What Does a Second Term of Mr. Trump Mean for China?

What would a second term of Trump administration mean for China? Would it be much harsher than the first one or would there be a minor compromise? It looks difficult to predict the exactness of Trump’s approach. However, looking at the chronology of recent past and Ukraine war, more of trade tensions and political uncertainty shall be evolving between the two.

On political front though Trump’s agenda is not very clear, yet established wisdom suggests there will be a conscious effort by Trump to restrict the movement of China in the Asia-Pacific region. USA and Europe are quite aware that China is on an expansive mode and would like to influence part of Asia-Pacific region through its aggressive military buildup and economic and trade linkages. Its outward FDI and establishment of firms in ASEAN countries such as Vietnam and Thailand in the aftermath of supply chain disruptions due to Covid-19 are strong indicators of its aggressive posture to establish its hegemony in the region. Its recent closeness to Russia and North Korea and its investments in Nepal, Pakistan and support to Maldives are all pointers towards creating a China-centric dominance in Asia-Pacific. Chinese Premier Li Qiang’s visit to Adelaide in June 2024 marks also a significant step in China-Australia relation and proposes to strengthen the region by rejuvenating China-Australia free trade agreement signed in 2015.

To counter such move, USA has also formed cordial alliances with Japan, Australia and India. What is expected of Trump to politically harass China in this time of uncertainty is to revoke China’s Permanent Normal Trade Relations (PNTR) clause which would lead to reversal of China’s WTO membership and would turn China an inward closed economy. PNTR is a legal status currently entitling China to enjoy the same favourable trade terms offered to other WTO members, specifically lower, nondiscriminatory tariffs. Revocation of PNTR for American trade & industry would mean immediate tariff increases, thereby drastically increasing the cost of goods, intermediate products and inputs imported by the US from China. Presidential address especially among Republican Party lawmakers have aroused such sentiments and can gain momentum in months to come. The likelihood of revocation of PNTR is currently low as the broad potential fallout of such decision can be huge on US economy. Yet, this could open the door for imposing some additional trade measures, visa problems etc. and largely curtail China’s accessibility to US market.

Such decisions are politically motivated. Jury is still out; looks like there is a mixed reaction from political parties, lawmakers, trade & industry broadly suggesting an element of political ambiguity currently prevalent in USA regarding such issue.

However, Trump’s economic approach to China is hardly ambiguous. Trump believes both are competitors, but America is ‘First’ and must win. In this regard, Trump and Republicans are not different from Biden and Democrats. USA under Biden continued with Trump’s tariffs and intensified its focus on high tech sector such as solar, EV, batteries, etc. in order to curtail China’s dominance in world market. With such head-start in high-tech sector by China, USA’s current and future leadership is worried that its national security will be compromised unless it develops its own advanced high-tech sector. Its inability will further damage its prospects for attaining green transition and securing future renewable energy.

In his second presidential run, Trump proposes to increase tariffs by 10% on every import, a 60% tariff on all Chinese imports, and a 100% tariff on all cars made outside the US- directly targeting Chinese companies like BYD, NIO, etc. This would also hit USA’s motor vehicle manufacturing and other transport equipment manufacturing including ships, boats, aircraft, and railway locomotives as they are Chinese imports’ dependent and such restrictions would be a drag on USA’s economy. In addition, even if USA administration wants to import such intermediate inputs including specialized intermediates from any other location would find it difficult or costly to source. This disturbs observers as such sweeping tariffs, along with Trump’s other tax proposals, could cost USA dearly, a burden that would be borne disproportionately by lower-income households, who largely rely on cheap imports.

Keen followers of this presidential election therefore may wonder whether such economic headwinds would prevent the US from imposing such high tariffs only to ensure Trump returning to White House and in the process losing its customs revenue. The answer could be in negative because why the government would forge ahead with a policy agenda that would harm average Americans.

Such trade distortion practices have also been adopted in the past when USA and Japan were caught in a trade war in early 1980s. Demand for American consumers to drive smaller cars after the oil crisis of 1970s led Japanese automakers to flood US markets. Imports of such auto and semiconductors became a threat, and forced USA to raise tariffs substantially to stop Japanese imports. The Republican administration of President Ronald Reagan had imposed 100% tariffs on $300 million worth of Japanese imports in 1987. However, Democrats under President Jimmy Carter had allowed the Japanese automakers to build factories in USA.

The two trade wars are somewhat similar. Back then, like now, the US government sought to secure America’s economic supremacy, an agenda that received popular support across the political spectrum, despite fat net losses to American consumers and firms. The tariffs imposed by USA in both cases violated free and fair-trade rules set by GATT and its successor, WTO.

The two trade wars convey significant differences. Japan depended entirely on the US for its military defense in the 1980s. American establishment was therefore confident that any pressure tactics will yield favourable result, whereas no such assurance is expected from China.

China’s ability to respond to US demands is also limited by its domestic concerns. China is in the middle-income category of nations having per capita much lower i.e. about 17% of USA level. Chinese government has invested heavily in human resource to lift people out of poverty whereas Japan and USA were almost at same level and are industrially advanced nations.

At a time of immense political uncertainty, it’s clear that the US government will continue with its aggressive stance toward China for which overwhelming support exists. It was unlike Japan during the 1980s which had a bipartisan support. Japan conceded to most of America’s demands, China may not be willing. Leaders of both countries need to recognize each other’s goals and limitations if they want to avoid economic losses for their people.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>