Donald Trump‘s return to the White House will fundamentally change US foreign policy. This is also likely to have an impact on relations between the USA and China. The relationship between the two countries has been extremely tense for a long time. Jürgen Matthes from the Institute of German Economy (IW) assumes in an interview with ntv.de that that the Trade war with China will significantly intensify. Trump will carry out his threat to massively increase tariffs. But it is questionable whether Trump’s policies will be successful, said the head of the Teams for International Economic Policy: “The Chinese can come up with a lot when it comes to bureaucratic arbitrariness.”
ntv.de: Donald Trump will be US President again. Chinese President Xi Jinping also congratulated him on his election victory, a little later than other heads of government. In his phone call with Trump, he warned against disputes with China and called on both countries to work together. Was this a warning or is Xi afraid of Trump’s second term?
Jürgen Matthes: Probably something in between. It is clear to Xi that the US and China are in a hegemonic conflict: who is the most important power in the 21st century? China says: We are the rising power and will eventually replace the USA. But of course the USA doesn’t want to give up first place. It’s not just about economic success, but also about military strength and even the concern that this could lead to a new Cold War or even, in the worst case, a third world war.
In his first term, Trump took a strong anti-China course. What are the chances of better cooperation between China and the US?
Not good. Trump has announced that he will raise tariffs on all Chinese imports, not just a portion of the product range, as he did in his first term. The average tariff rate that the US currently imposes on Chinese imports is around 20 percent. The average tariff will probably eventually rise to 60 or even 100 percent.
Trump threatened further tariffs on Chinese products during the election campaign. Do you think he will carry out this threat?
There is much to suggest that Trump will make good on his tariff threat. And not just towards China, but also towards other countries and therefore also the EU. He always referred to himself as “Tariff Man.” He wants to reduce the USA’s high trade deficit with tariffs. The USA imports significantly more goods than it exports. The underlying concern is that a trade deficit will ultimately cost American jobs. This thinking is deeply rooted in him and his advisors.
Jürgen Matthes is head of the International Economic Policy, Financial and Real Estate Markets Cluster at the German Economic Institute (IW).
So with high tariffs, would Trump have the power to disrupt or even destroy the entire global economy?
Of course, such a trade war would have negative global effects. If the economy in the USA, here and in China is doing worse, then of course that also means that world trade will come under the wheels and global economic performance will develop weaker. Now that global economic growth is slowly recovering, such a scenario would be untimely. Trump would almost certainly harm the global economy.
Will the trade war with China get significantly worse compared to Trump’s first term in office?
Yes, it will extend to a wider range of products. The US trade deficit with China is particularly large. But war always involves both sides. China retaliated during Trump’s first term in office, including increasing or imposing tariffs on US products for the first time. That is likely to happen this time too. But if China retaliates, Trump could go even further with punitive tariffs.
Whether Trump’s policies will be successful is questionable for various reasons. The US dollar is likely to appreciate. And as long as the US spends more than it saves, the trade deficit will not disappear. There are also attempts to work around it. Chinese products come to the USA via detours: for example via Vietnam and other Asian countries, sometimes also via Mexico. This will be a thorn in the side of the Trump administration. There is therefore a risk that the trade war against China will expand and other countries such as Mexico will also be affected.
However, the USA is dependent on products and imports from China, for example on Chinese solar cells or rare earths. Can this dependency be broken just like that?
This won’t happen overnight, even if the Biden administration has already worked towards it with subsidies for US production. The tariffs make imports more expensive and come at the expense of US consumers. If the USA is dependent on a product and it becomes more expensive, then in case of doubt you simply have to pay more. This is the great concern of those who are critical of Donald Trump’s plans. They fear an increase in inflation in the USA. The inflation issue probably cost the Democrats the election. And although Trump has called Democrats failures for allowing high inflation, his policies will end up fueling inflation again.
How much power and ability does China have to put pressure on the USA? Many US companies like Tesla have factories there and also sell many products to China.
When it comes to bureaucratic arbitrariness, the Chinese can come up with a lot of ideas: setting the tax authorities on their heels or delaying approvals are two popular examples of putting obstacles in the way of companies. H&M and others suffered even worse because they no longer wanted to do business in Xinjiang, where Uyghurs are forced to do forced labor. A campaign against H&M was waged on social media. As a result, sales in China have collapsed. The range of possible obstacles that China can put in the way of companies is quite large.
The situation today is different than it was a few years ago because the Chinese economy is weakening. To what extent can China afford such restrictions?
The Chinese’s room for maneuver has certainly not increased. On the other hand, it is also difficult to imagine that they would accept such an increase in tariffs without retaliation. The Chinese are most likely to impose punitive tariffs on US goods where the Chinese economy is no longer dependent on American companies in China. There is the possibility of buying more from Chinese companies – or from other foreign companies.
In the long term, more in-house production would be in line with the Chinese goals in order to make themselves more independent of the world market. Not just from imports, but also from foreign companies. We are also increasingly seeing this with European companies. When they no longer have the latest technologies and instead produce something that China can now do itself, the business environment sometimes suddenly becomes more difficult.
Can Trump 2.0 also be good for China? Do you also see positive effects?
If Trump carries out his threat and increases tariffs on all imports, including European imports, 10 or 20 percent are being discussed, then he will also start a trade war with the EU. Europe currently has the problem of orienting itself between the two great powers. In terms of values, we are clearly Americans; economically we are also much more closely linked to the USA, but China is now also economically strong. Because we are significantly more dependent on China than the USA, Europe and Germany do not want to follow the USA’s tough course on China. You want to get along well with both economic powers. The more Trump steps on the Europeans’ toes with his tariffs, the more he drives them into the Chinese camp. This benefits China. Given its economic weakness, China has just started rolling out the red carpet for foreign companies whose products are still needed.
There is another important aspect: that is the question of how the USA deals with Taiwan. Unlike Biden, Trump might not jump to Taiwan’s defense militarily. Then Taiwan would be easier prey for China. This could play a major role in global politics.
Trump had announced that he would impose much higher tariffs if China attacked Taiwan. Is this perhaps an indication that Trump would also defend Taiwan?
Possibly, Trump’s position on Taiwan is currently unclear. But it is questionable whether China would be deterred by even higher US tariffs. The Taiwan question is so important for China that political aspects are likely to be more important than the manageable economic damage caused by even higher tariffs. Because if the tariffs have already increased immensely, as Trump announced, the impact of a further increase should no longer be as great.
With Jürgen Matthes said Caroline Nurse. The conversation has been shortened and smoothed for better clarity. You can do it completely in the ntv podcast “Learned something again” listen.
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