On China, Trump picked the right battle but the wrong strategy | US economy

We are in a long trade war.

In the months since last year’s “Independence Day,” when Donald Trump unleashed tariffs on imports from everywhere, countries have rushed to forge new relationships in hopes of bypassing the United States to preserve the global trading system.

The European Union has rushed to sign a trade deal with South America’s Mercosur bloc, which has been on ice for years. China and Southeast Asian countries have deepened trade agreements. Canadian prime minister Mark Carney traveled to Beijing in hopes of establishing closer ties.

Hopes of rebuilding the open trade architecture are probably in vain. Global trade will be shaped by the emerging new imperative of halting China’s export juggernaut and ending its dependence on the supply of strategic inputs, from pharmaceutical ingredients to critical minerals and essential chips vital to industries around the world.

The USA will continue to be China’s main rival. But other countries in Europe and elsewhere are also shuffling their policy kits to consider their options, from tariffs and domestic subsidies to export controls.

War will have costs to economic prosperity. Prices of consumer goods will rise as countries block imports from China. Manufacturers will have to cope with more expensive Chinese inputs. Chinese exporters will have difficulty finding markets to place their products. And exporters in the United States and elsewhere may be locked out of the Chinese market.

The risk, which seems higher than others, is that China, as it has done before, will strengthen its grip on critical commodities and products over which it has a near-monopoly, cutting off supplies to retaliate against countries that block its products or try to undermine its dominance.

Of course, Trump will not manage this well. His disorganized protectionism, raising tariffs everywhere without a discernible strategy, and aggression against countries that would be natural allies in the evolving conflict ensure that American trade policy will remain a hot mess until the end of his term. I hope the next administration brings strategic thinking to the fight.

How the global economy got to this point is confusing. China is held accountable about one third While its share of world manufacturing production was only 5% in 1995, its share of global manufacturing exports increased from 3% to 20% during this period. It accounts for more than 50 percent of world exports hundreds of manufacturing products. Even Germany, which has a strong industrial history, is concerned about the deterioration of its industry. May not survive Chinese competition. China’s growing current account surplus – officially 3.8% of gross domestic product but up to 5% According to some analysts, it has become a global threat.

Economists observe that there is a peaceful way out of this impasse. Jason Furman, who chaired the U.S. Council of Economic Advisers under President Obama, points out that Beijing’s approach as a way to increase the prosperity of the Chinese appears to be a mistake. Getting the Chinese to save less and consume more — for example, by creating a more generous social safety net — would improve their well-being and strengthen China’s stagnant economy without overwhelming the rest of the world with goods.

But Furman also observes that Beijing may aim for a different goal: “maximizing your geopolitical dominance, not the economic well-being of your citizens.”

Governments far beyond Washington believe this to be the case, too: The story goes that China isn’t just ramping up exports to boost growth. He’s building an arsenal for the trade war. Beijing is doing nothing to allay this fear. In his 2020 speechPresident Xi Jinping has argued that “we need to tighten the dependence of international production chains on China, build a strong countermeasure and deterrent capacity against foreigners who would artificially cut off supply.”

China first tested its capabilities in 2010. cut exports Rare earth shipment to Japan after the Japanese captured the captain of a Chinese trawler near the disputed islands. Earlier this year, he once again punished Tokyo for its statements regarding Taiwan. restriction of supply magnets and minerals.

He aimed far away. Last year, Beijing forced the Dutch government to abandon its acquisition of Netherlands-based chipmaker Nexperia. blocking chip export From Nexperia’s factory in Dongguan. And he tightened restrictions He imposed sanctions on exports of rare earth elements and magnets, critical components in fighter jets, submarines, cell phones and electric vehicles, to force the Trump administration to withdraw the trade war.

China has benefited greatly from the globalization of the last 50 years. But Beijing apparently did not accept the argument that economic integration means creating interdependence and shared prosperity. “They don’t want interdependence, they want everyone to be dependent on them,” said trade economist Chad Bown, co-author of the newly published book How to Win the Trade War. “Their goal was to gain market power.”

The idea that an open, rules-based trading system could be rebuilt around China, perhaps in the absence of the United States. can’t survive this strategy.

Cecilia Malmström The report from the Peterson Institute for International Economics counts 50 ongoing anti-dumping cases against Chinese imports by the European Commission; this number was seven in 2024. Europe has imposed taxes or tariffs on China’s electric vehicles, solar energy supply chains, glass fibers, steel cylinders and more.

Partly at the behest of the United States, Mexico last year imposed tariffs of up to 25% on imports from countries with which it has no trade agreements, in a move directly aimed at China. The World Trade Organization reported that there have been more than 300 anti-dumping investigations against Chinese exports by low- and middle-income countries since 2020.

Hostilities will become more complicated. The first order of business for the US, Europe and other major economies is to establish alternative sources for critical commodities and other inputs; This process, initiated by the United States during the Biden administration, provided subsidies to improve chip production capacity and sought new sources for some minerals.

But this will be a slow, tortuous and dangerous process. Developing alternative sources for things like rare earth magnets will take time. And China could retaliate by cutting off supplies to any country that tries. Moreover, many potentially valuable allies—Indonesia and its vast nickel supply—have close economic ties with China that they are unlikely to willingly challenge.

There are better and worse ways to do this. It is clearly wrong for Trump to attack potential allies and necessarily protect industries regardless of their strategic importance. The goal of reducing the current account deficit makes no sense. (Increased imports from other markets more than offset falling imports from China.)

But even a better post-Trump strategy, in which the United States coordinates with allies to rebuild critical supply chains and carefully targets tariffs and subsidies to spur truly strategic industries, will not prevent economic pain. Let’s be ready.