 |
| (Photo: Illustration: Lazaro Gamio/Axios) |
“Who do I call when I want to talk to Europe?” Kissinger once quipped, highlighting the internal divides of the old continent. Today, he'd have a similar problem calling America.
In recent weeks, President Biden has yielded the spotlight to Trump who has talked with foreign leaders like President Macron and Ukraine's Zelensky, while commenting on Syrian turmoil before Biden. After Trump's meetings with Canadian PM Justin Trudeau and Mexico's president, Claudia Sheinbaum, trade and immigration policy are already out of Biden's hands.
Since 2021, Biden has missed opportunities to reset Trump's policies. Once again, he could have used the current administration transition period to warn Americans of Trump's impending revolution, which risks disrupting domestic politics and U.S.-China ties.
Trump's triple inflation risking China ties
If the 2021-23 inflation surge in America killed Biden's second term by instigating widespread voter frustration, Trump's economic agenda is likely to pose a triple threat to U.S. price stability.
The expected broad tax cuts will compound the already-huge federal deficits and debt, thereby exacerbating inflation. The possible effort to reduce the independence of the Federal Reserve would further foster inflation as well.
The second likely source of inflation would be Trump's pledge to initiate the “massive” deportation process, alongside other restrictive immigration policies. Not only would that effort divide Americans, reinforce xenophobia and white nationalism, it would likely disrupt U.S. labor markets, which rely on foreign-born workers, particularly in construction, agriculture and hospitality.
Additionally, such policies would encourage another ugly wave of anti-Asian sentiment that America witnessed with the Trump administration in2020, and that Biden's protectionism has continued to inflame. It would undermine Chinese immigrant talent in science, technology, engineering, and mathematics (STEM). Darkly reminiscent of the Chinese Exclusion Act of 1882, America First translates to deporting the Chinese first. The Trump White House needs to scapegoat an “enemy” for its policy failures.
Third, Trump seeks to integrate the barely-regulated cryptocurrencies into America's financial and fiscal systems thus opening the henhouse to crypto-foxes. It is a self-interested policy of the Trump oligarchs. The unregulated crypto-sphere, if fully executed, could cause high volatility in the financial markets. By potentially facilitating illicit activities such as money laundering, dark financing and diminishing the Fed's influence over the economy, it could disrupt the dollar hegemony in the world economy.
Hence, too, the president-elect's recent threat of a 100% tariff on BRICS countries if they pursue creating new currency. In reality, the 34-country bloc is more interested in trading with their own local currencies than a bloc-wide currency. But Trump's economic coercion is a taste of things to come.
Trade and technology wars
Since American hegemony can no longer rely on U.S. dominance in the increasingly multipolar world economy, Washington relies increasingly on trade wars, sanctions and geopolitics to retain that supremacy.
If the triple inflation threat associated with the Trump White House will materialize, the Fed will slow its rate cuts or return to tightening. That will push up the dollar, which could destabilize international currencies, including the Chinese yuan. When trade tensions take off, economic uncertainty and market volatility will increase worldwide, including the Chinese stock market. As investors' risk appetite decreases, markets face downward pressures.
The Trump administration will exploit sanctions to decouple bilateral high-tech ties with China, especially by targeting semiconductors, artificial intelligence, quantum technology, possibly advanced manufacturing and biotech. Such measures increase costs in high-tech over time but won't immediately affect daily living costs in the U.S.
Hence the attractiveness of such measures to Trump's trade authorities, including the new trade representative Jamieson Greer, a protégé of ex-trade czar Robert Lighthizer. Greer used to represent U.S. Steel in a lawsuit against China. Rewarded for his loyalty in the Capitol attack four years ago, the Sinophobic Peter Navarro will be his new senior counselor for trade and manufacturing.
Although the tough-and-rough Lighthizer managed to sell tariffs to Wall Street during Trump's first administration, he has now been played out. Treasury Secretary pick Scott Bessent, Commerce Secretary selection Howard Lutnick and Kevin Hassett, the new head of the National Economic Council, are all seen as business-friendly establishment figures. But each supports tariff and tech wars as well.
Unlike Lighthizer who saw tariffs as across-the-board duties to resolve America's chronic trade deficits, the Wall Streeters are more likely to use tariffs “strategically” on certain products and as a cudgel to coerce other nations to accede to Trump's demands.
China's counter-measures
As demonstrated by the just concluded Central Economic Work Conference, China has been preparing for Trump's trade wars. In priorities for economic policy in 2025, policymakers emphasize the need to maintain stable growth, employment and commodity prices through steps like higher deficit-to-GDP ratios, rate cuts and the issuance of ultra-long-term special treasury bonds.
During the first Trump administration, China was the primary tariff target. Now Trump says he will enact a 25% tariff on all imports from Canada and Mexico on his first day in office, and raise tariffs on goods from China by 10%. He has advocated 60-100% tariffs on imports from China and 10-20% tariffs on imports from all other countries, including allies. The “spread effect” could dilute the adverse impact on China. Moreover, like seven years ago, U.S. importers have been busy trying to frontload their China purchases to reduce the impact of the impending tariffs. The proposed tariff effect is more likely to materialize in 2025-26.
Second, the Chinese economy has changed. In 2017, it was more reliant on U.S. exports. For two decades, China was the top exporter of goods into the U.S. and even in 2022 bilateral trade was still at a record high. Now Mexico has overtaken China's role. Today, the U.S. attracts less than 15% of Chinese exports, whereas ASEAN and the EU account for over 16 and less than 15%, respectively. The EU will seek to emulate the U.S. tariffs, but prefers targeted rather than across-the-board tariffs.
Third, China was more dependent on exports in 2017. Today, China is a world-class science leader and benefits from more diversified innovation. I am currently touring in Guangdong's Greater Bay Area. In the “Chinese Silicon Valley,” research and development (R&D) as GDP is over 2.4%; higher than in France. In Shenzhen, it is over 6.5%; more than in any country.
True, China is still developing manufacturing processes for advanced semiconductors; a key target of U.S. export controls. But now it is leading in electric vehicles, automotive software and lithium battery technology. Moreover, China's LNG shipbuilding and high-speed rail industries are on track to hit targets. It produces the world's most efficient and lowest-cost solar panels, along with innovative drugs.
Hardball or dialogue
Recently, the Politburo, China's top decision-making body, opted to respond more actively to economic downturns, boost demand and stabilize the housing market. Fiscal easing is augmented by a “moderately loose” monetary policy next year. The decision to foster “unconventional” countercyclical adjustments is the greatest policy shift since 2008.
However, China too can play the tit-for-tat trade games, even if reluctantly. On Dec. 2, Washington added more than 100 Chinese companies to a restricted trade list and banned the sale to China of some of the fastest semiconductors and the equipment to make them. China responded by banning U.S. exports of rare minerals - gallium, germanium, and antimony - and other items.
It was the first time China included a broad ban on so-called transshipment in a government regulation on exports. U.S. sources estimate the likely total cost from disruptions to supplies of gallium and germanium alone at more than $3 billion. Beijing also began an antimonopoly investigation into Nvidia, the U.S. giant dominating the world market for the advanced chips needed for AI.
Does this mean China has opted for those geopolitical divides in the global economy that Trump and Biden have supported in the past seven years? No. It is a signal to the incoming Trump administration that unilateralism has no future in a multipolar global economy. It is still a move to begin dialogue - unless the Trump White House chooses otherwise.
