Trade war set to be the United States' next foreign policy quagmire

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Baku, 24 September 2018 –

History is littered with real wars, like those in Afghanistan, Iraq and Vietnam, that were supposed to be won quickly and cheaply but turned out to be the most expensive and inconclusive of quagmires.

Sadly, the same is likely to be true of the Trump administration’s trade war with China, which is all too likely to drag on for years with no conclusive result.

The main reason for doubting that there will be an early and favorable resolution to the U.S.-China trade war is that the Trump administration is making a number of basic miscalculations about the Chinese economy and its politics. Those miscalculations are deluding it into believing that a trade war with China can be won quickly and cheaply.

In particular, the administration is underestimating how effective a Chinese domestic economic policy response might be to higher U.S. import tariffs, how much economic pain the Chinese political system can bear and how strong the historical reasons are for President Xi Jinping not to be seen losing face in this trade war.

There can be no doubting that China has a highly unbalanced economy that in the end will go the way the Japanese economy went before with its lost economic decade in the 1990s. Over the past 10 years, China has had a credit bubble of epic proportions, which has been far greater than that preceding the U.S. housing bust.

Its economy has also become far too dependent on extraordinarily high investment levels to generate economic growth. That in turn has resulted in a massive amount of excess industrial capacity and large housing market bubbles in many parts of the country.

However, it is a mistake to think, as the Trump administration seems to be doing, that increased U.S. import tariffs will quickly send the Chinese economy into a tailspin.

Being still largely a command economy in which the government effectively controls the banks, the Chinese government can defer its plans to rebalance the economy and pump it up instead as it did in 2008 in response to the world’s Great Recession.

It could do so by increasing public spending and by instructing the banks to increase credit again as if there was no tomorrow.

Another mistake that the Trump administration is making in ramping up the trade war is to think that the Chinese political system has as little economic pain tolerance as the United States does.

It seems to be forgetting that during Chairman Mao’s "Great Leap Forward," the Chinese political system survived 30 million people starving to death. If the Chinese Communist Party could survive such a tragic disaster, can one really think that it cannot survive a few years of slower economic growth?

Similarly, the Trump administration seems to be forgetful of how important China’s "century of humiliation'' between 1839 and 1949 is in its collective political memory. A principal objective of the Communist Party’s rise to power in 1949 was to put behind it the time when foreign powers dictated humiliating economic terms to China.

This would seem to make it impossible for President Xi Jinping to back down in the trade war with the United States and to be seen as yet another Chinese leader losing face to the foreigners.

With there being every reason to think that China will not lightly accede to U.S. economic pressure and with every reason to believe that China is itself underestimating President Trump’s political resolve in this matter, an early end to the trade war would require President Trump to dial down the temperature in this dispute.

However, considering how important leveling the trade playing field with China is to President Trump’s political message, I am not expecting that to happen anytime soon. Rather, I am bracing myself for a long, drawn-out trade dispute with China that will prove to be economically costly to both countries.

The Hill

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