Now that US President Donald Trump has imposed a 10% tariff on yet another US$200 billion worth of Chinese imports, the US-China trade war has entered a costly new phase.
As China follows through on its pledge to retaliate, the casualties will include more than half the bilateral trade between the two countries, with China itself suffering the most losses.
Whereas China exported US$506 billion worth of merchandise to the United States in 2017, it imported just US$130 billion of American goods.
That means that, in a dollar-for-dollar slugging match, China will quickly run out of steam. Lacking powerful counterpunches, China now has some of its most creative political minds searching for novel means of retaliation.
One idea, in particular, has attracted a lot of attention in the press, mostly because it comes from Lou Jiwei, a former minister of finance who now heads the National Council for Social Security Fund, China’s national pension fund.
In a defiant speech delivered at the high-profile China Development Forum on September 16, he proposed withholding exports of goods that American companies need, thereby severely disrupting US supply chains for 3-5 years, at least. Such a manoeuvre, Lou mused aloud, would be economically painful enough to influence US elections.
True, many products manufactured in the United States depend on imports of intermediate goods from China. Should China cut off those supplies, under the legal fig leaf of “export restraint,” US companies would be unable, at least in the short term, to find alternative sources that could cover all of their needs?
The disruption to the US economy would, no doubt, be severe. But the damage to China’s economy would be worse because the US produces even more critical intermediate goods that China needs and would be unable to get anywhere else.
Of course, proponents of Lou’s approach know that China would suffer. They have faith in the deterrent of “mutually assured destruction” (MAD) – the principle that, if an attack by one country means the decimation of both, neither will make the first move.
During the Cold War, the concept of MAD helped, counter-intuitively, to maintain peace, as both the Soviet Union and the US knew that, if they deployed any of their 30,000-plus nuclear warheads, the other would mount a devastating retaliation.
But trade is not nuclear war, and in this conflict, the US possesses a much bigger arsenal than China. If one side’s destruction is not so assured, the logic of MAD breaks down.
The most crucial intermediate good the US can withhold is advanced semiconductor chips. In April, the US banned the sale of such chips to the Chinese telecom giant ZTE as punishment for the company’s violations of US export rules. Almost immediately, ZTE’s operations were effectively shut down.
Had Trump not given the firm a reprieve – in exchange for a US$1 billion fine and an agreement to adhere to strict compliance rules – ZTE would not have survived.
Minxin Pei is a professor of government at Claremont McKenna College and the author of China’s Crony Capitalism.
Copyright: Project Syndicate, 2018.