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Trump & Xi’s trade war has China’s planners scrambling to solve old problems

When everything was still normal in the opaque Chinese economic policy world, most observers were cautiously optimistic that the massive country would eventually rebalance its economy from debt-fuelled construction and export-led growth to a more sustainable consumption-driven one.

Domestic consumers were told to enjoy their lives a bit more, despite the fact that much of their capital was tied up in exorbitantly priced real estate, wages had not kept up with inflation, and banks were reluctant to loan to individuals – or even to many private companies.

Economic reforms would be top-down, but this was China after all. It would probably show the world what the China bulls had been gloating about since the 2008 global financial crisis: that the Communist technocrats of the rising east were better at running an economy than the crony capitalists in the west.

Donald Trump and Xi Jinping

Photo: White House.

Then came President Trump’s trade war. The Chinese Communist Party leadership was caught off guard not once, but twice. It overestimated the power of the Xi-Trump bromance and then underestimated the resolve of an American President with the attention span of a goldfish.

China’s central planners are scrambling for solutions to old problems that are suddenly becoming more acute.

As with so much American policy these days, predictions in the United States of how the trade war would unfold differed depending on the partisan side of the economist in question – or maybe the economists could only find publications based on the partisan way editors read their thoughtful conclusions.

Thus, the New York Times, forever ‘failing’ in Trump’s tweets, predicted a Chinese win, or, at best a stalemate. FOX News predicted chaos in Chinese streets and regime change through trade warfare.

But commentators from both sides of the political aisle in the States agreed that American consumers would suffer higher prices eventually, they just disagreed about the extent and length of time of the suffering.

It is understandable, and symptomatic of America’s parochialism, that very few people wondered how Chinese consumers would fare as a result of the trade war. Ironically, if China surrendered tomorrow and conceded to Trump’s saner demands, they would benefit greatly.

Even more surprising, China’s vaunted rebalancing towards more consumer-led growth would also be easier to pull off.

stock finance market bank banking financial

Photo: GovHK.

Allowing companies from abroad free and equal access to China’s consumer market would not suddenly unleash the worst capitalist practices on a poor China.

Liberating those markets 40 years ago, at the beginning of Deng Xiaoping’s Era of Reform and Opening Up, would have been disastrous, but China today has an economy that is many times stronger and at the limits of its capacities to continue growing along the now well-trodden path.

The Party and the people are definitely no longer crossing a river by feeling the stones. Instead, Chinese consumers know what they have and know what they want; they are better off, tech-savvy and eager to spend. Their hard-earned yuan would go much further if they could use their prodigious haggling skills at more and different market stalls.

Onerous Chinese policies of compulsory transfers of technology – to say nothing about China’s state-sponsored theft of corporate secrets – and mandatory joint venture requirements have soured China’s most ardent defenders in the west: business leaders.

The fact that the mercurial American President has managed to gain support from numerous EU countries for his demands for equitable treatment has surprised not just Beijing’s careful strategists, but most of the world’s casual observers.

If China’s State Owned Enterprises were forced to compete with lean, post-crisis western businesses within China, the Chinese consumer would be rewarded with lower prices and better services – and the bloated, inefficient SOEs would be forced to implement painful reforms that the more market-oriented Chinese economists have been arguing for anyway.

tsing-yi-shipping-container-terminal-6

File photo: GovHK.

The trade conflict could actually be a blessing in disguise: the need for reforms that the technocrats know are necessary would become clearer, and political resistance against more free markets for an otherwise unfree people would be less.

Instead, the Party is doubling down on state-led investment plans and Chinese private businesses are squeezed out of the markets they have helped to create in the first place by the SOEs that the Party feels more secure about. The only party that benefits from the current setup of the Chinese economy is the Party, and it clings to this power as it does to its political power: with an increasingly tight hold.

Trade wars have no winners and, as in ordinary wars, it is mostly ordinary people who suffer. If this conflict was purely about economics and trade, it would be relatively easy for both parties to come to a ceasefire and eventual peace treaty. Perhaps the first steps could be taken in November when President Trump meets his Chinese counterpart at a G20 summit in Argentina.

Unfortunately, more issues are now muddying the waters, not least in the waters of the South China Sea, and a chest-thumping anti-China speech by Vice President Pence. Saving face may get a lot more complicated very quickly.

That would hurt Chinese consumers more than American ones in the end – but it might help two dangerously megalomaniac leaders hold on to their nationalistic bases. This war is good for the generals, not for the grunts.


This is the English version of a monthly column in the Dutch daily Nederlands Dagblad, in which the author focuses on trade, China and the global disorder of our times.

Trump & Xi's trade war has China's planners scrambling to solve old problems