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Blame Trump? Democrats also want action on China

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The threat of an all-out trade war between the United States (US) and China has gripped the financial markets. If Trump makes good on his threat to impose a 25% tariff on all imports from China and the Middle Kingdom strikes back, then that would indeed be bad news for the world economy.

We estimate that a full-blown trade war would shave nearly 2%-points off of US GDP growth over five years. The impact on China would be almost three times that.

How likely is this scenario? To understand the risks requires insight into both US and Chinese domestic politics.

There are at least two things that are often underappreciated and they increase the risk of escalation. First, Trump’s concerns about China are shared by most Americans, including Democrats. Second, for Chinese leaders the image of being bullied by a foreign power might be more damaging than a trade war.

The political spectrum is highly polarised in the US, but not on the issue of China. Americans are concerned about the economic strength of China according to surveys by Pew and Gallup.

Democratic presidential candidates disagree with Trump on tactics, but most agree that China needs to be confronted. (A partial exception is Joe Biden, who has been criticized by fellow democrats for being soft on China.)

Therefore, being seen as tough on China might be more attractive for Trump going into the election than reaching a deal that Democrats could use to frame him as weak. It also means that trade tensions are not going away after the elections.

If the trade war escalates further, the Chinese economy would suffer more. Ironically, the more overtly the US plays this leverage the more difficult it becomes for Chinese leaders to acquiesce.

At the establishment of the People’s Republic of China Mao Zedong declared the end of the “Century of Humiliation” in which China had been bullied into “unequal treaties” that included concessions on trade and territory.

A Communist Party that claims to have restored China’s self-determination cannot openly cave in to Trump’s demands. Asking the Chinese population to resist US bullying fits better into this long-told narrative.

To make that point state media in China have started referring to the Korean War or, as they call it, the “War to Resist America and Aid Korea”. Chinese battle deaths were more than three times that of the US, but the war still ended in a stalemate.

Chinese leaders are signalling that they won’t be bullied and American leaders are being encouraged to be tough on China. The markets are right to be worried about a painful trade conflict.

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Author(s)
Menno Middeldorp
Chief Economist, Director Knowledge Development Rabobank Rabobank KEO
+31 6 8389 9872

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