Beijing is now telling the United States that it cannot win a trade war with China.
This contention is breathtakingly bold — and unsupportable. In reality, it is China that cannot prevail.
“Why the U.S. Can’t Win the Trade War With China — and Shouldn’t Try,” argues that the relationship between the renminbi and the dollar means that large trade imbalances in China’s favor will persist.
“At the heart of Sino-American trade tensions is the claim that China’s surging exports are a result of Chinese subsidies,” reads the article published on the Project Syndicate site. “But the driving force behind this glut of cheap goods is a significantly undervalued renminbi, a result of high capital outflows caused by both domestic policies and U.S. restrictions on investment in China.”
“Over a decade ago, China’s trade surplus was largely the result of an undervalued renminbi,” the author points out. “Today’s circumstances are somewhat similar. My research shows that in 2023, the [renminbi] was 16 percent undervalued against the dollar, contributing to China’s high exports and trade surplus.”
The piece notes that “the extent of the [renminbi’s] undervaluation in recent years has also significantly increased.”
As an initial matter, the article’s technical analysis overstates the effect of the currency on deficits. As Francesco Sisci, a Beijing-based scholar of the Appia Institute told me this month, China’s “whole system hinges on suppressing Chinese domestic consumption.”
The Communist Party suppresses consumption in myriad ways, especially by keeping deposit rates low, which allows the banks to provide low-interest loans to manufacturers. That’s effectively a subsidy to factories.
There is far more than cheap funding, of course. Subsidies apply to virtually every link in the supply chain and play a larger role than currency value in keeping the prices of China’s products low.
The argument made in the article attempts to intimidate the U.S. from waging a trade war. Yet the effort is futile because the trade deficit is so large that it is unsustainable from economic and political standpoints. Eventually, whether they want to or not, Americans will have to change the status quo.
“How can a growing trade deficit be sustainable over a long time?” asked Sisci.
Such large imbalances are, in fact, not long for this world. Recent increases in tariff rates announced by the United States on May 14 and the European Union on June 12 show that countries will not allow China to continue to flood markets and decimate local industries.
Alan Tonelson, a Washington, D.C.-area founder of the public policy blog RealityChek, told me that those doubting America’s chances in a trade war “not only overlook huge structural differences in the two economies — the differences have long made China much more dependent on exports and exports to the U.S. than the reverse — they also overlook China’s own assessments, which need to be realistic precisely because of the country’s vulnerability in this struggle.”
Tonelson was referring to research from leading Chinese institutions, such as Peking and Fudan Universities, showing that, after President Donald Trump’s 2018 tariffs Chinese companies exported less to the U.S., reduced hiring, devoted less money to research and development and were less likely to start new businesses.
Moreover, it appears in 2018 that the Chinese central government and exporters absorbed about three-quarters of the cost of Trump’s additional tariffs, which were imposed under the authority of the Trade Act of 1974. They did so primarily through increasing subsidies and lowering profit margins.
“Overall, the damage to China’s gross domestic product from the trade war was three times as high as the hit to the U.S., according to some Chinese economists,” the Wall Street Journal reported.
For some time, China’s technocrats understood that the developed world would soon begin to restrict market access. Therefore, the Chinese have looked to what they call the “Global South.”
Now, however, Global South countries are also raising tariff walls. Turkey, which has been firmly in Beijing’s economic camp in recent years, announced increased tariffs on Chinese EVs this month. Mexico, Chile and Brazil have all raised tariffs on Chinese steel.
The problem for Xi Jinping is that China’s growth model is exhausted, and after rejecting stimulating domestic consumption, he is entirely dependent on increasing exports. Just nobody thinks that his plan will work, however. For the first five months of this year, China’s exports increased only 2.7 percent over the same period last year.
Xi faces another obstacle to export glory. He touts “new quality productive forces,” such as those creating “green” products. Yet almost all of China’s green products are made with forced labor of Uyghurs and other minorities.
The U.S. Tariff Act of 1930, as amplified by the Uyghur Forced Labor Prevention Act of 2021, prohibits the importation of such products made with that labor. So far, the Biden administration has not vigorously enforced this law, but, should it do so, it will cripple China’s export sector.
This American leverage over China illustrates one enduring fact that the Project Syndicate article failed to mention: When it comes to trade wars, trade-surplus countries cannot prevail over trade-deficit countries.
Last year, America’s merchandise trade deficit with China was $279.4 billion.
China, despite what its scholars argue, is fighting a losing battle. After all, what are Chinese Communists going to do? Not trade with America?
Gordon G. Chang is the author of “The Coming Collapse of China” and “China Is Going to War.” Follow him on X @GordonGChang.