What if China declared a protectionist trade war on the US and the West?

China has perhaps more to lose than the US but in economic wartime, national interest and economic security concerns can triumph over reason
Besides, China has a secret weapon: it can devalue the yuan

Relations between the US and China have become so bad lately that, short of going to war (a possibility that cannot be ruled out), it might seem the situation cannot get any worse. Yet what if China were to declare a trade and wider economic war against the US and others?

This scenario was suggested to me recently by a prominent Chinese academic teaching in Tokyo. Whether it was just his speculation or done with the intent that, as a journalist, I might draw attention to the threat, I do not know. Either way, it is a possibility that bears closer examination.

If the already worrying deceleration in the growth of world trade were to turn into an actual decline as big hitters like China joined the zero-sum game of protectionism, it would affect global growth and employment, and invite recession, thus breeding economic (or even real) confrontation.

Until quite recently, it would have been almost unthinkable that China would risk shooting itself in the foot by declaring a trade war on the United States – the country to which it exports the most goods and which is a major source of imports – or on other nations.

But the world is changing rapidly and the idea of maximising economic advantage is being overshadowed by a growing obsession with “economic security“. Global trade growth is slowing, a trend that applies especially to US-China trade.

If trade does become further weaponised and China copies the protectionist example of the US and other major economic partners, Beijing does have a secret weapon to deploy. It could devalue the yuan sharply, some analysts suggest.

Veteran Japan analyst Jesper Koll, for example, has suggested China could devalue the yuan by 20-30 per cent this year to counter currency depreciation elsewhere. While Beijing might once have hesitated to take such action, it would have stronger reason to do so in an economic war.

Global trade is becoming so disrupted that almost anything seems possible as major powers – the US, especially – reach for tariffs, sanctions or any other weapon they can use to protect themselves, risking major economic harm to others.

A recent International Monetary Fund report noted that, as part of a backlash against free trade that has been building for almost a decade, “some of the world’s largest economies have made choices to halt further international integration and, in several instances, to embrace protectionist or nationalist policies”.

The US, as the world’s largest importer of goods, has the most power to use trade as a weapon and, indeed, has been doing so since former president Donald Trump launched his trade wars against China and others. His successor Joe Biden has taken the assault to new heights, or rather, depths.

But China, as the world’s second largest importer, also has real power to retaliate using trade and other economic barriers. Two can play the same game. As the IMF said in this month’s finance and development report, “Protectionism could make the world less resilient, more unequal, and more conflict-prone.”

Just as war is an extension of politics, as Prussian general Carl von Clausewitz once noted, so real wars can be an extension of trade wars, especially when a nation feels as cornered as China may be. All’s fair in love and war, it is said, and there’s little love lost now between China and the US.

Just which of these two – and other major trading nations – would lose most from an intensification of global trade wars, and which economic sectors would lose most from such hostile encounters, is a subject worthy of more intensive study as sentiment and on-the-ground conditions continue to deteriorate.

The value of world trade as a proportion of global gross domestic product has more than doubled since 1970 to reach almost 57 per cent by 2021, according to World Bank data, and top trading nations, such as China, the US, Canada, Britain and India, as well as the European Union, all stand to lose the most from intensified trade wars.

China perhaps has more to lose than the US from taking a more aggressive approach to trade actions – exports of goods and services account for some 20 per cent of China’s GDP versus around 11 per cent for the US.

But here again, what applies in economic peacetime does not necessarily apply in economic wartime. When so-called national interest tends to take precedence, and when economic security concerns are uppermost in policymakers’ minds, rationale often triumphs over reason.

US efforts to rally friends with ‘shared values’ against China could backfire

Mainland China’s top trading partners (apart from the US) include South Korea, Japan, Taiwan, Hong Kong (which acts largely as a transshipment point to other countries) and Vietnam. But more vulnerable to a China counterstroke on trade could be European nations and Australia, which are perceived as US allies.

It is hard to calculate the potential fallout from an intensified trade confrontation between China, the US and others. The top exports of the US include petroleum and petroleum products, cars and integrated circuits, and its biggest markets for them include China, Japan and South Korea.

Mainland China’s top exports, meanwhile, include broadcasting equipment, integrated circuits, office machinery and telephones, which are exported mainly to the US, Hong Kong, Japan, South Korea and Germany. All that can be said with certainty is that China’s entry into trade wars would be highly disruptive and maybe disastrous.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs