The Necessary War

A Trade War Between China And The U.S. Is Far More Likely Than Not
By Douglas Bulloch 

U.S. President Donald Trump speaks during an event in the East Room of the White House in Washington, DC, May 9, 2018. 
There has been much speculation recently about the deteriorating U.S.-China relationship, in particular, whether these opening salvoes on the trade front will amount to much in the end. 

Some imagine the current skirmish is little more than bluster, that we've seen it all before, and that the relationship is too important for all concerned to deteriorate too far. 

Others suggest there is something more structural about it, as if the cogs of world trade have begun to separate having been unbalanced for far too long.
Either way, the two sides are really very far apart, so if there is no trade war, it will likely be seen as a major climbdown by one side or the other. 

It is possible that we are still in what the German strategist Carl von Clausewitz might term, a "war of movement" in search of a strong "position" to defend, but the positions so far staked out are beginning to look pretty entrenched. 

It is my view, therefore, that a trade war is more likely than not, and there are three main reasons why.

This is structural
The first and most important reason why a trade war is likely is simply that we are already in the middle of one. 

A trade war, for want of a better term, is a deviation from the norms of free trade in pursuit of some advantage. 

Most people take the view that some distortions are inevitable and that all states have a clear interest in defending some key industrial or other sector against the vicissitudes of competition. 

Nevertheless, there are limits to the extent of state-led trade manipulation. 

These limits are set out pretty clearly in trade agreements, from GATT to the WTO, to regional agreements in which states agree to let the market determine prices and investment decisions, but all states engage in some level of protectionism.
China, however, has only been participating in these global institutional settings since joining the WTO in 2001. 

Negotiations commenced when they sought to participate in GATT in 1986, and took 15 years to conclude, ending in an accession agreement in which they committed to bring their own trade practices and economic policies in line with WTO norms. 

Yet they have simply not lived up to those commitments, and in some areas show not the slightest inclination to do so.
In the current negotiations, for example, China demands to be recognized as a "market economy" under the WTO, and has rejected outright U.S. demands to stop subsidizing key sectors in line with its "Made in China 2025" strategy. 

Yet China is not a market economy, and agreed to eliminate subsidies – a key component of "Made in China 2025"–in its WTO accession agreement in 2001. 

Specifically, Article 10.3 which states "China shall eliminate all subsidy programmes falling within the scope of Article 3 of the SCM Agreement upon accession." 

Following which Article 3 – or more specifically Article 3.1 (b) of the SCM (Subsidies and Countervailing Measures) Agreement states "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods" shall be prohibited.
The problem, therefore, is not simply that China is stretching WTO norms, but that it has simply never come into alignment with them. 

And having ignored them for so long, despite its own treaty commitments, has now announced a strategic aspiration that drives a coach and horses through them. 

China, therefore, is balking not at new conditions from the U.S., but at the very preconditions of its participation in the rules-based order of the WTO. 

Which brings the purpose of the WTO itself into question.

Donald Trump is structural too
The second reason why a trade war is more likely than not is simply the election of Donald Trump as President of the United States. 

As everyone knows by now, and whatever your chosen expletive, key to his victory was being able to win in traditionally deep blue states like Pennsylvania and Wisconsin. 

The key to victory in these states was remarkable changes in U.S. employment patterns, identified by economics Autor, Dorn and Hansen as consequent upon what they term the "China supply shock."

U.S. Treasury Secretary Steven Mnuchin (L) and U.S. Commerce Secretary Wilbur Ross (R) walk through a hotel lobby as they head to the Diaoyutai State Guest House to meet Chinese officials for ongoing trade talks in Beijing on May 4, 2018

Many economists have subsequently argued that this analysis is basically wrong and that the U.S. has really undergone an automation revolution, which means these voters in blue-collar states are simply struggling to adjust to a changing world. 

Yet evidence keeps piling up that Trump's critique of unfair trade practices holding back the U.S. worker is, in fact, broadly correct. 

And if it is, then a trade war between China and the U.S. is inevitable.

China is already celebrating victory
The last reason I think a trade war is more likely than not is simply that, bearing all the above in mind, China behaves like it has already won. 

By demanding to continue practices that they have long ago agreed by treaty to discontinue, and responding to accusations of predatory mercantilism by engaging in predatory mercantilism suggests that their view of trade has always been entirely transactional.
Indeed, while the U.S. is arguing about rules, China is arguing about behavior, without considering that its behavior has always been in breach of the rules. 

China seems, therefore, to believe that its sheer market size makes the rules themselves inconsequential and that the real issue is just a plain tug of war between itself and the U.S. 

Or borrowing from Clausewitz again, China views trade, like war, as politics by other means.
For the time being, it remains "jaw-jaw" but unless the square peg of China's attitude to trade and economic policy can somehow be driven into the round hole of WTO compliance, "war-war" will worsen.