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The Art of Trade War (Hint: China wrote the book)

To subdue the enemy without fighting, as the Chinese philosopher Sun Tzu wrote, is the supreme art of war. That’s what Xi Jinping might choose to do.

business Updated: Mar 07, 2018 14:53 IST
David Fickling
David Fickling
Bloomberg
Donald Trump,Xi Jinping,China
A man walks past a sign reading "Made In China" at the China Guangdong Pilot Free Trade Zone in Shenzhen, Guangdong province, China.(Qilai Shen/Bloomberg)

As the world’s largest economies stumble toward an all-out trade war, President Donald Trump is tweeting in all-caps, but carrying a small stick.

After White House chief economic adviser Gary Cohn announced Tuesday he’s resigning, the Trump administration is considering tariffs on a range of Chinese imports from shoes and clothing to consumer electronics, people familiar with the matter told Andrew Mayeda and Jennifer Jacobs of Bloomberg News. China “will take necessary measures” if its interests are harmed, Vice-Foreign Minister Zhang Yesui said Sunday.

Which side has the divisions best-arrayed to bring victory in this conflict?

One lesson from real warfare is that battles tend to be won and lost on the home front -- and in that respect, the U.S. is laboring under a significant handicap. Its major imports from China are overwhelmingly consumer goods, where the predictable effect of tariffs will be to increase costs to American citizens, as Gadfly’s Tim Culpan points out. The largest categories are computers, phones, knitwear, other clothing, and toys.

It won’t be easy for U.S. retailers to replace these goods. In every one of the consumer sectors where Chinese exports to the U.S. were worth more than $5 billion in 2016, China accounted for more than one-third of U.S. imports by value. Global supply chains can’t source from rival regions fast enough to avoid a tax on shoppers’ wallets, should further tariffs be imposed.

The ideal solution, from Trump’s perspective, would be for domestic production to come to the rescue -- but that horse has long bolted.

In clothing manufacturing, the U.S. production-line workforce has shrunk by more than 90 percent since 1990, and the electronics industry has lost almost 40 percent of its jobs. With China itself seeing industries quitting for cheaper locations in South and Southeast Asia and Africa, the chances of those jobs coming back to the U.S. are slim.

By contrast, China imports mainly intermediate products and parts from the U.S., led by soybeans, aircraft, cars, integrated circuits and plastic. The cost of any retaliatory tariffs on those products will pass through a number of producers before any citizens feel it in their hip pockets -- and dictatorships don’t have to worry so much about popular backlash, anyway.

If Xi Jinping chooses to fight back, watch what happens to the semiconductor industry. A quarter of U.S. chip exports go to China, but that constitutes just 3.8 percent of the People’s Republic’s total imports of integrated circuits. A relatively small shift in Chinese business patterns could deliver a devastating blow to one of America’s most successful export trades.

Soybeans, too, could come in the firing line. China swallows up more than 60 percent of America’s exports of the legume, but that trade accounts for only 12 percent or so of Chinese consumption, at least as measured by domestic production plus imports. Putting levies on those imports will turn up the heat at a time when global soybean prices are at a two-year high, raising pressure on the processors and farmers who use soy for animal feed -- but prices for pork, the most critical end-use sector in China, have been declining for 12 straight months, so they could afford to rise a little.

The smarter move for China might be to stand pat. Despite Xi’s boasts at Davos and elsewhere, the country’s record on free trade is dismal, a potential handicap if matters degenerate into a wider trade war. The better policy would be to let Trump raise costs for American consumers with ill-advised tariffs; refuse to retaliate; then pose as the innocent victim.

Governments in Washington’s sphere of influence, motivated by strategic investments in the likes of Deutsche Bank AG and Brazilian utility CPFL Energia SA and taken aback by Trump’s aggressive stance, may be persuaded to regard Beijing as the friendlier ally.

That would be the greater victory for a Chinese president without term limits and with a view to posterity: To subdue the enemy without fighting, as the Chinese philosopher Sun Tzu wrote, is the supreme art of war. Bloomberg Gadfly

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

First Published: Mar 07, 2018 14:52 IST