Meet the New Trade War. It is not the same as the Old Trade War

With U.S.-China trade deal goals increasingly out of reach, another round of trade conflict looks near. But things could play out quite differently this time.

By guest author Nathaniel Taplin from Wall Street Journal

Caption and graphic courtesy by Wall Street Journal

Investors in Asia woke up Thursday to an old, familiar and very unwelcome sound: President Trump saber-rattling on trade.

The U.S. President on May 6, 2020, said that he was “watching closely” to see if China was living up to trade-deal commitments to purchase large quantities of American goods, and could know one way or another within weeks. That was followed May 7, 2020, by Chinese trade data showing a surge of exports in April and falling imports. In yuan terms, imports from the U.S. were down 3% in the first four months of the year compared with the same period last year, according to China’s customs administration, not exactly what President Trump wants to see.

The stage seems set for a renewed flare-up in trade tensions. But the drama could play out differently this time.

The new aggressive rhetoric from the Trump administration is part of a broader push to paint China as the villain ahead of the U.S. election. But it also represents a tacit admission that current trade policy has failed. The trade war of 2018 and 2019 did damage China, but not enough to elicit meaningful changes to its mercantilist industrial policy.

One reason was that China’s currency fell sharply. But another, arguably even more important reason is that trying to pressure the world’s largest trading power without buy-in from allies is a losing game. China’s exports to the U.S. fell by close to USD 60 billion in 2019 according to Chinese data, but exports to everywhere else rose by about USD 70 billion as importers elsewhere took advantage of a glut of cheap Chinese goods. Overall Chinese exports still eked out a 0.5 % gain. The phase one trade deal presents a similar problem: China can try to massively increase purchases of U.S. goods, but that risks pushing up prices and damaging demand for American wares elsewhere. Now the coronavirus has made executing the already deeply flawed trade deal nearly impossible.

As a result, it is no surprise to see the Trump administration toying with a more multilateral approach. Secretary of State Mike Pompeo last week hinted at a broad attempt to restructure supply chains with the help of friendly nations including Japan, Australia, India, South Korea and Vietnam. Reuters reports that the U.S. is pushing for a “Global Prosperity Network” of trusted partners including companies and civil society. U.S. allies like France and Australia are expressing deep reservations both over China’s handling of the coronavirus outbreak and excessive dependence on China-centric supply chains.

The big winners from all this look like other Asian and Pacific nations who could find their bargaining power with both China and the U.S. enhanced. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership—the successor agreement to the now-defunct Trans-Pacific Partnership—could take on greater importance and expand membership. Strengthening supply chains within Asia but outside of China is one obvious way to reduce the risks of overdependence on China without overtly antagonising it.

China’s manufacturing prowess and huge domestic market mean most businesses aren’t going anywhere: but the logic of supply chain diversification is looking more and more inexorable. More tariffs may or may not be imminent, but the U.S. and others seem determined that the precrisis supply chain system cannot go on.