Tariff war: 'We are in the second China shock'

What does Donald Trump hope to achieve with his tariff war – economically and geopolitically?

I think he clearly wants several different things with his tariffs. He wants revenue so he can push through tax cuts. He wants to bring investment and production back to the United States. He wants some significant level of reshoring, bringing investment and manufacturing back to the United States. But he also just likes the process. He likes tariffs. He likes the intimidation. He likes the drama. He likes being able to stand up, make an announcement and watch the markets flip. And that's why it won't just stop now.

He wanted to see if he could fulfill all of the objectives simultaneously. The problem is that they will likely fulfil none of these objectives entirely successfully. If you wanted to bring investment back to the United States, you'd have to go much more sectoral and targeted. If you wanted just to do deals, you would have to methodically target individual countries. Due to the market's reaction, he had to withdraw many of the measures.

What does Trump want to achieve with the tariffs against China?

This was not a well-thought-out strategy. There was clearly no intention of focusing all of these efforts on China. This was a face-saving way of coming up with a kind of new strategy after the old one failed – and after only a few days. If you wanted a China-centric trade strategy, you would also have gone about it completely differently. Trump has maneuvered himself into this China-centric escalation.

Neither side is willing to compromise. A meeting also proves difficult. Xi's advisors want to avoid a public humiliation like the one Volodymyr Zelenskiy had to endure. Are we heading toward a rough decoupling?

Yes. It's been very difficult to agree, not even just a meeting between the two sides, but even a phone call. On the Chinese side, I think there had been quite a level of openness, from cutting deals to having a relatively early meeting at the top level. Trump himself had been very keen on an early meeting with Xi Jinping, but there's just been a real gap between the two sides in terms of the kind of conditions under which such a meeting could take place. The Chinese wanted a well-prepared meeting, and that was not the approach of the Trump side. The latter increased the pressure on the Chinese to force them to the negotiating table. But Xi does not want to be pressured by the USA.

Now we are seeing the drastically escalated version of this approach from the US side. So, it's very unlikely that the first moves will come from the Chinese side because that would be seen as a sign of weakness. If there is movement, it must come from the US side. It was clear from the very beginning that we would see face-saving moves from the US to pull back, given the impact on the US economy and US consumers if the measures had held.

We already see this with the exceptions for smartphones, computers and other product groups, which account for almost a quarter of US imports from China.

I expect that tariff levels from the US on China will still land at a high level but not at this embargo scale, which even the US policymakers who believe in a US-China decoupling never intended as the way to get there.

Why does Trump think he can win this war?

I think he has this view on all the tariffs. As the USA has a trade deficit, it can impose tariffs that other countries cannot respond to with counter-tariffs to the same extent. In addition, they can put more pressure on some countries because of their dependence on the USA in security matters. They believe that China is in a vulnerable position because of the weakness of its economy. I think this is a significant miscalculation. They have also not considered the impact of China stopping a substantial proportion of its rare earth exports. China has been preparing for this for a long time. They have strengthened their self-reliance and prepared the population for this scenario. I think they have a much better chance of coping with it.

There is currently a lot of talk about the China shock. How big was China's role in the US deindustrialization?

It is certainly the case that Trump is looking further back. He's looking at the hollowing out of the US automotive sector in Detroit in the 1970s and 1980s, he's looking at Japan and Korea. Part of it simply has to do with the rise of very capable competitors, particularly from Asia, and part of it has to do with automation. But there certainly was a Chinese shock component, which was particularly noticeable in the years from 2001 to 2010. China's accession to the WTO did really hit a number of sectors, and some parts of the country in the US never recovered. Now, there's more talk of China shock because we are already in the middle of what I think can reasonably be called the second China shock.

What exactly do you mean by that?

We see overcapacity across a range of sectors and a push for dominance at almost every level of the value chain. This is a risk not just for the United States but for all advanced industrialized countries. We are entering a period in which China could destroy entire industrial sectors.

What could a decoupling of the USA and China mean for the rest of the world, especially Europe?

Europe is already dealing with Chinese overcapacity. And because the Chinese government has started for the first time in a long time allowing the renminbi to slide in value. This is going to mean more cost pressures. And everyone who has been navigating the kind of China shock impact in all these sectors will be hit harder because the US market is, in the near term, essentially pulled out of the picture. I believe there is a real willingness on the European side to take protective measures. This is going to be an issue for a large number of other economies as well. And it's going to be a real question on how people collectively cope with that.

But I think the problem at the moment is this is such a huge level of disruption for the global economy. It's such a level of disruption to supply chains. No one has been able to really game this out on the scale that we are now seeing. And so I think that's still probably going to be the hope that we end up in a less extreme place on this in the next few months on the Chinese side as well. This is only a kind of negotiating phase, even if the two sides aren't really negotiating.

Andrew Small is Senior Transatlantic Fellow at the Indo-Pacific Program of the German Marshall Fund in Berlin. He is the author of "The Rupture", also titled "No Limits", about the transformation of European and American policy toward China.