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The Real Stakes of Trump’s Trade War With China

As the media obsesses over each round of tariffs, they're missing a much bigger story about the future of the global economy.

Nicolas Asfouri/AFP/Getty Images

President Donald Trump’s continuing trade war with China will escalate once more on September 1, when his administration plans to impose tariffs of 10 percent on $300 billion of Chinese imports. These new levies follow previously enacted tariffs of 25 percent on a separate basket of imports worth $250 billion, with still more to come later this autumn, as the two nations continue their tit-for-tat sparring. 

According to the president, the goal of this trade war is to spur the creation of jobs stateside, or force China to agree to trade with the United States on more favorable terms. Democrats continue to argue that neither of these outcomes are likely. Nevertheless, the debate over whether Trump can “win” the trade war with China is rather vague about what it means to “win” a trade war. 

Moreover, the conflict seems to be headed toward a far-reaching change in our approach to China—a shift to a containment strategy that could reorder the economic and political landscape. Whether we should pursue this path, and how prepared we are for the consequences, are questions that the media has left undiscussed.  

There are a couple simple reasons why these tariffs are unlikely to create an employment boomlet in the United States. For starters, these jobs don’t necessarily have to return home, they can easily move to other developing countries. Furthermore, should those jobs return to the United States, the work involved will likely end up being heavily automated in a bid to control labor costs, which will minimize the potential job creation.

Democrats have pointed this out, and they’ve further noted that the necessary creation of new supply chains will raise prices in the near-term, hurting economic growth. They also argue that the Chinese government is unlikely to enter into a new trade agreement on less favorable terms, because China can partially offset our tariffs by devaluing its currency. But close examination reveals that there’s more at stake. 

Since Richard Nixon went to China in 1972, the United States has pursued an “engagement” strategy with the nation, meaning that the U.S. has endeavored to both increase its trade links with the Chinese and embed the nation within international institutions like the International Monetary Fund, the World Bank, and the World Trade Organization.

But as China’s economy has developed, international relations theorists like John Mearsheimer of the University of Chicago have grown concerned that a rising China threatens to undermine American interests, challenging the United States for influence both in East Asia and around the world. Mearsheimer argues that we should embark on a containment strategy, opposing Chinese development and working to limit their influence by cooperating with China’s neighbors in an effort to isolate the nation, depriving it of the markets and investment it needs to continue to grow.  

There is some evidence that the Trump administration may lean this way. Kiron Skinner, formerly the Director of Policy Planning at the State Department, was put in charge of developing a long-term strategy for China. She has been quoted supporting a move toward containment, saying, “I think State is in the lead in that broader attempt to get a Letter X for China, what Kennan wrote.”

In this case, what’s past is prologue. “Letter X” references George F. Kennan’s 1947 “X Article,’’ which called for the United States to pursue a containment strategy against the Soviet Union. While Skinner was recently pushed out of the department, the fact that she was charged specifically with developing the administration’s strategy for China strongly suggests that the administration is considering containment.

When the United States was containing the Soviet Union, the two nations operated their own separate international economic institutions, and those two spheres seldom traded with each other. By restricting access to American investment, the United States was able to penalize countries that joined the Soviet sphere. By offering access, the United States could pry countries loose. We still do this today—Ukraine attempted to exit Russia’s sphere of influence in the hope of gaining access to greater levels of Western investment. 

Should the United States decide to pursue containment, it would need to decouple its economy from China’s, gradually shifting trade and investment away from China to other states in Asia. This strategy would also require us to push other countries to reduce their trade volume with China, because if they can interact with both America and China without penalty, they will still contribute to China’s development.  

The best way to induce them to do this is to provide alternative sources of trade and investment. Tariffs on Chinese imports push firms to relocate to places like Vietnam and India, increasing the value of their trade with the United States. If America can economically isolate China, it can starve the Chinese economy to death before China becomes large enough to fight back. 

Because the United States and China are so economically interlinked, this decoupling would need to occur gradually. The United States would have to slowly shift its supply chains away from China and it would need to wind down the Chinese equivalents. The failure of the United States and China to reach a new understanding on trade would be consistent with this process. 

Some commentators argue that China’s $1.2 trillion in bond holdings might prevent America from pursuing this decoupling, but the large headline number is misleading. China owns little more than 5 percent of total U.S. government bonds. The Federal Reserve purchased a comparable amount of U.S. Treasuries during its rounds of quantitative easing and still holds roughly double the amount of debt held by China. There’s little reason to think Chinese bond holdings offer much of an obstacle, if the administration is determined to go in this direction.

Meanwhile, Mearsheimer recently travelled to Australia to make the case that the United States is in the early stages of transitioning to a containment strategy, arguing that Australia will be forced to choose between trading with China—and exiting the American security umbrella—or retaining security cooperation with the United States and losing access to the Chinese market. 

These are stark choices, but no one in the press is discussing these trade-offs. Rather, their focus on the near-term consequences of the tariffs—on such matters as the growth rate, trade negotiations with China, and job creation at home—has pushed these big-picture questions out of the frame. 

There is another element to this—automation. As previously noted, a containment strategy would push a lot of jobs to strategically important countries such as Vietnam or India. But when firms do move work back to the United States, they invest in replacing expensive American workers with machines. 

Silicon Valley loves this. A containment strategy not only helps protect tech companies from having their intellectual property stolen, it also drives investment in robots and artificial intelligence. The technology produced as a result of that investment could have far-reaching consequences, accelerating the pace of automation and destabilizing the labor market in many sectors in ways that are difficult to anticipate ex ante.

This is another important debate that has largely gone by the boards, leaving vital questions about whether the U.S. economy is prepared to deal with the consequences of pushing the pace on automation, and make the necessary accommodations for the structural unemployment that could be produced. It’s a discussion that has largely been left to tech oligarchs, and most of the ideas they’ve hatched for dealing with an increasingly automated workforce are of the half-baked variety. 

At least one candidate for president, Andrew Yang, has considered this future. The idea that animates Yang’s candidacy is the creation of a universal basic income (UBI) to serve as a salve for when human beings are automated out of the workforce. But the amount of the UBI he proposes is too small to enable a person to get by without a job. Moreover, some iterations of Yang’s proposal have excluded seniors or proposed large cuts to welfare and Social Security to pay for the proposal. 

Recently, Yang has tried to respond to his critics by promising to make the UBI supplementary to Social Security. But this change would make it far more difficult for Yang to pay for the UBI, and he has yet to explain how he’ll make up the funds. A presidential candidate who is struggling to fund a very modest UBI without making controversial cuts to beloved social programs hardly inspires confidence in our collective ability to deal with automation. (There’s a reason Yang polls at 2 percent.)

Regardless, for all the discussion spawned by Trump’s tariffs on Chinese products, its big-picture ramifications remain undiscussed. The ongoing trade war augurs a potential shift away from the globalization of the last half-century, toward a world once again split into two systems. These changes have vast consequences, far beyond next quarter’s growth rate. The entire world system is being reordered. We face a question of global governance, and we need to take it seriously.