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The US-China trade war has escalated to new heights. This week Donald Trump focused his protectionist zeal firmly on his longtime economic foe. On Wednesday, the US president paused “reciprocal” tariffs — above a 10 per cent flat rate — on all trade partners bar Beijing. US imports from China now face total duties as high as 145 per cent — retribution for its retaliation against the White House’s April 2 tariff announcements. Trump’s team will also soon enter tariff negotiations with nations supporting Chinese supply chains. On Friday, Beijing returned fire, increasing its tariffs to 125 per cent. The world’s largest exporter and largest consumer market are now, in effect, walled off from each other.
The US president’s next moves remain, as ever, uncertain. For China, the upheaval of the global trading system leaves it with a strategic choice over how to shape its economic policy. In the near term, losing access to US markets and the rising risk of a global recession will erode its external demand. As it is, domestic consumption is still languishing from a real estate crunch. President Xi Jinping also wants technological production to underpin its long-run growth model, which leaves the country vulnerable to Trump’s rambunctious approach to international trade.
China could take advantage of the turmoil. The White House’s readiness to impose hefty duties and cause chaos in financial markets has sapped US credibility with trading partners. Trump has given Beijing a motive and opportunity to integrate more with those nations. After all, most countries still believe in the benefits of trade and China is already the top trading partner for many countries worldwide.
But Beijing needs to read the room. Right now nations are on alert for cheap Chinese products previously bound for America being diverted into their markets. This builds on growing concerns that the Chinese export machine is crushing domestic industries, from mining to automaking, across the world. Last year China’s global trade surplus in goods hit a record $1tn. The US is far from alone in accusing Beijing of using unfair tactics. Since becoming a member of the World Trade Organization in 2001, allegations raised against China include dumping, unfair subsidies, and weak intellectual property protections.
If China ignores these concerns it risks a backlash in more countries, not just Trump’s America. That would stymie the nation’s growth prospects, broaden global protectionism, and slow growth worldwide. Instead, Beijing should be more engaged in assuaging trade partners’ concerns, particularly those of the EU, the world’s largest trading bloc. European Commission President Ursula von der Leyen told the FT that China’s Prime Minister Li Qiang had promised to stimulate domestic consumption to avoid flooding European markets with Chinese products. Beijing ought to abide by that. Relying on exports is not sustainable for its long-run trading relations or its own economic development.
China cannot afford to write off the US market either. Although it began decoupling from America in Trump’s first term, the US consumer will still be an important source of demand for Chinese products. It is true that Beijing has leverage in the trade war: it has significant holdings of US Treasuries and it could clamp down on US businesses operating in China. But continuing the tit-for-tat cycle of economic sanctions with America is not in either country’s interests, or those of the global economy. Both sides need to find an off-ramp and negotiate their way out of this crisis.
Trump’s chaotic agenda and focus on trade deficits has put international concerns with China’s overproduction into the spotlight. As the global trading order shifts, its own prosperity also depends on adjusting its economic model.