Author: Xu Jin, Economic Chief Editor of FT Chinese Network
Tariff wars have returned to hard political games, and soft public opinion wars are of little significance. Trade is inherently an infinite game, and geopolitics can be a zero-sum game. China should take a long-term view of the current chess game.
April is cruel, not only for the passing of winter but also for the trade war stirred up by Trump.
Behind the imminent trade war is the fluctuation of economic data, which also signifies the return of hard politics.
On April 2, the Trump administration announced the implementation of new reciprocal tariffs, the specifics of which shocked the world. As of the time of this writing, Trump’s latest announcement has raised tariffs on imports from China to 104%.
Tiered design of equivalent tariffs. The first tier is the global benchmark tariff, which imposes a baseline tariff of 10% on all imported goods; the second tier consists of differentiated additional tariffs, primarily targeting 60 countries with significant trade deficits with the United States. China is among them, with an additional tariff rate of 34%. In comparison, other key regions also have notable rates, including the EU at 20%, Vietnam at 46%, Taiwan at 32%, Japan at 24%, India at 26%, and South Korea at 25%.
It can be said that under Trump’s tariff stick, both large and small economies are affected. Soon, China chose to retaliate in kind; previously, an author on FT Chinese also suggested this. Subsequently, Trump threatened to impose an additional 50% tariff.
Now that the tariff war is on the horizon, what is the impact of the tariff shock? For example, a Chinese Academy of Social Sciences estimates that reciprocal tariffs in the United States will lead to an 8.2% decline in global trade.
In fact, regardless of how sophisticated the models are, I personally believe it is too early to say. The self-adjustment of the economy is actually more flexible than many people expect.
In the case of the United States, tariffs will clearly lead to price increases and rising inflation, and consumers will pay a hefty price, which will inevitably lead to public discontent. When the French thinker Tocqueville observed America, he once wittily remarked that cheapness in America is as irresistible as conquest in France. Whether it’s made in China or made in Japan, over the years, most American consumers have indeed not questioned the origins of cheap goods and have accepted them without hesitation. The problem is that, politically speaking, consumers are scattered individuals without a strong organization, often unable to form a unified interest group. From the perspective of different industries, the effects of tariffs vary for American manufacturing, and one must even admit that some industries do benefit from them.
For countries like China, tariffs are a real test. The bad news is that it will definitely be a burden for Chinese manufacturing. At the beginning of the year, the tariff on China was already 20%, and now it has increased to 34%. If an additional 50% is added, and considering the previous round of tariff wars, in July 2018, the U.S. officially imposed a 25% tariff on $34 billion worth of Chinese products, then some industries are facing tariffs exceeding 100%.
As a result, the cost of exports from China has risen sharply. So far, exports remain the most important foundation of the Chinese economy, not only bringing in real foreign exchange but also being a key link between the Chinese economy and the global market. According to official data, in 2024, China’s export scale is expected to reach 25.45 trillion yuan, a year-on-year increase of 7.1%, maintaining growth for eight consecutive years.
Therefore, the pressure from tariffs can be considered quite direct. In recent years, China’s manufacturing industry has made significant technological progress, but the biggest advantage remains its cost advantage, which is not necessarily a drawback, as being cheap involves not only labor but also a combination of factors such as organization, technology, and industrial clusters. Over the past year or two, the relative weakness of the yuan has provided exporters with a breather, but now with the introduction of tariffs, they are facing immense pressure.
Different industries react differently to tariffs and have different bargaining power. Business owners in the textile industry admitted to Xu Jin that there was a lot of pressure. In their industry, the new cost is generally shared by half and half, half of the customer, and half of the enterprise. He observed that the leading enterprises in the industry are either making efforts in the domestic market, not meeting the OEM as in the past, but striving to enhance the added value of the brand, or the production capacity is greatly transferred to other countries, and the domestic industry is focused on intelligent production. Originally, they had planned to set up factories in Southeast Asia, but now they feel that these places are also facing tariff pressure.
A leaf knows autumn; behind these changes lies the reflection of the retreat of globalization.
Free trade and globalization are basically twins, and this has been the economic tone of the past three or four decades. As far as the United States is concerned, both the neoliberalism of the Democratic Party and the neoconservatism of the Republican Party are generally practicing this rule, so much so that for a while everyone will feel that the two parties in the United States are politically convergent, and economic and trade relations have become the “ballast stone” of Sino-US relations.
In fact, it’s just an illusion. It can be said that in the view of the opposition forces represented by Trump, globalization has caused both parties in power to be captured or persuaded by the economy to varying degrees, ignoring the opposition to globalization.
In the era of globalization, it has indeed brought dividends to emerging countries such as China. The most typical is China’s economic take-off after China’s accession to the WTO in 2001, which gave birth to a new generation of China’s middle class. However, not everyone gets the benefits, and the groups that can arbitrage on both sides of the equation in this process, such as multinational corporations, obviously get the biggest benefits. With the transfer of manufacturing, the Rust Belt and other groups in the United States have obviously lost, and the class has slipped into a soft class, falling into what US Vice President Vance called “the tragedy of the countryman”.
It can be said that globalization flows like sweet honey, but the degree of immersion varies. The unequal distribution has led to a backlash of conservatism. Figures like Trump or Vance, whose ideologies are seen as “strange” or “non-mainstream” by political opponents, fundamentally represent a force of dissatisfaction with globalization.
In such a situation, “free trade”, which is the consensus in economists’ circles, has brought its own opponents politically. In the world of the future, globalization may ebb and the new trend will be more localization or localization.
Returning to tariffs, Trump did not let go of Vietnam and other places this time with tax increases, which not only put great pressure on China’s manufacturing industry, but also put great pressure on China’s manufacturing industry to transfer its global layout, and it can even be said that potential options have been added.
Going out or going to sea is a fashionable topic in China’s business circles at different points in time. Of course, there are many successful people, but more based on their own characteristics of the advantages of the bonus, the general enterprises, especially the manufacturing industry, to go out, is not easy at the moment. In the past two years, the domestic self-media have shouted slogans such as “going to sea” for so long, and in the end, it seems that some people who organize study tours and engage in training have made money. For Chinese enterprises, it is a bit late, a little difficult and a little expensive to transfer the industry now.
Trump’s actions may seem crazy and arbitrary to many, but they are not without reason.
For Trump and his ideology, one can mock, insult, and criticize freely. However, this provides more emotional value than actual value, as the weapon of criticism cannot replace the criticism of weapons. At this stage of the trade war, it has returned to hard political games, and the significance of soft public opinion battles is minimal.
The so-called “hard politics” has many definitions. In the current context, you can understand it as the exposure of the warm veil of globalization, where the logic of economic supremacy is diminished, replaced by a more hardline and direct power struggle. In such a power struggle, trade, as a means, is naturally used as a tool.
Free trade can be said to be a gilded ideal, but ideals are difficult to translate into reality at all times. The Jewish economist Hirschman, from Europe to the United States, was not so naive; he experienced the Holocaust and knew how real and ugly politics can be. In 1945, he pointed out in “National Power and the Structure of Foreign Trade” that while trade relations certainly create dependencies between two countries, free trade theory generally believes that such dependencies lead to peace between the two nations. However, in reality, if this relationship is not symmetrical, these dependencies may even become the origin of domination. More importantly, trade also involves political games among different domestic industries, which can easily be exploited by state power, turning trade dependency into a security risk.
Using trade as a means is actually not uncommon in history. For example, in the first half of the 1980s, the US-Japan trade war reached its most severe moment. Even President Reagan, who was known for emphasizing deregulation, still challenged Japan’s industrial policy and even its domestic system through trade conflicts during his tenure.
Looking at it the other way, throughout much of American history, tariffs have been an important source of revenue for the federal government, reaching as high as 90% at the founding of the nation. Today, tariffs account for less than 2% of federal government revenue, indicating that there is clearly a lot of room for growth compared to historical highs.
In the era of hard politics, it often involves a comparison of hard power. It is important to understand Trump’s motives; for him, tariffs are not a means of negotiation but rather the goal of action.
What should China do? Doing well itself is still key. I have recently been revising my Japanese trilogy, which involves a lot of content related to the Japan-U.S. trade war. Although the Japanese case cannot be completely equated with China, the response to the Japan-U.S. trade war can still provide some references. Of course, there are many differences as well. Japanese politicians and bureaucrats seem to be adversarial negotiating opponents with the U.S., but no matter how the exchanges go, both sides have always positioned themselves as allies. In fact, at many times, they also leverage the U.S., such as by using U.S. demands to implement some reforms that face significant domestic resistance. The end result has actually played a certain role in boosting Japan’s economic reforms. Japan’s economy then entered the lost thirty years, but many professionals have also told me that this is actually more about Japan’s own economic issues rather than U.S. oppression.
In contrast to present-day China, which is also in the second position in the world, the per capita income has crossed the ten thousand dollar mark, entering the middle-income country category, with globalization playing a role in this. It is actually a stroke of luck for people and countries to catch up with one or two cycles of benefits; it is unlikely to always be at the peak.
Trade negotiations are essentially an infinite game. Fighting and cursing, it’s just about making more or less money; it can always continue. Moreover, losing this round doesn’t mean there will always be losses in the future, and winning this round doesn’t mean there will always be wins ahead. In contrast, geopolitical confrontation may be a zero-sum game, where the loser might even leave the table.
For China, the current situation is naturally centered around “self”, without being disturbed or led by opponents. We should respond to tariff challenges with the mindset of an infinite game, treating the current chessboard with a long-term perspective. In a finite game, players aim to win against their opponents, while in an infinite game, the goal of the players is the continuation of the game. From this perspective, it is crucial to discard some external noise, risks, and temptations.
