Author: Xu Jin, Economic Editor of FT Chinese Network
The tariff war has returned to the hard political game, and the soft war of public opinion is of little significance. Trade is essentially an infinite game, while geopolitics may be a zero-sum game. China should treat the current chess game with a long-termist perspective.
April is cruel, not only the passing of winter, but also the tariff war launched by Trump.
Behind the imminent tariff war, the corresponding rise and fall of economic data also means the return of hard politics.
On April 2, the Trump administration announced the implementation of new reciprocal tariffs, and the specific content shocked the world. As of press time, Trump's latest announcement to increase import tariffs on China has been raised to 104%.
The reciprocal tariff is designed in layers. The first level is the global base tariff, which imposes a base tariff of 10% on all imported goods; the second level is differentiated additional tariffs, which are mainly targeted at 60 countries with large trade deficits with the United States. China is among them, with a tariff rate of 34%. In contrast, there are many other key regions, including the European Union 20%, Vietnam 46%, Taiwan 32%, Japan 24%, India 26%, and South Korea 25%.
It can be said that under Trump's tariff stick, large and small economies are equally affected. Soon, China chose to retaliate in kind. Previously, an author on FT Chinese also made this suggestion, and then Trump threatened to impose a 50% tariff again.
Now that the tariff war is in sight, what is the impact of the tariff shock? At present, major institutions have different estimates. Generally speaking, most people think that the probability of a US recession has increased, and the global economic outlook has therefore become much bleaker. For example, an institution of the Chinese Academy of Social Sciences estimates that the US reciprocal tariff will lead to a 8.2% decline in global trade.
In fact, no matter how sophisticated the model is, I personally think it is too early to say these views. The self-adjustment of the economy is actually more flexible than many people expect.
As far as the United States is concerned, tariffs will obviously lead to price increases and inflation, consumers will pay a lot, and public resentment is bound to be great. When the French thinker Tocqueville observed the United States, he once said sarcastically that cheapness was as irresistible to the United States as conquest was to France. Whether it is made in China or Japan, most American consumers in recent years do not ask where cheap goods come from and accept them all. The problem is that from a political perspective, consumers are scattered individuals, without strong organizations, and often cannot form interest groups with consistent goals. From different industries, the effects of tariffs on the US manufacturing industry are also different, and we even have to admit that some industries have indeed benefited from it.
For countries such as China, tariffs are a real test. The bad news is that it will definitely increase the burden on China's manufacturing industry. At the beginning of the year, the US tariff on China was already 20%, and now it has increased by 34%. If we add the additional 50%, and consider the last round of tariff war, that is, in July 2018, the US officially imposed a 25% tariff on 34 billion US dollars of Chinese products, then some industries will face tariffs of more than 100%.
As a result, the cost of China's exports has risen sharply. So far, exports are still the most important basic plate of China's economy. It not only brings real foreign exchange, but also a link between China's economy and the global market. According to official data, China's export scale in 2024 will be 25.45 trillion yuan, a year-on-year increase of 7.1%, and it has maintained growth for 8 consecutive years.
For this reason, the pressure of tariffs can be said to be quite direct. China's manufacturing industry has made great technological progress in recent years, but its biggest advantage is still the cost advantage, which is not a disadvantage. After all, cheapness is not just about labor, but also a comprehensive factor of organization, technology and industrial clusters. The relative weakness of the RMB in the past one or two years was originally an opportunity for exporters to take a breath. Now that tariffs have come, they are facing great pressure.
Different industries have different reactions and bargaining power to tariffs. The owner of the textile industry told Xu Jin's agent that the pressure is great. In their industry, the new costs are generally shared in half, half by the customer and half by the enterprise. He observed that the leading companies in the industry now either focus on the domestic market, not like in the past to meet the OEM, but to strive to increase the brand added value, or the production capacity is greatly transferred to other countries, and the domestic focus is on intelligent production. Originally, they had planned to set up factories in Southeast Asia, but now they feel that these places are also facing tariff pressure.
One leaf knows the autumn, and behind these changes is actually a reflection of the retreat of globalization.
Free trade and globalization are basically a pair of twins, which has been the economic tone of the past three or four decades. As far as the United States is concerned, both the Democratic Party's neoliberalism and the Republican Party's neoconservatism are generally practicing this rule, so that for a while everyone felt that the two parties in the United States were converging politically, and economic and trade relations became the "ballast stone" of Sino-US relations.
In fact, this is just an illusion. It can be said that in the eyes of the opposition represented by Trump, globalization has made the ruling parties of both parties captured or persuaded by the economy to varying degrees, ignoring the voices of opposition to globalization.
In the era of globalization, it has indeed brought dividends to emerging countries such as China. The most typical example is China's economic takeoff after joining the WTO in 2001, which gave birth to a new generation of Chinese middle class. However, not everyone benefits. In this process, groups that can arbitrage on both sides, such as multinational corporations, obviously get the biggest benefits. And with the transfer of manufacturing, groups such as the Rust Belt in the United States have obviously suffered losses, and their class has declined to the soft class, falling into what US Vice President Vance called "the tragedy of the country people."
It can be said that the flow of globalization is like sweet honey, but the degree of penetration varies. Unequal distribution has led to a backlash of conservatism. Although the ideas advocated by Trump or Vance and others are regarded as "weird" or "non-mainstream" by political opponents, their essence is a force of dissatisfaction with globalization.
In such a situation, "free trade", which is a consensus among economists, has brought its own opponents in politics. In the future world, globalization may recede, and the new trend will be more localization or localization.
Back to tariffs, Trump did not spare Vietnam and other places this time. Not only is there a lot of pressure on China's manufacturing industry, but there is also a lot of pressure on China's manufacturing industry to shift its global layout. It can even be said that all potential options have been added.
Going out or going overseas is a fashionable topic in the Chinese business circle at different times. Of course, there are many successful ones, but it is not easy for general enterprises, especially manufacturing industries, to go global at present. Domestic self-media has been shouting slogans such as "going overseas" for so long in the past two years, but in the end, it seems that only some people who organize study tours and provide training have made money. For Chinese companies, it is a bit late, a bit difficult, and a bit expensive to transfer industries now.
Trump's approach is crazy and random in the eyes of many people, but it is not completely without rules.
You can ridicule, abuse and criticize Trump and his ideas. But this only provides emotional value, not actual value. After all, the weapon of criticism cannot replace the criticism of weapons. The tariff war has entered this stage and has returned to the hard political game. The soft war of public opinion is not very meaningful.
There are many definitions of the so-called "hard politics". In the current context, you can understand that as the warm veil of globalization is unveiled, the logic of economic supremacy is downgraded and replaced by a tougher and more direct power game. In such a power game, trade, as a means, is naturally used.
Free trade can be said to be a gilded ideal, but ideals are difficult to always shine into the real world. Hirschman, a Jewish economist from Europe to the United States, was not so naive. He experienced the Holocaust and knew how realistic and ugly politics could be. In 1945, he pointed out in "State Power and the Structure of Foreign Trade" that trade relations will certainly bring dependence between two countries. In free trade theory, it is generally believed that such dependence will lead to peace between the two countries. But in reality, if this relationship is not symmetrical, these dependencies may even be the origin of domination. More importantly, trade also involves political games in different industries in the country, which itself is often easily exploited by state power, and trade dependence may even become a security risk.
Trade as a means is not uncommon in history. For example, in the first half of the 1980s, the Japan-US trade war reached its most serious moment. Even when President Reagan, who liked to emphasize deregulation, was in office, the United States still challenged Japan's industrial policy and even domestic system through trade conflicts.
On the other hand, in American history, tariffs have been an important source of income for the federal government for many years, and even reached 90% at the beginning of the founding of the country. Today, the tariff ratio is less than 2% of the federal government's revenue, which is obviously a lot of room compared with the historical high.
In the era of hard politics, many times it involves hard-core strength comparison. It is important to understand Trump's motives. For him, tariffs are not a means of negotiation, but a goal of action.
What should China do? Doing well is still the key. I have recently been revising my Japan trilogy, which involves a lot of content about the Japan-US trade war. Although the Japanese case is not completely equivalent to China, the response to the Japan-US trade war can still be referenced. Of course, there are many differences. Japanese politicians and bureaucrats seem to be opposing negotiating opponents with the United States, but no matter how the two sides go back and forth, they always position the two sides as allies. Even, many times they are also using the United States, such as using the United States' requirements to complete some reforms that have great domestic resistance. The final result actually played a certain role in promoting Japan's economic reform. The Japanese economy subsequently entered the lost three decades, but many professionals also told me that this is actually more of a problem of the Japanese economy itself, rather than oppression from the United States.
On the other hand, China is also in the second place in the world, with per capita income entering the 10,000 US dollar mark and entering the middle-income country industry. The dividend of globalization has played a role in it. People and countries are actually lucky to catch up with one or two dividend cycles, and it is unlikely to always be at the top.
Trade negotiations are essentially an infinite game. Fighting and scolding are nothing more than making more or less money, and it can always continue. Moreover, if you lose this time, it does not mean that you will always lose in the future, and if you make this time, it does not mean that you will always make money in the future. In contrast, geopolitical confrontation may be a zero-sum game, and the loser may even leave the table.
For China, the current situation is naturally based on "I" and will not be disturbed or led by opponents. We should respond to tariff challenges from the perspective of infinite games and treat the current chess game with a long-term perspective. Because in finite games, players want to win over their opponents, while in infinite games, the goal of players is to keep the game going. In this way, it is key to abandon some external noise, risks and temptations.
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