Less than halfway into the Trump presidency the world stands at the precipice of a global trade war. In March Trump imposed tariffs on steel and aluminum import, while exempting the EU, Canada, and Mexico. On June 1 he removed these exemptions and threatened the EU with $350 billion in tariffs. In July Trump levied $34 billion in tariffs on China’s high-tech industries and raised the possibility of tariffs on $500 billion, virtually the whole of China’s exports to the United States. The EU, Canada, Mexico, and China retaliated with tariffs aimed at farmers and manufacturing workers. The Chinese foreign ministry has proclaimed that the United States has begun “the largest trade war in history.” French Finance Minister Bruno Le Maire has declared that “the war has already started.” What is driving U.S. trade policy? Can a trade war be averted?

       Notwithstanding Trump’s aggressive rhetoric towards Germany and the EU, there is a fundamental distinction between U.S. interests with respect to Europe, on one hand, and China, on the other hand. The transatlantic space is characterized by extraordinarily high levels of economic and political-military integration. U.S.-European relations are organized on a hub-and-spoke basis. The euro has further divided the continent, subjecting much of it to a punitive austerity regime under German supervision. The conflicts among the member states of the EU are in many cases more serious than those between individual member states and the United States.

       These realities informed the commitments made at the EU-US summit in Washington on July 25. The two sides aspired to “zero tariffs” with respect to industrial exports and automobiles and agreed to refrain from imposing new tariffs. Although the agreement was tentative, a full –blown trade U.S.-European (or North American) trade war seems unlikely.

       U.S.-China conflict is far more dangerous and intractable. For the first time since World War II the United States is confronting an economic challenge from a geopolitical competitor. Anti-China sentiment has increased throughout corporate America and across the political spectrum. However, globalists, led by Treasury Secretary Steven Mnuchin, have sought to exert restraint with respect to Europe and to limit demands on China primarily to obtaining greater access and treatment for banks and multinational corporation. Led by U.S. Trade Representative Robert Lighthizer and While House economics advisor Peter Navarro, the nationalists want to contain China’s economic development by reducing the trade surplus, preventing transfers of technology, and blocking China’s acquisitions of U.S. high-tech firms. Closely aligned with the Pentagon, and with growing congressional support, the nationalists are also concerned about the military implications of a loss of preeminence in advanced technologies such as artificial intelligence, electric cars, and cyber capabilities.

       In May, China agreed during talks in Beijing to increase imports of agricultural and LNG and to lower tariffs on automobiles and pharmaceuticals. China also accelerated the opening of the financial sector and accepted a punitive $1 billion fine of the Chinese telecoms giant ZTE for violating sanctions against North Korea and Iran. These concessions satisfied Mnuchin but not the nationalists, and reportedly resulted in a public shouting match in Beijing between Mnuchin and Navarro, who has compared the Treasury Secretary to Neville Chamberlain. Trump subsequently reversed course and escalated the trade war. In addition to tariffs, the 2018 annual defense bill enhances national security reviews of Chinese acquisitions and tightens controls on the export of U.S. technology. It expands strategic cooperation with Taiwan and India in the “Indo-Pacific.” The Pentagon has banned China (and included Viet Nam) from the 26-nation Rim of the Pacific summer naval exercises. China has responded aggressively. Despite a last-minute appeal from Mnuchin, Beijing vetoed the U.S. semiconductor company Qualcomm’s bid to take over the Dutch semiconductor firm NXP Semiconductors, taking the United States and China beyond a “mere trade war” to “open economic conflict between the two countries.”

       Although China’s GDP by some measures already surpasses that of the United States, national accounts data do not reliably indicate the underlying structure of power. U.S. and other foreign multinationals account for a large amount of its exports as well as sales within China. The status of the dollar as international reserve currency remains unchallenged; use of the renminbi in global payments and trade has actually declined in recent years. The U.S. economy is less dependent on trade than its major trading partners. Beijing’s retaliatory capacity is limited by the fact that China exports $505 billion to the United States but imports only $130 billion from it. Beijing’s decision on August 9 to remove crude oil from its tariff list reflects its growing dependence on U.S. oil imports.

       China also faces numerous domestic problems including massive surplus capacity and excessive debt. With growth slowing, China has been thus far unable to transition to a more domestic, consumption-based growth model. China also remains acutely dependent on western technology, especially foreign-made microchips, which accounted for nearly half of its imports by value in 2016.

       The U.S. nationalists believe that the continuing economic recovery provides “strategic depth” for a successful trade war, especially as the economies of major trading partners are slowing. Transatlantic unity would further strengthen the U.S. position, and might also reduce frictions between globalists and nationalists. EU officials have reportedly rejected proposals from senior Chinese officials for a “Grand Alliance” against the United States under which China would grant the EU preferential access and China and the EU would launch a joint offensive in WTO. By contrast, a united front against China is already visible not only in the July 25 truce but also joint agreement to block market economy status for China in the WTO and Germany’s increasingly tough stance against China’s investments. Two weeks before the U.S.-EU Summit NATO concluded its own “extraordinarily successful” summit that resulted in the “most substantive agreement” in years.

       However, China derives enormous advantages from the size of its market, demonstrated most recently by Google’s desire to launch a censored search engine in China to connect with 753 million internet users. China can also retaliate with informal boycotts, as it has done against South Korean and Japanese companies, as well as take blocking administrative measures, as with Qualcomm. 25% of Apple’s net income and 75% of Qualcomm’s derives from the Chinese market. The seven leading U.S. IT and intercom providers receive the majority of their components from China. It is also doubtful that the U.S. economy can sustain its present momentum in the context of rising interest rates and a soaring budget deficit. If China were to begin dumping its $1.2 billion supply of U.S. Treasuries—replicating on a grander scale the decision of the Russian Central Bank to sell 84% of its U.S. debt after the imposition of sanctions on aluminum exports--bond prices would spike; higher Treasury yields would increase borrowing costs, pushing the country into recession.

       Although promising to restore jobs and dignity to the (white) working class that had been abandoned by neoliberal Democrats Trump assembled the “wealthiest cabinet in modern history” and governed exclusively and relentlessly on behalf of capital and against labor. The new administration did not initially pursue confrontational trade policies. However, while the domestic economic agenda united the corporate elite and Republican Party behind Trump, the threat of trade wars has opened up divisions that were largely submerged during the 2017 bacchanal. The U.S. Chamber of Commerce, the largest business lobby, has launched a campaign against tariffs. The Koch network, the political arm of Koch industries and one of the largest and most influential Republican donors, has also turned against Trump.

       Fearing a potentially disastrous defeat in the November congressional elections, Trump cannot easily abandon a confrontational trade posture that serves as compensation to his base for neoliberal policies. Yet, the nationalist project is unconvincing and incoherent. “Neoliberal nationalism” in itself does not provide a genuine (re)industrial strategy, redistribution of wealth and income, or adequate funding for infrastructure, research and development, and general education. The social forces within American society that could bring about these policies—the basis of a long-range, multilateral settlement that could bring mutual benefits to the Chinese and American people-- are very weak and disorganized. Maximum containment on the part of the United States, even with the EU on its side, is certain to deepen the global crisis, but unlikely to derail China’s rise over the long term.

       Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.