Trump tariff fails to rein in China

China's trade surplus topped $1 tn this year despite US tariff pressure, data released on Monday showed. The two countries have reached a fragile truce in their trade war, and Beijing's strategy of diversifying its exports and moving into advanced manufacturing is strengthening its negotiating position. The Trump administration will have to up the ante if it wants China to back down from its investment-led growth strategy. In his second term, Trump does not have time on his side, but the protectionist rhetoric will not die down. Despite G20 economies putting in place industrial policies, China's share of global exports is poised to climb. This is not a welcome development in a deglobalising world economy.

The US risks isolating itself and allowing China to drive global trade. The financial markets will have to adapt, with consequences for the dollar as the primary reserve currency. Instead of Washington making Beijing see reason over under-consumption, clarity could dawn on the US to rein in overspending. The two must reach common ground and, even then, will face some degree of decoupling. Whether US production or Chinese consumption ramps up to levels desired by their respective policymakers, the outcome will still be a fractured trade order.

The rest of the world will have to adjust. Chinese exports less reliant on the US will limit their ability to grow. The effects on income inequality are adverse because exports provide the clearest pathway for emerging economies. The US model of globalisation has been beneficial for the developing world. A China-led model may not be so. There will be some gains to world trade from supply chain diversification, but these could be offset by rising Chinese concentration of exports. The worry is that China is gaining share in a rising market. Strong measures like an all-out trade war may not be able to stop the juggernaut. It will be left to China's political leadership to bring about a course correction.