United States vs. China: The (currently commercial) war that is just beginning

BarcelonaAfter weeks of uncertainty over tariffs imposed on a long list of countries—including long-standing trade and diplomatic partners—US President Donald Trump suspended them again for three months, with one exception: China. The US administration sees China as the greatest enemy to defeat and has increased tariffs on Chinese products. up to an unusual 145%, that Beijing has responded with a 125% surcharge..

The trade war between the world's two largest economies has not been well received anywhere. Stock markets reacted with sharp losses when Trump announced the wave of tariffs against most countries in the world, but investors also disliked the fact that he kept them focused on China, so the market declines continued throughout the week. For the moment, then, the fight doesn't seem likely to slow down. If it continues, which of the two powers is better positioned to hold on?

In 2023, the United States had an economy worth $27.2 trillion, almost $10 trillion more than China's $17.8 trillion. However, Trump's main objective has nothing to do with economic activity; rather, it is to end his country's trade deficit with the rest of the world. In his view of the economy, importing more than it exports is a weakness that has had a negative impact on the United States economy, which is declining precisely because free trade with less developed countries cleared the country's industrial fabric beginning in the 1980s, with the rise of globalization. And among the nations that have benefited most from this industrial outflow from the United States to other parts of the planet is China.

This, in his opinion, must be corrected and the way to do it is to impose tariffs to protect existing production and to incentivize foreign companies to return production to North American territory: after all, for example, a car manufactured abroad has to pay a tariff at the border, but if it is manufactured in the country, but if it is manufactured abroad, but if it is manufactured.

In other words, Trump has an "isolationist" policy, says Xavier Ferrer, president of the international economics commission of the College of Economists of Catalonia. "He wants to be the richest country with the richest inhabitants," even if it means giving up the hegemony that the US currently has in all fields, both economic and geopolitical, he adds.

Difficulties in manufacturing

However, after decades of globalization (China joined the World Trade Organization in 2001), Trump's idea of restoring industrial production with tariffs is easier said than done. "A good part of the trade deficit can't be broken overnight," explains Joan Ribas, professor of economics at Pompeu Fabra University and an expert in macroeconomics and economic growth. One of the Republicans' arguments to justify their tariff policy is unfair wage competition: in emerging countries like China, wages are lower than in the US, but this fact isn't the only reason why China has its trade status.

"A small part is labor costs," Ribas explains, but there are other reasons, such as "the ability to produce electronics on a large scale overnight." Thus, China has a technology sector that adapts very easily when manufacturing new products (from phones to clothing), something that has taken many years to achieve and that the US cannot replicate right now. For example, if Apple decides that its mobile phone screens must be different, Chinese factories—and those in other Asian countries—will adapt to them in record time. In the US, factories will have to be built first, because they don't exist now. This explains why Trump has partly reversed himself and has left electronic products tariff-free.

This fact became evident during the pandemic, not only in the United States but in all developed economies, including Europe. "We realized we couldn't manufacture simple things like respirators or masks," recalls the UPF professor.

According to data from the Office of the US Federal Trade Representative, the United States exported goods worth $143.5 billion to China last year, while imports of Chinese products into the United States amounted to $438.9 billion. This puts the US trade deficit (the difference between exports and imports, in this case negative) with the Asian giant at $295.4 billion in 2024.

It's true that this trade deficit decreases if services are added, but not enough: in this area, the balance is in favor of the US, with a surplus of around $32 billion thanks to all kinds of services, from Hollywood movies to courses at American universities, a long series of tertiary sector activities. Therefore, the figure is insufficient to alleviate the deficit in trade of physical products, but it is significant in key sectors that, moreover, are concentrated in coastal states, which vote mostly for Democrats.

The financial deficit

The other side of the trade deficit is the financial deficit. And in this case, it's China with the US. According to economic theory, when a country imports more than it exports, the money is returned in the form of investments. This explains the billions of dollars in US Treasury bonds that China has been accumulating (other exporting countries, such as Japan, also hold large reserves of US debt). In other words, just as Chinese companies sell products to the US market, they also buy assets, especially debt, which allows the US government to finance itself at a much lower cost.

Chinese companies, therefore, "make contracts in English and in dollars," which places both the US currency and Washington's debt securities as "risk-free assets" in international markets, Ribas points out. The global economic system is based on the dollar as the reserve and reference currency. The price the US pays for issuing the currency that everyone uses is these enormous trade deficits. If the situation shifts to a smaller deficit, the dollar's importance could diminish.

In other words, Trump has decided that his country must choose what it wants: whether to maintain an import-based economy—with the political costs this entails for broad sectors of the population and the internal inequalities it creates between, for example, rich service-exporting states and poor deindustrialized states—or to maintain the global economy—which "they themselves have created" since World War II, Ribas recalls—and return to a more closed economy, but without the hegemony given by its currency and the political power it now has. For the moment, it seems to be opting for the second option, but with caution, because the uncertainty and costs of making such a transition are very high, as the stock markets have shown this week.

Beijing's strength

In Beijing, however, they don't want change: "China is not a democracy, it's horrible, but it has more common sense because the current system benefits it," says Ribas. In this sense, the opening of Asian economies throughout the 20th century through "orienting growth toward production" and exports is "the historic experiment in escaping the greatest poverty in the world." First came Japan, followed by the so-called four tigers (South Korea, Taiwan, Singapore and Hong Kong) and then China along with other countries such as Indonesia, Malaysia, the Philippines and Vietnam.

In this sense, the Chinese experiment has been so successful that it explains the growing competition with the US for global hegemony, including economic ones. "China has done too well," but currently "cannot grow as much" because it is "on the frontier" between developing economies and more advanced ones, such as those of Europe and the United States. From growth rates above 10% fifteen or twenty years ago, Xi Jinping's government is currently satisfied with exceeding 4%.

"It is true that there are also many millions of poor people, but in China there are between 200 and 300 million people richer than the average Belgian," Ribas recalls, explaining the country's level of development. In other words, the middle class is now real and, with a population of 1.3 billion, it is very large in absolute terms. And in some high-value, research-intensive sectors, such as microchips, renewable energy, and electric cars, Beijing is gaining ground in the US and the European Union.

China, in fact, enters the trade war with Trump "in a much more stable position," says Ferrer. Despite dysfunctions in the housing market and the significant inequalities (regional and income) that still exist in the country, Beijing "is more prepared to enter a trade war that it doesn't want, but that it believes it can win," he adds.

Taiwan: The Elephant in the Room

However, all of these considerations could be blown out of the water if China decides to invade Taiwan, a possibility that most military analysts believe is almost certain to happen in the coming years—or even months—absent a radical shift in Beijing’s foreign policy.

For the time being, European governments are keeping mum about what would happen if Xi Jinping were to emulate what Russian President Vladimir Putin did in Ukraine and launch a full-scale military offensive against a territory he claims as an intrinsic and historical part of the Chinese nation. The people of Taiwan, which has a democratic political system, have almost no interest in living under the control of Beijing’s authoritarian government, and while the island is not recognized as a state by most countries in the world (not even its allies, like the US), it is independent. de facto thanks, above all, to the economic and military support of the United States for decades. Until Trump's arrival, all US governments had seen Taiwan as a key ally in maintaining their influence in Southeast Asia. Now, the Republican has attacked Taipei with tariffs, as he has done with the rest of its traditional allies, from Europe to Mexico, including Japan, Australia, and Canada.

"If they invade Taiwan, it's already uncharted waters," says Ribas. However, the risk is there, because Xi Jinping, like other leaders such as Vladimir Putin, Benjamin Netanyahu, and Trump himself, have a very marked "imperialist vision," notes Ferrer.

In the event of a possible invasion, it remains to be seen how Trump reacts: if he remains faithful to his isolationist policy, the US may not respond, may do so timidly, or may use the island as a bargaining chip in negotiations with Beijing. If, on the other hand, Washington is forced to respond militarily to halt Chinese expansion in this struggle for global hegemony, the tariff crisis will become the least of the country's concerns. It would be the final chapter in a war that, for now, exists only economically.