What do you think about the trade war with China?
Bad strategy and even worse execution
A series of related thoughts come to mind:
(1) Executing a trade war. From the U.S. perspective, trade wars are waged primarily by the executive branch of our government. Congress has delegated the President as head of the executive branch with the tools and authority to regulate international trade by taking action like imposing tariffs. As such, confidence in America’s ability to fight a trade war largely rests in one’s confidence in the execution capability of President Trump and handpicked members of the executive branch.
(2) “Economic exceptionalism”. As it relates to trade and economics, the U.S. and China are exceptional and this idea is significant in how I think the long-term strategic winner of such a trade war will be determined. Please note that this is different from the more widely discussed concept of exceptionalism in the context of political idealogy or culture, sometimes referred to as “American exceptionalism”. Let’s refer to this version as “economic exceptionalism”.
The sources of both Chinese and American economic exceptionalism lay simply in the size and scale of their respective economies. For the foreseeable future, there aren’t any other economies that come close to either one.
This economic exceptionalism allows the U.S. and China to follow a different set of rules when it comes to international trade and economic development. This is because unlike smaller economies, the U.S. and China can largely ignore the rest of the world (and each other) and still do “fine”.
For massive economies like the U.S. and China, the vast majority of economic activity can take place within the borders: Intra-national trade trumps (no pun intended) inter-national trade. An easy way to think about this concept is to imagine the European Union as if it were a single economy — the vast majority of trade, much of which would normally have been categorized as “international trade” would now be counted as intra-national trade between between member states.
For the U.S. and China it is much more important to execute well within the borders as opposed to without. While there are certainly many differences between the two economies, on this factor, the U.S. and China are quite similar.
This “economic exceptionalism” is the reason why it actually makes a lot of sense for China to initiate a plan like “Made in China 2025” and its push to promote domestic innovation. At this point, China has the economic scale to climb up the value chain on their own if they have to. While it may be able to slow down the process, the U.S. cannot really do anything (economically) to prevent this from happening.The same is also certainly true the other way.
(3) Winning strategically. That being said, international trade can still provide major benefits to “exceptional” economies like the U.S. and China. Even the largest economies can benefit significantly from trade with smaller economies that have comparative advantages in certain areas. As such, I see the long-term strategic winner between two competing economic leaders as the one that can assemble the best and strongest economic alliances.
Historically, the U.S. was the world’s single economic hegemon not only because we had the largest economy (by far) but we had also assembled the best economic alliances. We essentially re-built Western Europe and transmitted our brand of capitalism around the world. And after the fall of the Soviet Union, most former Communist countries fell into the American orbit as well.
However, the rise of the developing world is once against upsetting the equilibrium. About five years ago, the combined PPP-adjusted GDP of the “developing world” surpassed that of “advanced economies” largely driven by the rise of China and India. We are living through a transition period where the deck is being re-shuffled, so to speak.
The strategic winner of this trade war will be the one that comes out of this having assembled the strongest alliance.
(4) Strategic vs. tactical thinking. From my American perspective, the troubling thing is that our executive branch does not seem to be thinking about this strategically. Not only did we kill initiatives to form new alliances such as the Trans-Pacific Partnership, we are also attacking our closest allies and core economic partners in Europe and even our closest neighbors.
Meanwhile, China appears to be making a concerted effort to built up its economic alliances through various long-term oriented efforts:
Investing heavily in the infrastructure developing countries through the One Belt, One Road program in an effort to re-shape future trade routes and establish economic spheres of influence.
Establishing organizations such as the Asian Infrastructure Investment Bank as an alternative to existing incumbents.
Promoting its own indigenous technologies and business models such as mobile payments, e-commerce and high-speed rail, especially in developing regions like Southeast Asia and Africa.
Offering to fill the gap potentially vacated by the U.S. as the current administration works to shred existing alliances, even with our closest natural allies.
As an American, this is beyond frustrating. Unfortunately, referencing my first point above, for the next two to three years (at a minimum), execution of our international trade strategy lies in the hands of the current executive administration.
The only explanation I can come up with as to why it appears to be doing the exact opposite of what I think is a coherent long-term strategy is that the administration is really fighting a very specific, tactical goal: To get re-elected in 2020.
Even for this relatively short-term, tactical goal, it remains to be seen how effective such a strategy will ultimately be. However, long-term damage will be caused no matter the outcome of that election. The only question is the magnitude of the damage and the amount that needs to be repaired by future administrations.
This is a very important situation with major ramifications for decades to come. Unfortunately, it feels like our executive leadership is approaching it from a very narrow set of tactical goals while China’s executive leadership is looking at things from a very strategic, long-term perspective.
Sadly, it feels like we chose a one-legged man to represent us in an ass-kicking contest.
This was originally published on Quora in July 2018.