Navigating war

Recent trade wars have the potential to turn into the real deal if you ask former Australian prime minister Kevin Rudd. In an opinion piece, Rudd explains why China may not be so intimidated by US tariffs as President Trump expects, and political psychology plays just as big a part as trade numbers.

The traded sector represents 38% of Chinese GDP to 27% of US GDP. If Trump were to escalate the current dispute to cover the entire US$650bn in bilateral trade, the world would certainly have an economic problem on its hands, according to Rudd. Once growth numbers declined, it wouldn’t be long before sentiment follows, dragging the economy down with it too.

In the US, Rudd says there’s an idea that there’s a limit to the impact of retaliatory tariffs as China only exports nearly US$500bn to the US, and the US exports only US$150bn in return. Furthermore, China’s overall economy is more trade-exposed and the country’s GDP is smaller than the US. However, Rudd says it would be a mistake to underestimate China’s resilience and ability to hit back.

While it would be messy, China could impose tariffs on any US components used in global supply chains, even if the final country of origin for the export isn’t the US. China could give other countries a year to sort out alternative, non-US sources of supply. This would potential escalate the pain for the US well beyond bilateral trade.

In the US, the consensus seems to be that Chinese President Xi Jinping would back down if he’s forced into a corner, however, Xi’s response to internal political challenges indicates he is more inclined to destroy opposition than back down. Xi has effectively made himself president for life and could easily promote an anti-US narrative to steel his population for the fight.

Rudd points out the world has routinely failed to discern when the tipping points come between public disagreement, failed diplomacy, political crisis, failed crisis management, limited conflict and then more general war. Serious diplomatic intervention is required to head off an escalation that would damage the world economy

Meanwhile, US companies are still placing their bets on China. Starbucks has inked a deal with Alibaba to deliver drinks and food in China, with 2,000 stores planned across 30 Chinese cities by the end of the year. The alliance suggests that while Alibaba may be scaling back its US footprint as a result of Trump’s anti-China rhetoric, co-founder Jack Ma has no problem getting into bed with American corporations. Trump isn’t scaring off US companies from doubling down inside China – Starbucks still expects China to surpass it home market.

The path for the China-US conflict could go in a number of directions from here. One thing is certain, President Trump’s focus on winning and losing on bilateral trade flows is a huge over-simplification. Trade is not between countries, it’s actually between companies.