Everyone is worried about a “trade war,” and last week’s U.S. presidential election has only heightened those fears. Donald Trump, the resounding winner in that contest, has threatened high across-the-board tariffs on all goods coming into the United States, and many fear a global downturn as a result. “If you have some very serious decoupling and broad scale use of tariffs, you could end up with a loss to world GDP of close to 7 percent,” Gita Gopinath, the IMF’s first deputy managing director, told the BBC last month. “These are very large numbers; 7 percent is basically losing the French and German economies,” she added.
The concerns are real, but observers and analysts are identifying the wrong culprit, confusing the victim and the perpetrator. Don’t blame Trump or America. Blame Xi Jinping and China.
Yes, Trump loves tariffs and tariff increases can cause global downturns. The former and future president has talked about them throughout his career and during the campaign, calling himself “Mr. Tariff” and “Tariff Man.” “To me, the most beautiful word in the dictionary is ‘tariff,'” he said at the Economic Club of Chicago in the middle of last month. “It’s my favorite word. It needs a public relations firm.”
Yes, that word could use some help. Economists abhor these measures, and global leaders do not like them either. Take Christine Lagarde, president of the European Central Bank and former IMF managing director. She sees parallels between today and the “economic nationalism” that led to a collapse in global trade and ultimately the Great Depression.
In a lecture delivered in September in Washington, D.C., she pointed out that global trade as a percentage of the world’s gross domestic product fell from 21 percent in 1913 to 14 percent in 1929 to 9 percent in 1938. Lagarde blamed, among other things, tariffs.
Last year, global merchandise trade in fact fell 1.2 percent. Although trade volume will return to growth this year, there are concerns that global commerce has peaked, especially because countries are again prioritizing resilience and self-sufficiency and therefor trying to onshore industry.
What’s the culprit causing the stagnation of trade? The IMF has long complained about “protectionism.”
U.S. President-elect Donald Trump
Chip Somodevilla/Getty Images
Protectionism is not the problem, however; it is only a symptom. Countries are protecting their economies because they are reacting to predatory and criminal trade practices, especially those of China. Those Chinese practices have created large imbalances, like its outsized trade surpluses. Imbalances, as the Wall Street Journal reminds us, brought on the Great Depression. They also are responsible for the 2008 global downturn.
This time, China is depressing consumer demand at home—the Chinese economy is structured to do that—and subsidizing manufacturing as Xi seeks to build an even more fearsome export powerhouse. China already accounts for 30 percent of global manufacturing.
As U.S. National Security Advisor Jake Sullivan said last month at the Brookings Institution, Beijing’s system “is producing far more than domestic demand, dumping excess onto global markets at artificially low prices, driving manufacturers around the world out of business, and creating a chokehold on supply chains.”
Sullivan is right. In October, China’s Producer Price Index, which measures factory gate prices, fell for the 25th straight month, indicating that China’s manufacturing capacity is out of whack with internal demand. Yet Beijing is pouring even more money into manufacturing, which has an incidental effect of depressing consumers’ ability to buy goods.
Internal demand in China is, as a result, falling. Last month, imports dropped a larger-than-expected 2.3 percent—at the same time exports soared 12.7 percent, far faster than estimates predicted.
The Chinese export-driven system creates “collateral damage,” as the Wall Street Journal labeled the effects felt by China’s trading partners. “China Shock 2.0” is how the Biden administration terms it.
So far, the IMF does not want to deal with Chinese trade practices, which means countries are going to take matters into their own hands. In response to Beijing’s export-promotion policies, the U.S., the European Union, and even countries in the so-called Global South are raising tariff walls. Trump is now in good company.
“Foreign countries, and especially China, have been waging highly successful trade wars against clueless pre-Trump presidents for years,” trade expert Alan Tonelson told me. “High tariffs, non-tariff barriers based on Mickey Mouse regulations, subsidies, local-content regulations, currency manipulation, and intellectual property theft have been Standard Operating Procedure for years.”
A reckoning is coming soon, because the world’s largest market is losing patience and will take action. It is true that tariffs will create “a world of unintended consequences,” as Andrew Collier, a senior fellow at the Harvard Kennedy School, told me this month.
Is one of those consequences a worldwide downturn as Lagarde hinted? Perhaps, but as Tonelson, who writes about the intersection of trade and geopolitics at RealityChek, notes, “foreign economies are so dependent for growth on the American market that any retaliation for new U.S. levies will be symbolic at best.”
Yet even if there is more than symbolic retaliation, the Great Depression shows that trade-surplus countries suffer the most. America should understand that: A century ago, it was the world’s trade-surplus king and was hit hardest by the falloff in trade. Now, China will be the one to take the blows.
Trade-surplus countries, therefore, are in no position to wage trade wars with trade-deficit ones like America.
The Chinese regime surely knows this. In 2018, Beijing huffed and puffed when Trump imposed tariffs pursuant to Section 301 of the Trade Act of 1974 but took actions that absorbed somewhere between 75 percent to 81 percent of the cost of these measures.
History is already repeating itself. In recent days, China has been forcing down the value of the renminbi, partly in anticipation of Trump imposing new tariffs. Even before he has taken the oath of office, China’s regime is paying the cost of his new tariffs.
Gordon G. Chang is the author of Plan Red: China’s Project to Destroy America and The Coming Collapse of China. Follow him on X @GordonGChang.
The views expressed in this article are the writer’s own.