Big war and future of free trade
By Gholamreza Mansouri
International
affairs expert
The trade war between the United States and China is the largest trade conflict the world has ever seen. The combined GDP of the US and China constitutes over 40 percent of the global economy, indicating that this conflict could have far-reaching repercussions worldwide.
Trump previously raised tariffs on Chinese goods to 104 percent, and after China retaliated by hiking tariffs on US goods to 84 percent, Trump further escalated tariffs on Chinese imports to 125 percent.
One of the consequences of this back-and-forth exchange of tariffs is the disruption of the economic relationship not only between these two nations but also globally.
After World War II, free trade emerged as the central tenet and organizing principle of the global market. It was this principle that shaped the outcome of the Cold War between the two blocs of the US and the Soviet Union. In this model of cooperation, governments are expected to refrain from intervening in the markets, allowing free trade to chart the course.
Free trade has historically fueled increased production and elevated exports. The more a country can export, the greater its economic strength and prosperity. Since the 1970s, China has adopted an open-door policy that has allowed it to achieve remarkable economic growth through unparalleled hard work. After five decades, China’s economy has surpassed that of the US. In this context, higher production and exports have been fundamental principles for the Chinese economy. Chinese President Xi Jinping has acknowledged this by stating, “For over 70 years, China’s development has relied on self-reliance and hard work — never on handouts from others, and it is not afraid of any unjust suppression.”
This economic logic has been embraced in many regions globally, particularly in the United States. The reason for China’s substantial economy, which supplies affordable consumer goods to the world due to its low production costs, is that the American consumer market is especially keen to utilize these Chinese products because of the high domestic production costs.
Before 2018, the economic relationship between China and the US operated seamlessly. Global crises, including the US invasions of Afghanistan and Iraq, as well as subsequent involvement in the Middle East due to the rise of Islamic movements and its support for Israel’s actions against Palestine, presented a unique opportunity for China to enhance its export strategy.
During his first presidential term, Trump highlighted these issues and declared his main focus as countering China’s economic expansion. Another important point raised was Trump’s belief that the Chinese government, instead of following free-market principles, manipulates economic factors to secure greater advantages.
What do statistics indicate?
Statistics show that China’s economic dependency on exports is greater than that of the US. In simpler terms, high tariffs on imports would yield greater profits for the United States. In the current international trading regime, some countries, like the United States, constantly import more than they export, while others, such as China and Germany, consistently export more than they import. As stated in a Carnegie report, “The United States, as a deficit country, experiences the opposite of what surplus countries experience. The current trade system increases the capacity of American households to consume, while reducing the competitiveness of American manufacturing. As a result, US producers are effectively forced to subsidize US consumers, which has hollowed out the American manufacturing industry. The US share of global manufacturing fell from 15 percent to 10 percent over the period 2000 to 2021.”
Trump’s argument is that the principles of free trade, which are correctly implemented in the United States, have become a tool for China to dominate the US economy.
By imposing heavy tariffs, Trump has shown that he can no longer tolerate such a situation. Now it remains to be seen how China will respond. The first comments from the Chinese president after the imposition of retaliatory tariffs were that there would be “no winners.” He warned President Trump that China is “not afraid” — and shortly after his statement, Beijing announced reciprocal tariffs of 125% on all US imports.
Xi is well aware that the US market is China’s largest economic dynamic, making it difficult for China to walk away from it easily. Experts believe that China’s strength lies in its dynamic and export-oriented economy. If this strength is undermined, China is likely to pursue three scenarios. First, it would retaliate against US tariffs. Second, it would explore new markets for its exports. Finally, it may shift its economic strategy from one centered on exports to one that relies on domestic consumption.
If China were to adopt the third scenario, considering the high production costs in the US, the world might see a transition towards a new economic model. This model could either result in a true liberalization of global trade (as Trump desires), with governments stepping back from market involvement, or, due to reduced trust in the principles of free trade, governments might pursue strategies that contradict free trade ideals on a global scale. For example, they might prioritize domestic production and consumption over reliance on exports.