US trade hawks seize their chance to reset China relations

Latest tariffs look more like the start of a cold war than a trade war

Rana Foroohar

It would be easy to see the latest $200bn round of US tariffs against China, set to go into effect on Monday, as just another provocative shot fired off by an American president in need of overseas distractions at a time when the legal noose seems to be tightening around his own neck.

But that would be wrong. In fact, far from being an ill-advised and hasty policy decision emanating solely from Donald Trump’s White House, this latest tariff round represents something much more dangerous and lasting: a true reset of economic and political relations between the US and China, and the beginning of something that looks more like a cold war than a trade war.

This reset is supported by factions stretching well beyond Mr Trump, on both the left and the right. That is what makes it so serious. The president is indeed single-mindedly obsessed with the US-China trade deficit, but he’s also the sort of person who will cut a deal for personal gain, and it is hard to imagine that the Chinese could not come up with something that would make him flip to a more moderate position.

Not so the economic hawks within the administration, like Mr Trump’s trade adviser, Peter Navarro, and Robert Lighthizer, the US trade representative, who are playing an entirely different game. They believe it is in the long-term national interest for the US to decouple economically from China.

There are plenty of people in the Pentagon, as well as some in the labour faction of the progressive left, who agree. Many of these people will be in positions of power long after this president is gone. They have different agendas, but coalesce around the idea that the US and China are in a long-term strategic rivalry, and that, as a result, US trade policy and national security policy should no longer be separated.

That marks a fundamental shift for global business. The economic hawks have little sympathy for multinational chief executives who complain that the latest round of tariffs is broad and deep enough to create real inflationary pressure or force them to raise prices. Indeed, they see these companies as traitors who have naively sold out for short-term gain in a country that does not share fundamental western values, and will ultimately not allow them equal market access.

And in the current economic and political environment, they have taken control of the narrative. Hawks can cite Chinese intellectual property theft, human rights violations, and aggression in the South China Seas as proof of their position.

“You hear a lot of them talk about China as a ‘revisionist’ power, like the Soviet Union — a purveyor of a completely different system,” says Arthur Kroeber, managing director of Gavekal Dragonomics, a China-focused consultancy. That vision may be overblown, but it is an easier sell than defending status quo economic globalisation to an American public who are increasingly anxious about China or robots (or Chinese-made robots) taking their jobs.

The hawks have also been quite clever so far about crafting tariffs that will minimise the impact on consumer prices while also penalising companies that have shifted the most sensitive supply chains to China. Think of chipmaker Qualcomm (which has found itself on the wrong side of nationalism in both countries) or tech group Cisco, which lobbied unsuccessfully to have its routers and switches, which power smart cities in China as well as the US and Europe, left off the latest tariffs list.

A white paper recommending some US supply chain insourcing, prepared by the Department of Defense and likely to be released next month by the White House, may provide guidance on where the Trump administration will take its nascent attempt at industry policy. But it is clear that not all companies will suffer equally in a US-China cold war.

Traditional consumer businesses — Starbucks, say, or Walmart — will be able to maintain a Chinese market presence more easily than high-tech companies trafficking in sensitive data, or any business working in strategic areas such as mapping or autonomous vehicles. Apple, Facebook, Microsoft, Google and any number of other US multinationals doing business in China may have tough choices to make in the future if the trade war escalates into a cold war in which they can no longer turn a blind eye to the national concerns of the states where they operate.

The pain may be felt in China first, since the country is still much more export dependent than the US. But over the mid- to longer-term, US companies have more work to do in terms of insourcing supply chains.

It is both politically and logistically unfeasible to become Fortress America, insourcing everything, which means that the Trump administration must build alliances with trade partners in places including Europe if it wants to be able to execute an American industrial policy — not a strength of this president.

Business faces more existential challenges. What does it mean for a company like, for example, Google to launch a censored search engine in China, while its parent company, Alphabet, refuses to send its chief executive, Larry Page, to testify in the Senate on Russian meddling in US tech platforms? Can corporate leaders be above politics? They used to like to think so. Today, that seems like wishful thinking.

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