The opening salvos of the trade war between the US and China were deafening, and while the battle is far from over, a rift between the countries may be beneficial to Beijing in the long term, experts say.
Donald Trump, the US President, fired the first warning earlier this year by taxing key Chinese exports including solar panels, steel and aluminium. The most significant escalation rolled in this week with new tariffs affecting $200 billion (£150 billion) worth of items, effectively taxing half of all goods coming into the US from China.
Beijing has retaliated each time in kind, most recently slapping tariffs of five to ten per cent on $60 billion of American goods. China has pledged to match the US shot-for-shot, and the world’s second largest economy is unlikely to blink anytime soon.
Getting Washington to back down means caving into demands, but publicly bowing to the US would be far too embarrassing for Xi Jinping, China’s president. Still, experts say if Beijing can play its cards right, US trade war pressures could positively support China over the long term by lowering the inter-dependence of the two economies.
“The fact that a quick political decision in either Washington or Beijing could create the conditions that start an economic tailspin in either country is actually a lot more dangerous than onlookers have acknowledged before,” said Abigail Grace, a research associate who focuses on Asia at the Center for New American Security, a think tank.
“From both Trump and Xi, you’ve seen a willingness to engage in more head-to-head economic warfare, and that increases risk overall… that degree of leverage for either is not particularly helpful or productive.”
For instance, the US implemented in April a seven-year ban on exports to Chinese telecom firm ZTE after learning it didn’t abide by a previous settlement agreement for violating trade sanctions. ZTE announced weeks after it planned to “cease major operating activities” because of financial consequences from the ban.
Trump later tweeted he was working with Mr Xi to get ZTE back on its feet; the ban was lifted.
That a Chinese company could be tanked by one decision indicates an unhealthy level of interdependence, Ms Grace said.
Along those lines, she said it would be equally disastrous for the US if China started blocking shipments for items manufactured in the country crucial to American supply chains like parts for Apple's iPhone.
Thus the trade war could “force China to build a more vertically integrated supply chain within the country,” said Damien Ma, an economist and associate director at the Paulson Institute, a think tank. Doing so would allow China control from beginning to end, whether assembling widgets or dealing with more advanced technologies. “That’s a great outcome for China.”
This is not lost on Mr Xi. “Internationally, it’s becoming more and more difficult [for China] to obtain advanced technologies and key know-how,” he said this week. “Unilateralism and trade protectionism are rising, forcing us to adopt a self-reliant approach; this is not a bad thing.”
To properly do this, however, China needs to move away from supporting its wasteful, inefficient state-owned enterprises and support the private sector, said Nicholas Lardy, a China specialist and senior fellow at the Peterson Institute for International Economics.
While that’s easier said than done, Beijing has long known it would have to allow economic growth to mature away from manufacturing and exports and toward services sectors.
This could lead to more jobs created that are a better fit than factory gigs for China’s increasingly savvy middle class and growing numbers of university graduates, Ms Grace said.
Plus, as Mr Trump continues to bellow and bully other nations, China may even be seen as “more politically stable,” Mr Ma said. One potential impact of that, he thinks, is the yuan becoming favored over the dollar as the reliable currency of choice for investments and transactions. China has long wanted to boost the role of its currency on the global stage.
A report released this week by the European Central Bank that simulated the impact of the trade war echoed similar sentiments. It suggested the US would suffer from the brunt of diminished trade and deteriorating business and consumer confidence, whereas China could supplement lost trade with the US by selling to other countries.
China is “giving a real, clear alternative - a choice,” Mr Ma said. “Before, even if you didn’t like the US, there wasn’t much of a choice, but China - even if you don’t like them that much … they are increasingly saying, we are a legitimate choice; we do offer things that you want and need”.