Editor’s Note: The following piece originally appeared at Arc Digital. It is adapted here with permission.
From the highest vantage point, here’s America’s grand strategy: Defend and expand the U.S.-led international order. The system’s alliances, trade agreements, and institutions entrench America’s position at the center, giving the United States considerable influence over world affairs.
The more other countries benefit from the American-led system, the less likely they are to oppose it — and the more likely they are to join the United States against those who try to disrupt it, whether rogue states (Saddam’s Iraq, Kim’s North Korea) or terrorists (al-Qaeda, ISIS).
This remains the principle benefit of formal alliances with the U.K., France, Germany, Canada, Japan, South Korea, Australia, and more. It’s the best defense of economic globalization. It’s why the United Nations, as frustrating as it can be, is worth supporting.
The world gets international security and economic growth. America gets global dominance (and economic growth). All participating countries benefit, but none as much as the United States.
Donald Trump is throwing that away. And China’s taking advantage.
Retreating from Asia
On July 1, ministers from 16 Asian and Oceanic nations met in Tokyo to create the world’s biggest trade bloc. The Regional Comprehensive Economic Partnership (RCEP) includes Japan, South Korea, Australia, India, and China. But not the United States.
The RCEP would cover a third of the global economy, and almost half the world’s population. China’s GDP is more than Japan’s, India’s, South Korea’s, and Australia’s combined. As the largest member, it’ll end up having the most influence.
At the post-meeting press conference, Japanese trade minister Hiroshige Seko said, “As protectionism concerns increase globally, it’s important that the Asian region flies the flag of free trade.”
Online they call that a subtweet.
The cause of those protectionism concerns is President Trump. The United States is raising tariffs on adversaries and allies, including China, Europe, and Canada. They’re all retaliating, targeting American products from soy to motorcycles.
Trump claims this pressure is necessary because current trade arrangements take advantage of the United States. For example, he frequently points to Canada’s high tariffs on dairy products.
In one of his first acts as president, Trump withdrew from the Trans-Pacific Partnership (TPP). That twelve-country trade deal would’ve covered almost 40 percent of the global economy, making it larger than the RCEP. It also lowered Canadian dairy tariffs.
Trump claimed he withdrew from the TPP on behalf of American workers. As with any trade agreement, it’s likely some workers would’ve been hurt. However, the deal would’ve helped some businesses by lowering the cost of manufacturing inputs, and benefited everyone by lowering the cost of consumer goods.
Most likely, the TPP would have resulted in economic losses for some but modest gains for the country as a whole. The real benefit was geopolitical.
The agreement included Japan, Malaysia, Brunei, Singapore, Vietnam, Australia, New Zealand, Canada, Mexico, Peru, Chile, and the United States. But not China. As the largest member, the U.S. would’ve had the most influence.
The other eleven TPP countries are moving forward without the U.S. Instead of tying Asia-Pacific economies to the United States, facilitating a China-containment strategy, America forfeited considerable long-term influence in one of the world’s most important regions.
Seven of the TPP countries are also in the RCEP. China is developing economic relationships while America is retreating from them.
How to Manage China’s Rise
China presents the biggest challenge for the grand strategy of defending and expanding the U.S.-led international order.
With its population and path of economic development, China is the one country with the potential to challenge America’s global primacy.
Historically, rising and established powers end up in conflict. For example, Germany unified in the late 19th century, presenting a challenge to British supremacy, which is among the causes of World War I. And the treaty that ended that war suppressed German power, which helped cause World War II.
With its population and path of economic development, China is the one country with the potential to challenge America’s global primacy. Theoretically, plugging China into the American-led system gives China a path to rise peacefully while ensuring continued American hegemony. If China gains within the system, it becomes a stakeholder, rather than a disrupter.
The great successes of this theory are Germany and Japan. Instead of demanding reparations, as the Allies did after World War I, the United States spent resources rebuilding its World War II adversaries. Both are now staunch allies.
The first big move to integrate China into the American-led order was a resounding success. In 1972, Nixon recognized the government in Beijing — which replaced Taiwan as the representative of China on the U.N. Security Council — splitting Beijing from Moscow and encouraging China’s shift toward capitalism. That put America in a better position to win the Cold War, and positioned China as a competitor rather than a Soviet-style enemy.
The second big move is more controversial. In 2001, the U.S. supported China’s entry into the World Trade Organization (WTO). China allowed foreign investment, liberalized its service sector, lowered tariffs, and added some intellectual-property protections. In return, the U.S., Europe, Japan, and others reduced barriers to Chinese trade.
The upside for America’s grand strategy: China agreed to play by economic rules it did not design, and became more invested in the American-led international system. The U.S., the European Union, Japan, Canada, Mexico, and Guatemala have brought disputes against China to the WTO, and China has changed its behavior in response, often in mutually agreed upon settlements without requiring a formal ruling.
The big downside is facilitating China’s rapid, export-driven growth. As countries become more dependent on trade with China, China’s political influence grows. And with more money, China can afford more military spending. In 2001, China’s military budget was under $20 billion. It’s increased every year, officially up to $175 billion in 2017 (independent analysts estimate it’s really $228 billion).
Plugging China into the global economy encourages China to support the system, but at the expense of facilitating China’s rise within it. Unlike Germany and Japan, China is large enough that it could eventually overtake the United States. Economically, that should happen around 2030, when China’s GDP likely surpasses America’s. Militarily it won’t happen for a while. Diplomatically is an open question.
Is China Cheating?
Trump and other critics argue that China’s taking advantage of the system. The president primarily points to the trade deficit, which has increased since China joined the WTO. American exports to China have increased, but Chinese exports to America have increased faster.
However, trade deficits aren’t inherently problematic. Unlike budget deficits, they’re not debt that has to be paid off — they’re how much we buy minus how much we sell. For example, you have a trade deficit with your grocery store and a trade surplus with your employer. The United States has a trade deficit with China and a trade surplus with Brazil.
To close the gap, Trump wants China to buy American. But Americans could also decrease the trade deficit by buying fewer Chinese products. They don’t want to.
More generally, Trump’s accusing China of unfair trade practices.
One good example is intellectual property. While IP protections have improved since 2001, China still allows quite a bit of piracy. More concerning: Government operatives have hacked American businesses, helping Chinese state-owned companies with industrial espionage.
The president also cites Chinese tariffs and currency manipulation, though neither is currently a serious problem.
In 2016, China’s average tariff was 3.5 percent, compared with 1.6 percent for the United States. But in 2015, China’s rate was 4.5 percent. In 2001, before China joined the WTO, its average tariff was 14.1 percent. The year after, it dropped to 7.7 percent. If reducing Chinese tariffs is the goal, admitting China to the WTO is achieving it.
In the 1990s and 2000s, China bought large amounts of U.S. treasury bonds, thereby weakening its currency to boost exports. However, starting in 2012, China became a net seller of U.S. Treasuries. With a growing middle class and advancing manufacturing base, China now sees greater appeal in a strong currency.
Additionally, a strong, stable yuan could eventually help China undermine a main source of America’s economic power: the dollar as the world’s reserve currency.
Trade Wars Aren’t Easy to Win
Here’s the best argument for a trade war: China engages in unfair practices, including intellectual-property theft. With economic development, it’s easier to catch up than maintain a lead, and China’s population is more than four times America’s. China won’t reform without pressure, and the United States will never have as much leverage as it has now.
In 2017, Chinese exports to the United States topped $430 billion, accounting for 19 percent of China’s exports and almost 4 percent of its GDP. They need access to U.S. markets, and their concessions will make for fairer trade going forward.
However, winning concessions from China will be difficult. They have a strong incentive not to give in to bullying — it could easily invite more — and the government controls the economy. As a democracy, the United States is more vulnerable to targeted retaliation. For example, China raised levies on Harley-Davidson motorcycles, targeting an iconic American company headquartered in Wisconsin, a swing state.
But if we’re launching a trade war with China, it’s not a good idea to antagonize allies at the same time.
If the United States finalized the TPP, it would be in a better position to confront China. About 15 percent of China’s exports go to TPP countries. Another 10.1 percent go to U.S. allies South Korea, Germany, and the United Kingdom. Combined, that’s 25.1 percent of Chinese exports, more than the 19 percent that go to America.
Instead of rallying a united front, Trump’s picking fights, imposing tariffs on Japan, South Korea, Canada, and Europe. Fighting a trade war on all fronts, the United States is isolating itself.
This comes on top of Trump’s fighting with other leaders at the G-7 summit in June. The NATO summit scheduled for July 11 will likely see further friction.
Applied Business Strategy
Now the president is threatening his biggest move yet: withdrawing from the World Trade Organization. He can’t do it himself, because membership was ratified by the Senate, but the White House reportedly drafted a bill giving Trump the power to pull out of the WTO.
When Trump burned bridges with one contractor, partner, or creditor, he could always find another. But there are fewer players in the Great Game, and they can cooperate with each other.
It’s unlikely that bill gets through Congress. But Trump has been imposing tariffs under a national-security exemption, most of which are hard to justify. (How are Canadian dairy tariffs a national-security threat?) Congress, which the Constitution grants the power to regulate trade, has done nothing to curb Trump’s abuse of the national-security exemption. If he declares that the U.S. will no longer follow WTO rules, there’s a decent chance Congress lets it go.
But withdrawal would be a mistake. The WTO is an excellent example of the American grand strategy at work. The United States submits some authority to the institution, but it entrenches American hegemony and benefits the U.S. economy.
For example, the United States has brought the most complaints to the WTO, winning 87 percent, which is above average. So is America’s 25 percent win rate on complaints brought against the United States.
Withdrawing would create chaos in the global trading system, weakening the rules-based order and overlapping partnerships that perpetuate American power. And it’s not clear what the United States would gain, besides the ability to impose more tariffs.
As a businessman, Trump would sometimes stiff contractors, with the idea that he could endure the pain of a lawsuit more than they could. With Trump’s lawyers piling up motions, the contractors’ legal costs rose, and they often would settle for less than Trump owed.
That’s what he’s trying to do with the trade wars: cause mutual pain under the assumption he can tolerate it longer.
But the strategy doesn’t translate. When Trump burned bridges with one contractor, partner, or creditor, he could always find another. But there are fewer players in the Great Game, and they can cooperate with each other.
Chinese president Xi Jinping understands that, which is why he’s pursuing the Belt and Road Initiative, an ambitious effort to build economic partnerships throughout Asia and Africa and into Europe. Under his leadership, China created the Asian Infrastructure Investment Bank, setting up a potential rival to the World Bank and International Monetary Fund, which are dominated by the U.S. and Europe. And now he’s pursuing the world’s biggest trading bloc with the 16-country RCEP.
This is basically a version of America’s successful international grand strategy. Or at least what America’s international strategy used to be, before President Trump decided to risk the relationships America built over 70 years in pursuit of relatively small economic gains.
Even if he wins, the geopolitical damage will probably leave the United States weaker. And China stronger.