The Trade Numerologist: Superpower Spat Could Reshape Global Trade

After almost twenty years, the global economy is moving into a new trading order, and the emerging rules governing how corporations and companies buy, sell and ship goods are going to be shaped in large part by what happens next in the relationship between the world’s two supereconomies. 

Just as the U.S. agreed to exempt allies like the European Union and Canada from new steel tariffs, it announced it would impose a raft of new duties against an estimated $60 billion worth of imports from China.

President Trump said he aimed to eventually reduce the U.S.’s $375 billion trade deficit with China by $100 billion, numbers that do not include trade in services. In practice, the U.S. is planning 25% tariffs on selected Chinese imports, and it will target 1,300 categories of goods.

China threatened to retaliate with tariffs impacting roughly $3 billion in imports from the U.S., on over a hundred products, including wine, fruit, pork and selected high-tech steel products. China “doesn’t hope to be in a trade war, but is not afraid of engaging in one,” the Chinese commerce ministry said. “China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.”

This is a big deal: Trade tension between the world’s two biggest economies could have massive consequences for major corporate manufacturers, shipping lines and economies in Europe, Latin America, Asia and Africa. And whatever the fate of the Trump presidency, it seems clear that the U.S. is entering a phase where protectionism is part of public policy, and import duties promised to Americans, and enacted, by leaders of both parties.

Since the end of World War Two, the U.S. has been the world’s most open market, and biggest advocate of free trade. The U.S. has an average tariff of 3.4%, compared to 10% for China, according to the WTO.

It was thanks to U.S. support that China joined the WTO in December, 2001. The Clinton and George W. Bush administrations were led by free-traders, and their corporate backers were excited about building plants in China, and gaining access to the world’s biggest consumer market.

And for China, accessing to the world’s governing trade body meant that the world’s most populous country, ambitious and aggressive about subsidizing domestic industries and eager to welcome major European and U.S. corporations hungry for higher profit margins on manufactured goods, suddenly had full access to the world’s richest markets.

Before joining the treaty, China was the world’s sixth biggest exporter, thanks to a slow and steady build-up of the country’s manufacturing capability after the death of Chairman Mao in 1976.

Sixteen years later, China is the greatest commercial power the world has ever seen. Its manufacturing and export dominance boosted the global container industry and created markets for manufacturing zones, especially on China’s east coast, lifted hundreds of million out of poverty, and gave people in Europe and the U.S. an unparalleled abundance of televisions, shoes, smart phones and toys.

The U.S. market was, and still is, key to China, offering Chinese factories the economies of scale they need to cut costs and win markets around the world. It also helped wipe out factories across the U.S., fueling the protectionism now being enacted by Trump.

When China joined the WTO, the consensus among Western trade officials and politicians was that its manufacturing zones would focus on producing low-tech goods that wouldn’t threaten key U.S. and European exports. In the year China joined, for example, shoes were its third biggest export to the U.S.

Now the game has shifted. Chinese companies dominate production of basic consumer goods like shoes, toys and phones, but under a program known as “Made in China 2025,” they’re also competing in areas like artificial intelligence, self-driving cars, robotics and latest-generation microchips. Shoes have fallen out of the top five categories of Chinese exports to the U.S.

The tariffs the U.S. is preparing against China are the result of an eight-month inquiry that concluded that Beijing cheats on trade by making U.S. companies investing in China turn over important technology to Chinese companies.

Now that Chinese and U.S. companies, and their governments, are on a more equal footing than in 2001, and the U.S. is becoming more protectionist, the leaders of the world’s two superpower economies have almost no choice but to rewrite the rules of global trade.