"There are no winners in a trade war or a tariff war," wrote Xi Jinping this week. If he’s talking about China, he’s absolutely right. Across the board, the Chinese will suffer.
In America, the story will be different. When the dust settles on President Donald Trump’s tariffs, there will be 340.1 million people much better off.
For more than four decades, China’s regime has been implementing predatory and criminal trade practices. For various reasons, the U.S. and other countries have let matters slide.
Trump in his first term, in 2018, fired a warning shot with his 25% tariffs. Unfortunately, the Chinese regime did not take the hint. This month he raised the general tariff rate on China’s goods to 145%.
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Trump’s trade actions could not have come at a worse time for Xi.
As an initial matter, his economy is stumbling. It cannot be growing at the 5.4% pace reported Wednesday for the first quarter of this year. Price data for March – the Consumer Price Index was negative for the second-straight month and the Producer Price Index was negative for the 30th-straight month – indicates the country has entered a deflationary spiral. That phenomena suggests the economy is now contracting and will do so for some time.
And it’s going to get worse. Xi Jinping, despite what his technocrats say, does not want consumption to form the foundation of the Chinese economy. In fact, consumption’s share of gross domestic product – an abnormally low 38% last year – is now falling. In these circumstances, Xi’s only way to rescue an increasingly grim situation is to export more.
Yet Trump’s elevated tariffs close off the U.S. market to most Chinese goods. The U.S. accounts for more than a third of global consumer spending.
Worse for Xi Jinping, Trump’s tariffs are helping end the fast globalization that has marked the post-Cold War period.
"Due to many reasons, the world has been deglobalizing for years," trade expert Alan Tonelson told Fox News. "Now, the Trump Liberation Day tariffs are greatly speeding up the process, and further threatening the well-being of the People’s Republic of China and other export-led economies."
As Tonelson, who blogs on trade at RealityChek suggests, the world is de-integrating. "The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades," wrote Larry Fink in his March 24, 2022, letter to BlackRock shareholders. The world’s largest asset manager – BlackRock has $11.6 trillion under management – suggested the Ukraine war killed globalization because globalization had already been weakened by the COVID pandemic, which had lessened connectivity among nations, among companies and among people.
In this deglobalizing world, other countries will not allow China to flood their markets with goods the Chinese would have otherwise sold to America. Those markets are not large enough to absorb those goods and, in any event, they will not permit China to decimate their local industries.
China will be hurt. Even now, export factories in southern China, with nothing in their order books, are closing. Workers have begun to return to hometowns, many to subsist on farms.
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The downturn in the export sector is occurring while the country is essentially having its 2008. In 2008, Hu Jintao, Xi’s predecessor, decided to avoid a downturn by embarking on what was then the biggest stimulus program in history. In the process, China took on an enormous amount of debt. Today, China’s total-country-debt-to-GDP ratio could be as high as an unsustainable 375%.
As a result, there have been for four years a series of high-profile debt defaults, especially in the property sector. Prices of flats in China have tumbled, a social stability issue: Approximately 70% of household wealth is in property.
And if all of this were not bad enough, Trump has picked this moment to begin challenging China’s mighty export sector with tariffs.
The obvious course of action for Xi Jinping would be to pick up the phone to call 1600 Pennsylvania Avenue. He has, however, made it clear that he won’t be doing that.
"China wants to make a deal," Trump said last Wednesday. "They just don’t know how quite to go about it."
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No Xi Jinping doesn’t. And it’s not hard to figure out why something so easy is in fact so hard.
Xi has configured the Chinese political system so that only the most hostile answers are considered acceptable. As a result, he cannot now back down or make concessions for fear that will lead to a challenge to his leadership. There are already signs of discontent with his rule, especially in the top ranks of the military.
Xi remains intransigent. "China does not flinch from any unjust suppression," he proclaimed during his meeting with visiting Spanish Prime Minister Pedro Sanchez on April 11.
So Xi has boxed himself in. For him, there are no good outcomes. If he does not compromise, the Chinese economy will fail. If he compromises, he will fail.
For China’s willful leader, the choice is easy: He will not initiate talks with Trump. China, as a consequence, will bear the consequences.
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