China Came Ready for This Trade Fight, and the US Has a Lot to Learn

Yahoo

a day ago

(Bloomberg Markets) -- Under President Donald Trump, the US has launched a multipronged attack on China's economy. Since Chairman Mao Zedong's reign, China has seen it coming. A US system built around the ideal of openness and interdependence is facing off against a Chinese counterpart constructed as a fortress of control. Both sides have powerful resources. Only one has been preparing for the fight for decades.
Since the beginning of Trump's first term in 2017, the US stance on China has swung from constructive if increasingly cautious engagement to something between fierce rivalry and outright hostility. China's exports to the US face duties running close to 40%. Supply of bleeding-edge semiconductors for China's technology companies has been curtailed. The country's science, technology, engineering and math students, once welcomed into US university labs, are checked at the border. The social media app TikTok, owned by Chinese parent ByteDance Ltd., is on a stay of execution in the US market.
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The assumption in Washington is that China must now be floundering. Isn't it hooked on US customers and technologies? It's only a matter of time, surely, before President Xi Jinping picks up his red phone to call the White House and concede defeat.
The reality is rather different. It's certainly true that Trump's policy pivot is a problem for Beijing. Bloomberg Economics calculations show tariffs at the current levels would erase more than 50% of sales to the US. But it's far from the end of China's development story.
China's exports to the US equal about 3% of gross domestic product—down from a peak of 7% two decades ago, after a campaign to diversify away from American consumers that's been every bit as deliberate as US efforts to reduce reliance on Chinese supply chains. That means even if half of China's exports to the US get wiped out, the blow to the overall economy is just 1.5%. Not good news, to be sure, but far from a disaster.
With the US starting a trade war against not just China but everyone else as well, its losses may well be around the same size. Model-based estimates from Bloomberg Economics flag a hit of about 1.6% of GDP as import prices rise and supply chains snarl.
The algorithmic outperformance of DeepSeek (China's answer to ChatGPT) shows its coders are smart enough to work around the US embargo on semiconductor supplies. Control of rare earth elements critical for manufacturing and defense industries has given China an export-controls weapon of its own—one it's used in this year's negotiations in Geneva and London to extract concessions from the US.
The upshot: Even after almost a decade of US efforts to contain its manufacturing might, China's share of global exports remains elevated.
Why is China proving so resilient? Because for more than a century, from the last gasp of the Qing dynasty, through a short-lived Republic, to the chaos of Maoism and the progress of the reform era, there's been one outstanding constant: preparation for the struggle now playing out.
It started in the late 19th and early 20th century, when, after humiliation from foreign invaders, China's thinkers started to aim at 'self-strengthening' through modernization. Born in 1854, and graduating from the British naval academy, intellectual and educator Yan Fu translated into Chinese the works of Western scholars such as English biologist Thomas Huxley and Scottish economist Adam Smith. From Huxley he introduced the idea of 'survival of the fittest,' making the case that nations, like species in the natural world, must continually build themselves up to avoid falling prey to more powerful rivals.
In the 1930s struggle between Mao's Communists and Chiang Kai-shek's Nationalists, Mao's promise of effective resistance against the Japanese invaders, as much as the dream of a more egalitarian society, was the center of his appeal. In power from 1949, he instituted a forced-march approach to industrialization that ended in the graveyard for many Chinese. The path was winding, but the aim was unwavering: Stave off foreign threats. 'The American imperialists have always wanted to destroy us,' he warned.
In the reform era that began soon after Mao's death in 1976, the self-strengthening objective remained the same, but the policies to deliver it were vastly improved. In the 1980s and '90s, He Xin—a Chinese Academy of Social Sciences scholar whose work ­circulated among top leaders—warned that as China rose, 'developed countries feeling threatened by the increase in ­competition will seek to hold China down.' He had a plan to respond: 'With the constant threat of being destroyed, building a fully self-reliant industrial system should naturally be the most realistic option for China.'
Such thinking was behind successive waves of development plans. In 1983, Deng Xiaoping introduced the State High-Tech Development Plan, aiming to close the gap with the US in information technology, automation and other areas. In 1994, Ren Zhengfei, founder of telecommunications equipment champion Huawei Technologies Co., told then-President Jiang Zemin 'a nation that does not have its own switching equipment is like one that lacks its own military.' Ren's lesson on the link between industrial self-sufficiency and national security is one the US is only now beginning to relearn.
Under Jiang's successor Hu Jintao, the priorities were 'indigenous innovation' to bring foreign technologies in and a 'Great Fire Wall' to keep Western influence out. More than a decade before the US debate about TikTok's influence went viral, Google, Facebook and Twitter found themselves on the wrong side of the wall and effectively frozen out of the China market. Blocking the US giants opened space for China's own tech companies—Baidu, Tencent, Alibaba and others—to flourish.
In the top job since 2013, Xi unveiled his 'Made in China 2025' plan to extend Beijing's technology ambitions from self-­sufficiency to global leadership in industries including IT, robotics, high-speed rail and electric vehicles. His 'Belt and Road' initiative aimed to diversify export markets, reducing dependence on the US consumer and extending China's global influence through investments in ports, rail networks and roads. While neither plan has been an unequivocal success, there have been tangible wins, including surging EV and solar panel exports and stronger ties with other emerging markets. Trump eyes the expanding BRICS coalition—Brazil, Russia, India, China and South Africa, as well as several more ­countries—as an anti-American club.
In the US, meanwhile, policy was shaped by post-Cold War hubris. The collapse of the Soviet Union convinced leaders that democracy and capitalism had won and the days of authoritarianism and state control were numbered. President Bill Clinton called support for China's membership in the World Trade Organization 'the most significant opportunity we have had to create positive social change in China since the 1970s.' His successors George W. Bush and Barack Obama did little to change the orientation.
Focused on the next quarterly earnings report, US multinationals shifted their supply chains to China's low-cost factories. An implicit bargain was struck: access to the world's most populous consumer and labor market in exchange for blueprints for vital technologies that power modern industry. Automakers including Ford Motor Co. and Volkswagen AG were welcome so long as they signed on to joint ventures with homegrown Chinese companies. Starbucks Corp. and KFC opened thousands of outlets. But access to strategic upstream industries such as power and steel remained strictly walled off.
In a first-best world of free trade and market competition, the dynamism of the US approach should win every time. In the second-best world of protectionism and economic statecraft in which we now find ourselves, China's planned approach still carries significant costs, but the benefits are also easier to discern.
The theory of the second best, expounded by economists Richard Lipsey and Kelvin Lancaster in 1956, holds that if one of the conditions for perfect markets is missing, sticking with the others—rather than finding a second-best accommodation—only makes things worse. China's state planners have spent decades developing tools for a second-best world. Their counterparts in the US haven't.
Of course, the US isn't entirely bereft of sticks and devoid of carrots. Control of the intellectual property behind advanced semiconductors, and the biggest consumer market in the world, might not enable Washington to deliver a hammer blow against China, but it can certainly land some painful punches. Investment pledges running into the hundreds of billions of dollars from the likes of Apple Inc. and Taiwan Semiconductor Manufacturing Co. suggest Trump's attempts to bring manufacturing home are gaining at least some traction. As a free-market democracy, the US has a capacity for course correction that is missing from China's state-controlled, single-party system.
Conversely, China's slow-motion real estate collapse, burgeoning industrial overcapacity and sky-high debt mean the blow from Trump's tariffs is hardly coming at an auspicious moment. The European Union following suit with its own protectionist measures threatens to compound the problem. Brussels has imposed tariffs on China's EVs, and European Commission President Ursula von der Leyen's recent remarks on China 'flooding global markets with cheap, subsidized goods, to wipe out competitors' echo Trump on substance, even as the tone hews closer to diplomatic protocol.
'I don't blame China,' Trump said shortly after his April 2 tariff extravaganza. 'I blame the people that were sitting at that desk in that beautiful Oval Office for allowing it to happen.' His solutions might misfire. Tariffs and export controls could end up causing more problems for Silicon Valley than they do for Shenzhen. On diagnosis of the cause of the problem, though, Trump has a point. The US thought free trade would change China's leaders; in fact, it empowered them. Now it's the US that faces a wrenching transition.
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