Hopes for a breakthrough in the US-China trade talks in Shanghai last week were faint after a bout of pugnacious tweets from US president Donald Trump. His subsequent announcement of plans to impose 10 per cent tariffs on the remaining $300bn of Chinese imports from September 1 have extinguished them. This latest tranche of tariffs will cover consumer goods for the first time. With growing data pointing to the slowing of the global economy, Mr Trump’s efforts to isolate China from global trade are creating a ripple effect.
The trade war is moving into ever more uncharted waters. Mr Trump’s assumption that China would buckle has been shown to be little more than wishful thinking. Instead, Beijing has dug in its heels and removed the prospect of immediate concessions. Without a softening of stances, the trade war will only rumble on, dragging down the world economy in its wake.
Mr Trump’s latest tariffs speak to a breakdown of trust between the sparring powers. Only a few months ago, there had been hopes that a trade deal was within sight, partly based on the decent working relationship between Mr Trump and Chinese president Xi Jinping.
But this is no Manhattan real estate negotiation. It now involves a fundamental reappraisal of the relationship between an incumbent superpower and a rising rival.
Both Mr Trump and Mr Xi have had less political room for manoeuvre as their differences have become more stark. Mr Trump finds himself outflanked by the Democrats on trade. On Nafta, his aggressive America First approach led to some concessions within a rebranded US-Mexico-Canada Agreement. China is a problem of a different order. With presidential elections just over a year away, Mr Trump sees Democrats doubling down on his protectionist rhetoric. In China, Mr Xi faces down an increasingly ardent nationalism which at times he has been happy to stoke. Sometimes cast as China’s strongest leader since Mao, Mr Xi may not be quite so immune to challenge as observers may think.
The terms of debate about China as a rising power has taken a turn for the worse in the US. There is loose talk of a new cold war, focused on the arms race in areas such as artificial intelligence. This winner-takes-all approach is dangerous. Cooler heads should be thinking about new rules of the road on cyber security and cyber-arms.
Those in Beijing who think that they can simply wait for Mr Trump to leave office underestimate how deep these sentiments run in the business community as well as policymakers. Mr Trump, whether wittingly or not, has unleashed forces he will struggle to control.
There may be a temptation in Washington to believe that the US economy will ultimately prevail in the tariff war. This may be true in the medium term, but the cost will be high. Separating China from trade supply chains will hurt Beijing but splinter technology. The domestic labour market, which added 164,000 jobs in July may be resilient, with the unemployment rate falling to a 49-year low in April. But the woes of the US manufacturing sector, which has now contracted for two consecutive quarters, are indisputable.
Returning to a status quo ante bellum looks difficult. Both sides need to re-evaluate their positions. Mr Trump should modify his aggressive unilateralism and work with others to pressure China. Mr Xi should commit to limited concessions around the treatment of foreign investors and intellectual property rights. Movement is vital. The hardening of positions will lead to fallout across the world.