The Advantages of China in the U.S. Trade War

Daniel Fasnacht, Linkedin, 4 October 2018

The U.S.-China trade war is heating up since the new tariffs of another US$200 billion on Chinese goods. Though Donald Trump seems to do everything right to fix the trade deficit, trade is not a zero-sum game and, actually, not a game at all. If it were, China would be in advantage to play the long game as the global economic power is inevitably shifting to China, surpassing the U.S. economy by late 2020s.

Higher tariffs are discouraging domestic consumption

We know that free trade brings benefits to all countries. Lower tariffs on exports increase the quantity of exports that in turn boosts jobs and economic growth. The world’s largest firms by market value – Apple, Amazon, Alphabet, Microsoft, and Facebook – would all benefit from economies of scale. The more trade and the more competition from abroad, the higher the incentives for U.S. firms to cut costs and increase efficiency, which results in lower prices for consumers and a greater choice of goods.

Though China has achieved its surpluses mainly in computers, electronics and manufacturing, there are many other sectors impacted by higher tariffs. Overall the trade war will reduce the purchasing power of U.S. households, hence significantly impacting the GDP.

U.S. exporters are losing market share

The U.S., historically a trading nation with wide networks across continents and sectors, is challenged by the emerging ecosystems from China. Its legacy is protecting neither its rust belt nor the financial or technology sectors. In a global and interconnected world where sharing information and knowledge and co-innovating with clients, social communities and many other players are the new reality, protectionism would be a controversial route. If protectionism rose, there would be many opportunities for China to expand, for instance, in Africa, South America, Southeast Asia, Russia and Europe.

Though, the actual trade deficit with China reached over US$220 billion, bilateral trade between the two nations is merely 3.2% of the global trade volume. Also note that China’s government is reshaping global trade with the One Belt, One Road initiative, affecting 70 countries, corresponding to two thirds of the world’s population and 35% of global trade worth over US$ 1 trillion.

That is why for the coming decades Chinese exporters are generating growth and new wealth, rather than companies in North America or Europe.

The trade war is holding back investments

The trade war prevents U.S. investment banks and asset managers to explore the new wealth markets. Besides having the largest tech and internet firms, financial products from Blackrock, Vanguard and State Street among others will hardly find the way to the next generation of rich clients in Asia.

Ant Financials’ Yu’e Bao money market fund claims assets under management of US$ 250 billion and became the largest in just five years, overtaking JPMorgan’s U.S. government money market fund issued in 1993. Ant is already worth more than Goldman Sachs with a valuation of US$ 150 billion. Apple Pay with around 90 million users worldwide will be soon attacked by Alipay – Alibaba’s online payment platform – which ranks first in the world with more than 530 million users – mainly in China.

Chinese ecosystems are advanced

Cross-sector ecosystems build on the trend to buy, sell, deliver and pay globally, using digital platforms as the entry point. Many firms are on the fast track to materialize the social behavior of people using their mobile devices for everything they do. Expanding their ecosystem will increase global competitiveness. While gaining experiences and success in their region, firms like Alibaba Group and Tencent are about to transform their domestic and organic growth into rapid global expansion.

We must acknowledge that China’s wide-ranging ecosystems have become vital incubators for innovation and growth. The time when Chinese firms copied products and were driven by exporting cheap goods is over. They opened up, became agile innovators and created a system that transcend organizational boundaries and sectors and performs without borders.

Being a modern and consumption-driven economy, their ecosystems dominated by several giant firms are penetrating consumption scenarios in daily life with hundreds of millions of clients, expanding scale and scope across the globe.

Collaboration beyond the state level

Free trade means openness, innovation and making sustainable policies with an ecosystem mindset. Demonstrating power, instead of fostering technology, knowledge and education is counterproductive on the long-run for an economy. Investing in good trade relationships and collaboration would be a better strategy to engage with the rest of the world to create prosperity.

Trump will be history most likely by 2025 and his trade war will not have changed anything but disadvantages for U.S. firms to negotiate and collaborate in the new world order.

Jack Ma, the founder of Alibaba noted, trade is to prevent wars and a trade war will take 30 years to solve with many losers. Let’s put it this way: the more trade – the more peaceful our world will be, bearing in mind the current tensions.