According to Martin Wolf, chief economics commentator at the Financial Times, London, China is likely to come out better than America in their escalating trade war. And it might be advisable for countries such as India to walk the middle path, like it has done in the Russia-Ukraine conflict, he said in an interview with Anil Sasi.
Edited excerpts:
When was inaugurated in January, the general impression was that he might pander to the MAGA base for a while and then get back to business. There was a feeling that all this tariff talk could just be transitory. Now it does not seem like that. How do you read the situation?
I think what’s changed between his first term as president and the second term is that the last time he didn’t know what to do. He was almost a classic example of the famous story of the dog that catches the car and then doesn’t know what to do after that. He became president the first time around, and I don’t think he really expected to become president. He didn’t know who to appoint… The area where he was probably most radical was trade policy even then, but he had a US trade representative Robert Lighthizer, who was very professional. He was very conservative, and I disagree with him on most things, but he was a professional trade negotiator.
So (now) MAGA moved from being a slogan to being a cult, and there were a lot of people, many of them associated with the Heritage Foundation, who developed a detailed plan for what they would do when they were in government. A lot of that is happening so it’s a very different administration with a man at the head who feels both vindicated and vengeful.
I think that’s sort of the description of what we’ve got and there are very few people in this administration, I think Scott Bessant is probably one of them, Marco Rubio is another, who would be plausible candidates to be in the administration of a Republican president before Trump himself. Nobody else in this administration, as far as I can see, would have been appointed, even by Trump 1.0, let alone George W. Bush or George Herbert Walker Bush.
So this is a new administration. Now, tariff is the one thing he really feels (strongly) about, thinks about, and he feels that all this should be rectified by having bilateral balances.
China move to issue a fairly open threat that countries that are negotiating for a deal of some sort with the US will be slapped with some sort of retaliatory tariffs of their own. Now this is an escalation of the kind that was probably not expected earlier. Are we in some way now reaching a point of no return?
Well I think it’s very plausible. I mean, it seems to me the (most) probable outcome… With Europe interestingly in the middle. There are three major trading powers. The EU is not of course a major power, but it’s a very much a major trading power and it looks to me as though it’s certain that what the US will say to all the other trading partners is we won’t impose these reciprocal tariffs on you that we have temporarily waived if you put a prohibitive tariff on China.
I assume that’s what’s going on. And completely predictably, China is saying, well, if you do that, we’re going to retaliate against you. Of course they are! So, the countries will have to choose, it seems to me, whether they’re going to be in a bloc with the US or in a bloc with China. And that’s going to be a very, very difficult choice for many countries who have extremely important trading relations with both. And more importantly, relations for the Europeans, for example, America is its principal ally; for Southeast Asian countries well China’s right there next door; it’s a huge military power rising power they have to consider not only their trade relations with China, which are very very important to them, but the potential geopolitical consequences of being seen by China as an enemy and they have to wonder, well, will America protect us, under Trump… So it seems very clear to me that there are some very, very difficult choices and I would assume if this is what’s happening, and I haven’t seen absolutely explicit stories on this, but I think it’s pretty plausible that this sort of choice will also apply, in some respects, to India.
Now, I assume India will choose America for obvious reasons, but it will still be a very difficult choice. And having outright hostile relations with China in economics, as well as on security issues, the Himalayas and so forth, will be a very big issue, I imagine, for India, it’s a terrible situation, and should never have been allowed to happen. But this looks to me what is going on. And the whole host of countries, Australia, for example, are going to find all this very, very difficult to handle.
Now if we were to discount the ham-handed manner in which the Trump administration has pursued this tariff agenda, doesn’t the world economy not have a China problem: the way Chinese manufacturing had been allowed to grow unabated for over two decades. At what level is some of what Trump is doing now justified in some manner, if this onslaught were solely an attack only on China?
Well, it’s what I suppose is what he (Trump) tried to do the last time. And he did play hardball with China. He did get a deal, which they obviously concluded that it didn’t work.
It didn’t work partly because, of course, Trump lost power and so the Chinese felt that they didn’t need to worry about this anymore. My view, for what it’s worth, is that it was perfectly legitimate to form a coalition of countries around the world, that certainly would have included Europe… I imagine it would include India, who would tell China (that) you have to change the way you run your external economic policies on a number of dimensions. You can’t go on pretending you’re a developing country, you have to accept the rules of the game, as we accept them.
And I think there are several big issues.
First, and most important to me is macroeconomic policy, the constant huge current account surpluses and trade surpluses. But there are also issues about industrial policy, the openness of the Chinese economy, although I think it’s much more open than many people suppose, but it’s still not open in the way that the US or the Europeans have been open, and that we would expect you to do this, and if you don’t, we are going to retaliate against you. The advantage of doing that is you can make (it) very clear there are obligations, you have to live up to those obligations, and everybody in the world that matters agrees on this, and we’re going to act collectively.
And I think it could have been done within the WTO (World Trade Organization), and if it couldn’t have been done within the WTO, you could have tried, you could have done it, as it were, cooperatively among the rest of the world…
What Trump is trying to do (now) is quite clearly an act of war against China. It’s trying to break China. It’s trying to impoverish China. And it’s doing so in a way that inevitably, and perfectly understandably, will be viewed as humiliating by China. And China is a proud, ancient nation. It’s enormous. It has made enormous progress. And it feels very bitterly the impact of Western colonialism in the 19th century. So behaving like this is going to turn China and the Chinese into an enemy. And my view is a world in which the US and China are actually at war, even if it’s a Cold War, is going to be very dangerous and very difficult and very unpredictable. Any sane strategy would have tried to avoid that outcome. So my view is (that) there were legitimate issues. They should have been taken out in the most multilateral way possible. The Americans could have provided the leadership, they didn’t for a whole host of reasons.
They never created a coalition with other interested powers like the Europeans on this. We are now moving into a world in which there will be a complete breakdown of relationships and the division of the world in a sort of Cold War way.
And I’m not at all sure that the US is going to come out the winner in this. China is a vastly more powerful enemy than the Soviet Union ever was. It has tremendous resources, human capital as well. It has lots of countries that are highly dependent on it, which will not, and this is crucial, trust Donald Trump’s America, because Donald Trump’s America is really not very trustworthy, as the Europeans have been discovering.
Is there a prescription for India in all of this? Can it make the best of a bad bargain?
I actually feel, more than usual, very unwilling to advise India in such a difficult situation, because it’s a very difficult situation and the Indian policymakers have historically been fairly good at managing situations like this… I think India has weight! After the three great economic powers, India is clearly, leave aside Russia which is all on its own now and that’s a sui generis, India is the country that sort of matters most by far, clearly. Because of its size and potential economic dynamism. So both sides will want it to align with them. And it has enough weight, it seems to me, to avoid being forced to make a choice. Or at least if I were India, I would try to avoid making a choice in the sense that, of course, there are natural reasons to want to be close to the US and the West. They’re very important trading partners, economic partners and potentially security partners. You want them to balance, to some extent, the power of China, which is very close to you, obviously. So you want to preserve that. But I do think that India will always be a neighbour of China. China is always going to be an important country and you don’t want to turn it into an outright enemy… So I think if I were, God forbid, advising Indian policymakers, I would say you probably have enough weight to avoid being forced to make the choice. And if you can use that weight to avoid making an outright choice, then you should try and avoid making that outright choice and being sort of a bit in the middle, as you have been over the Ukraine war, to give an example… I wish you weren’t, but I fully understand why you have been…
And I think that’s what you should try to do here. Because it is quite possible the next President of the United States, I’m not predicting it, will have quite a different policy. He will try to reconcile, to open up again somewhat at least to China. And China won’t forgive. And your relation, China will not forget. China has very long memories. And your relationships with China might be poisoned for a very long time. I realise it would be very, very difficult and it might be very difficult to avoid making a choice, even if you would rather not.
Theoretically, in terms of staying power, isn’t China better placed to weather this tariff storm because they can do what they’ve not done so far: push domestic consumption. Beijing also has the fiscal power firepower. President Xi doesn’t have to face , unlike Trump and the Republicans. Isn’t China better placed than the US to see this through?
My instinct is exactly as yours that at the very least, the Americans will have to be much cleverer than they’ve been so far.
I mean, much cleverer to avoid eventually losing. They cannot close China out of the world completely. I don’t think that’s in any way a realistic bet, given China’s economic and military size.
It now has a very formidable military establishment, given its proximity to such an economically powerful and dynamic region with countries that are very closely intertwined with it. It has, as you say, huge degrees of freedom. It can generate domestic demand, reduce its export dependency, create more demand for other countries to sell things into China. It’s shown remarkable innovative capacity.
So, of course, America can stop it from getting access to certain technologies, there’s a limit to how effective that seems to be. And so China has tremendous room for maneuver. America, on the other hand, as you say, it’s politically fragile. The economy looks somewhat fragile now.
The markets look fragile… This trade war is going to damage American business very, very considerably. It’s going to make the supply chains in America extremely fragile already, likely to break quite a number of them. The supply shock here could be really quite damaging.
And all this underlines the unpredictability of America, because America clearly started this, and all of it now shows that this is not an ally you can trust. Remember, it is attacking its own allies.
So I tend to think that both economically and strategically, when historians write about this 30 or 40 years from now, on the hope that there will be a 30 or 40 years from now, and we haven’t blown ourselves up, historians will say this was a catastrophic blunder by an unprepared president, exercising an ill-thought-out policy. So I’m inclined to think objectively that China is likely to come out of this better than America.
As a Westerner, I find that a bit depressing, but I would also say the Americans will probably deserve it.
