Stop the Trade War in the Name of Prosperity
Part of the Trump administration’s latest round of 15 percent tariffs on Chinese imports went into effect Sunday, with the rest to follow on December 15. These increases will impact the prices of many consumer goods that Americans rely on, including clothing, appliances, televisions, smartwatches, textbooks, diapers, coffee, and even whiskey. And given their timing, they’ll likely have an effect on holiday shopping. This makes all the more welcome President Trump’s recent statement during the G7 summit that China is looking to end the trade war and that he too is open to making a deal.
Trump is right to negotiate with Chinese President Xi Jinping, as finding an off-ramp from the trade war should be Washington’s priority. America’s interest is in out-competing Beijing, not hurting our own economy in an attempt to damage theirs. The United States has a better hand here, but we must play it to our advantage.
America’s great strength is in our freedom, our market economy, and our democratic system. The United States has attained a level of prosperity unseen in human history, and that economic engine is what fuels our military power. Without a strong economy, we cannot have a strong military. Thus an endless trade war endangers American security in the long term: as both sides pile on retaliatory tariffs, the risk of recession increases. American consumers will feel each new trade barrier as it hits their pocketbooks.
Washington must not pursue policies that hurt those it governs. And the suffering inflicted by a trade war wouldn’t just be limited to the pricing of consumer goods. It would also make us weaker for no good reason. And it would lower tax revenues, requiring America to go further into debt to maintain our present level of security.
Moreover, long-term trade attacks on China are unnecessary, because China already has more problems than America. Beijing suffers from high national debt, a lack of clear economic reform, and a rapidly aging population. It has few, if any, good or timely solutions to these pressing issues.
According to the Institute of International Finance, China’s total national, corporate, and household debt is now over 300 percent of its GDP. What makes this especially bad for Beijing is that the debt was taken on very quickly after the 2008 global recession, without the power of a global reserve currency to make borrowing easier, as the United States has. Moreover, this debt is largely corporate and China’s state-capitalist system makes it harder for Chinese companies survive market pressures. Beijing has used cheap credit to fuel its exports and its economic rise through fully and partially state-controlled national companies.
The Chinese economic system has undergone some reforms in recent years but still remains too top-down and too focused on exports over consumption as compared to more developed economies. In other words, China needs to transition to a full market economy like Taiwan and South Korea did on their paths to prosperity, but it hasn’t done so yet.
Furthermore, because of the horrific legacy of the one-child policy, China faces a rapidly aging population that will strain resources and reduce the number of working-age people. By 2050, it is estimated that the average Chinese will be 56 years of age. In contrast, the average American will be 44. No amount of spending or legal reform will prevent Beijing’s coming demographic crisis.
This comparative weakness is why it makes sense to find a trade war off-ramp sooner rather than later. China needs one badly and will eventually want a deal—if it doesn’t already. As for the United States, recession may be inevitable, but it would be better if it were not self-inflicted.
Already the trade war has cost American billions in higher prices for imported products. American farmers have been hit hard by China’s retaliatory tariffs and, according to a report by IHS Markit, U.S. manufacturing has shrunk for the first since 2009. Economists polled by Reuters believe the trade war has increased the risk of a recession, with a median of those surveyed giving a 45 percent chance of a downturn over the next two years. Additionally, major banks have expressed concerns, as the stock market takes hits with every new tariff increase and angry statement between Washington and Beijing.
To protect and maximize American prosperity and security, a trade war ceasefire is necessary. Washington should seek a lasting solution, in the knowledge that more tariffs are not needed for America to out-compete China. The United States has the better hand to play and must look after its own prosperity. Beijing has a weak hand largely of its own creation. It is time for America to make a deal.
John Dale Grover is a fellow with Defense Priorities. He is also an assistant managing editor at The National Interest. His articles have appeared in The Hill, Defense One, Real Clear Defense, The Diplomat, and The American Conservative.