Opinion: Will US see Trade War with China? Trump's State of the Union Speech will have the answer

The US president Donald Trump will be delivering his State of the Union (SOTU) speech on Jan 30, 2018. Given the promises made during Trump’s campaign and the trajectory of the events since he took office, the White House has been gearing up to prepare for a trade crackdown on China. During his Asia Trip, Trump addressed the problems the US is suffering due to unfair and unfavorable trade practices by the other countries. In his ‘America First’ policy, Trump vowed to only engage in fair and reciprocal trade, revisiting several trade pacts made under previous administrations. 

The National Security Strategy (NSS), released in December 2017, unabashedly saw the global trade practices as unfit for the US objectives of making ‘America great again’. The NSS categorised China as a strategic and economic competitor, which took advantage of the US-led globalisation initiative. 

The US and China have continued to express displeasure at each other’s trade practices. In the last World Economic Forum, 2017, the keynote speech delivered by Xi Jinping expressed a different side of Chinese thinking where Xi prompted liberal and free trade for a globalised world while accusing the US of protectionism. The speech came after Trump Administration took over from Obama administration. 

In the period of Trump’s campaign, several allegations were made against China’s unfair, regressive and harmful trade practices, currency manipulation, and imbalance of trade, against which a vision of ‘America First’ policy was promoted. Trump promised to ‘fix’ the trade deficit, engage only in reciprocal and far trade instead of free trade. 

As politico published—according to the three administration officials—the crackdown is likely to include new tariffs directed at China. The tariffs are to involve everything from imports of steel and solar panels to intellectual property theft.

The White House was seen keen on addressing the trade issue with China since Trump’s Asia Trips. The events that followed, suggest that Trump administration is past the question of ‘should’ and reached precise measures on ‘how’ to rectify trade imbalance with China. Moreover, trade is one of the policy areas where the President can act without reliance on the Congress.

Underlining the development, there have been serious debates between the Trump senior advisors on the course of trade policy against China as the consequences may be severe. The officials said that even though Trump is undecided on specific policies, there are chances that these tariffs will be sanctioned, attracting severe retaliation from the targeted countries.

Trump’s meeting with Republican Congressional Leaders, at Camp David on 6th Jan 2018, drew caution from going too far on a trade war. The meetings included key Cabinet Secretaries and senior administration officials, including Commerce Secretary Wilbur Ross, Agriculture Secretary Sonny Perdue, Labor Secretary Alexander Acosta, Treasury Secretary Steven Mnuchin, US Trade Representative Robert Lighthizer, trade advisor Peter Navarro, Council Economic Advisers chairman Kevin Hassett and National Economic Council director Gary Cohn. The Politico reported, a clear divide between the senior members, Cohn and group, calling for more moderate, targeted approach and Navarro, advocating harsh and sweeping actions.

The current administration is known for reversing the actions taken during Obama administration. Trump pulled out from Trans-Pacific Partnership, Paris Agreement on Climate Change, demanded allies to pay their share for security provided under the US and announced renegotiation of two major trade agreements—North Atlantic Free Trade Association (NAFTA) and Free Trade Agreement with South Korea. Not to forget the upcoming World Economic Forum, from 23-26 Jan 2018, will also condense US policy on trade (with China) and face real-time response from the attending nations. 

China has already received certain blows on trade, complicating an overwrought relationship. The Congressional Committee on Foreign Investment in the US (CFIUS) blocked Ant Financial, Jack Ma’s company, from acquiring MoneyGram due to concerns for national security. In the cases of import of solar power and washing machines, the US Trade Commission concluded that increased imports are a “substantial cause of serious injury to the domestic industry”. 

On 22 Jan 2018, White House decided to enforce tariffs on solar panels and washing machines. Chinese Commerce Ministry criticised the move saying, “the US side once again has abused its trade remedy measures…will resolutely defend its [China’s] legitimate interests”.

Trump has a wide berth for maneuvers in deciding tariffs and import quotas. It can be speculated that he may only choose to target China to signify the US attempt and resolve at punishing China for trade malpractice. It’s likely that his attempts may face challenges at the World Trade Organization (WTO) and may also trigger mirrored actions by countries, barring the US products in their respective markets. The prospects of such tariffs are likely to result in loss of tens of thousands of jobs, alarming the booming solar energy sector in the US, created under the Obama administration.  

The reason given behind these tariffs, is to provide much required impetus to the indigenous solar manufacturing, significant for national security and economy.

The attack on solar power has also lead to a debate questioning the intentions behind tariffs against a green, renewable alternative to fossil fuels. The Trump administration increased efforts to repeal Obama administration’s climate rules on the power industry, it proposed measures to give financial support to coal-fired power plants. The administration has also pushed to increase US exports of liquefied natural gas. 

In the Obama Administration, the solar power sector enjoyed its boom years resulting in cost competitiveness with natural gas and coal-based power plants. The cost declination in prices of solar panels will be reversed with the execution of the tariffs. Chinese companies hold about 80 percent of the solar manufacturing capacity, the US being the second largest. 

The US congressional policies have already reduced Chinese investments from about US$ 50 Billion in 2016 to less than half in 2017. The US’s barring of Chinese investment in US high-tech sector has, ironically, accelerated the pace of tech innovation in China, increasing expenditure on R&D from 1% in 2000 to 2% in 2017. 

On Jan 22nd 2018, Pentagon released its National Defense Strategy (NDS), calling for aggressive steps towards the strategic competitors—China and Russia. Previously, the NSS 2017, had already categorised the two nations as a danger to the US national security and international order. 

Post the release of NDS, Jim Mattis Secretary of Defense said, "this required some tough choices ... and we made them…based upon a fundamental precept: namely, that America can afford survival.” The paper called China and Russia ‘principal priorities’. China reprimanded the document, calling it ‘a cold war mentality’ and ‘full of unreal assertions of zero-sum games and confrontations.’

On the eve of the release, USS Hopper sailed within 12 nautical miles of Scarborough Shoal, occupied by China from Philippines in 2012, reviving the Freedom of Navigation Operations (FONOP) after months. 

On reports of continued militarisation in the South China Sea, Brian Hook, US State Department, vowed to resume FNOPs. The revival of Quad and the new term ‘Indo-Pacific’ and its amplified use by the US and allies have alarmed China into increasing its military presence on the artificial islands. 

Moreover, from Trump’s Asia visit, increasing US arms sale have also fueled speculations enticing conflict between China and the neighbors. The US is deploying more military assets in the region, blaming North Korea, but China remains unsure of the US intentions. Seeking closer ties with the Southeast Asian nations against China’s growing militarisation on the South China Sea, Jim Mattis is on his Southeast Asia visit from 22-26 Jan 2018. He visited Indonesia and vowed continued efforts to expand maritime cooperation and make Indonesia as ‘a sort of fulcrum between Indian and Pacific Ocean’.

While aggressive military and diplomatic actions by China has provided legitimacy to the US presence in East Asia, the US naval exercises in South China has also had a reverse effect. China never stopped militarising in the South China Sea, in fact, it increased the deployment of military assets, encouraging tension and disputes. 

Tensions in US-China relations have global consequences and Trump’s response to China in both defense and trade will also have inevitable underpinnings for the rest of the world. Under his administration, the US has acknowledged revival of the great power competition and its reduced leverage on land, in the air, and space and nuclear. 

Even though Trump may levy strict tariffs on imports from China, will it improve the US standing in the globalized world? Trump’s insistence on ‘America First’ takes away the US credits as the leader of the globalised world. Moving away from multilateral forums, when it is perhaps required most, the US may isolate itself but at the cost of its supremacy. 

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)