Analysis

China's trade war advantage is a huge and increasingly sophisticated economy: Don Pittis

In a trade war, China has advantages similar to those of U.S. during its own growth spurt: high technology and an enormous domestic-led growth potential.

Trump's push for $100B in new tariffs may help make his rival the world's biggest economy

A model presents a creation for a makeup styling show by Mao Geping at China Fashion Week in Beijing on March 26. A sophisticated consumer economy and growing personal income could mean a trade war will help propel the country of 1.4 billion people into first place. (Jason Lee/Reuters)

As U.S. President Donald Trump threatens what many say is an unnecessary trade war with China, he may be creating an even more dangerous and powerful trade competitor.

Rather than cowing China into submission with trade threats, experts who study international trade say, Trump may instead be hastening the day when the Asian giant supersedes the United States as the world's most influential economy.

Trump has instructed the U.S. trade representative to consider slapping $100 billion US in additional tariffs on Chinese goods. The move comes a day after China issued a $50 billion list of U.S. goods, including soybeans and small aircraft, for possible tariff hikes.

There is a certain irony that the conditions that made the United States the world's undisputed economic leader, overcoming its British parent in the late 1800s, may now exist in China.

China's American example 

"So how did our American cousins overtake us so spectacularly and for so long?," asked BBC reporter Iain Haddow in a 2008 capsule history. "Economies of scale and a single market had a lot to do with it."

The fact is, even long after the U.S. separated from Britain following its 1775 rebellion, the U.S. economy depended on the mother country for advanced technology and high-quality manufactured goods.

As late as the U.S. Civil War, the important market for cotton produced in the U.S. South by slave labour remained the fabric mills of the British Midlands. But that had already begun to change.

About the time of the U.S. Civil War, the country's dependence on British exports had begun to wane and a growing domestic economy gobbled up nearly everything it produced. (Randall Hill/Reuters)

But by the end of the war in 1865 not only had the U.S. population grown larger than Britain's, but as Haddow observes, U.S. technology on all fronts had begun to catch up. Soon it had exceeded that of Britain, signalled by the fact that U.S. factories were able to produce more goods with the same amount of labour — an increase in productivity.

And while the U.S. continued to produce and export, its own giant and growing domestic economy gobbled up the vast majority of everything it produced.

Wholly dependent

As Walid Hejazi, professor of international business at the University of Toronto's Rotman School of Business, points out, in some respects history may be repeating itself. 

"Twenty-five years ago, China was wholly dependent on the U.S. and Europe as a market for their exports," says Hejazi.

But in that quarter of a century the Chinese economy has transformed itself at least as much as the U.S. did in a similar period in the 1800s.

Hejazi says a trade war is not something China wants; most analysts agree that tit-for-tat tariffs on both U.S and Chinese goods will create inflation for Chinese consumers while slowing the overall global economy on which China, the U.S. and Canada depend.

Chinese President Xi Jinping shakes hands with Kenyan President Uhuru Kenyatta. China has a 'Belt and Road' plan to diversify its exports. (Uhuru Kenyatta/Reuters)

But in the long run that could well mean the main beneficiary of a full-fledged trade war will be China.

According to Hejazi, even unwanted, Trump's trade war will actually spur on the development of the Chinese economy, making it an even stronger competitor.  

"Given there is a trade war, it can push China into doing things that could really help it over the longer term in terms of diversifying itself into Asia, into other markets, but also developing its domestic economy."

As economic commentator Martin Wolf recently pointed out in London's Financial Times, "consumption is at last becoming the most important driver of demand in the Chinese economy."

Unlike the other so-called Asian tigers such as South Korea and Singapore, as domestic demand grows China can become less dependent on exports. Like the U.S., it will have the advantage of "economies of scale and a single market."

In 25 years China has transformed itself into a technological powerhouse, filing for more patents than any other country. (Reuters)

Canadian China scholar Jia Wang says the country is well on its way to substituting Chinese made goods for high-technology imports, a sore point with Trump, who says China has used joint venture rules to steal U.S. technology.

Wang, deputy director of the China Institute at the University of Alberta, says Beijing still depends on the U.S. for top quality exports such as Boeing's jetliners, but China has begun production of its own aircraft. A trade war, she says, will only encourage China to increase import substitution.

Patent leader

But just as when U.S. innovation overtook Britain by producing things like the cotton gin and assembly line manufacturing, China's surge of investment has made the country a technological powerhouse in its own right. 

"For the past two years at least, China has filed for more patents … than any other country," says Wang.

She says investment in its own intellectual property is one of the reasons the country may be willing to come to terms with the U.S. on what is one of the most sensitive issues in trade talks, patent protection. But it is also a sign the horse may be out of the barn, since in many areas China has become a technological leader.

Tit for tat

If China could begin to replace American goods such as Boeing jets, couldn't the U.S. just do the same thing with the Chinese products it imports? Wang says that could be harder.

"For the U.S. it's the massive amount of consumer goods — the clothing, the shoes, the household electronics, the computers and the phones." 

Wang says the sheer volume of imports of inexpensive Chinese goods purchased by lower-class and poor Americans makes it almost impossible for the U.S. to replace those imports by making them at home.

"If suddenly the price goes up by 50 per cent, can they still afford it? And that's the real danger."

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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