, personal liberty, religious freedom – the entire family of human rights. But that hope has gone unfulfilled.”
“Over the past 17 years, China’s GDP has grown nine-fold; it’s become the second-largest economy in the world. Much of this success was driven by American investment in China. And the Chinese Communist Party has also used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies that are handed out like candy to foreign investment. These policies have built Beijing’s manufacturing base, at the expense of its competitors – especially the United States of America.”
We know that China has grown a lot further since that speech was made. But the essence of the argument remains, and it is quite clearly the political dimension of Trump’s view on China. With tariffs, however, he aims to bring out whatever economic weapons the US has in its arsenal.
At present, tariffs against most Chinese goods are at 145%, and China’s tariffs against most American goods are at 125%. As Treasury Secretary Scott Bessent has said, this basically amounts to “a trade embargo”.
That’s significant for the world economy, as the US and China together account for almost 45% of global economic output. It’s especially significant for Australia, which has China as our largest trading partner. As geopolitical tensions rise between Washington and Beijing, trade and other economic linkages make Australia’s job of threading the needle between these two giants more difficult. “When elephants fight, the grass suffers”. Australia imports US$70 billion from China (telecom equipment, computers, furniture, toys, etc), and exports double that to China (mainly iron ore, natural gas and coal).
China’s Top Ten Trading Partners in 2024
Source: Pew Research Centre
Trump’s tariff campaign has hit markets and created a climate of policy uncertainty, although markets have had a strong bounce-back. The US economy still appears to be doing fairly well, and it added a stronger-than-expected 177,000 jobs in April. At the same time, initial data indicated that the US economy shrank by 0.3% in the first quarter of this year—its first quarterly contraction since the first quarter of 2022 (driven by a surge in imports to circumvent tariffs).
Trump has insisted his tariffs will generate revenue and that foreign firms will absorb the cost. Most commentators contest that. According to analysis from Warwick McKibbin and Geoffrey Shuetrim at the Peterson Institute for International Economics, Trump’s tariffs “could generate trillions of dollars in new federal government revenue over a decade, but the net gain would be reduced by the measures’ damaging effects on the US economy and the other economies’ likely retaliation.”
The tariffs have already been highly disruptive, with the rush to get goods to the US leading to huge distortions in global trade patterns and economic data. As a result, the US trade deficit in goods has exploded, reaching a record $162 billion in March. The import surge is frustrating Trump’s goal of reducing America’s trade imbalances with the rest of the world.
Much commentary has focused on potential damage to the US, where data flow is plentiful and reliable. But what about the damage to China? The following charts are instructive.
The Chinese Consumer Confidence Index remained very depressed in March (around the post-Covid lows)
Source: Yardeni Research
Chinese households are still very depressed by the bursting of their property bubble, which has caused their finances to suffer and inflicted a significant negative wealth effect.
Source: Yardeni Research
Contributing to the negative wealth effect on Chinese consumers are still depressed Chinese stock prices (notwithstanding the rally at the start of this year).
Source: Yardeni Research
The 10-year Chinese government bond yield rose earlier this year in response to the government’s economic stimulus announcements, but has fallen back to record lows since early April.
Source: Yardeni Research
And lastly, China’s official purchasing managers’ survey showed significant declines in the new export order indexes for both nonmanufacturing and manufacturing industries during April.
Source: Yardeni Research
