In a trade war, there are only losers, but the biggest loser is turning out to be the US. Politicians should never try to fight the market.
Early this year, I explained why China would win the trade war that the first Trump administration started and the second Trump administration escalated.
Nine months later, a little nestling has arrived, and I shall name it, “I told you so”.
At a recent summit in South Korea, the supreme leaders of the US and China met to declare an uneasy truce in their fiery trade war. Both promised to de-escalate trade hostilities.
Who won?
So, who won? Well, it is all over the news. Hardly anyone disagrees, and there aren’t all that many ways to say it.
Here’s The Economist: Why China is winning the trade war. Here’s Bloomberg: China is winning the trade war without fighting. Here’s the Wall Street Journal: China, betting it can win a trade war, is playing hardball with Trump. Here’s Quartz: Trump is threatening more tariffs. But it looks like China is winning the trade war. Here’s the Financial Times: Why China keeps winning the trade war. Here’s Foreign Policy: Why China is winning the trade war. Here’s the New York Times: Trump lost the trade war to China and Trump proved that China can stand up to America now.
All of these headlines appeared in the last four to six weeks. Things have turned out exactly as I expected.
China was much better prepared this time around, and quickly moved to diversify both its import and export markets.
In response to US import tariffs, Chinese exports to America fell sharply – by 27% – but other markets more than made up for that loss, and China’s total exports grew 6.1% this year.
China did not respond well to being insulted as “weak” by Trump administration officials. Instead, it proved itself capable of inflicting a lot of pain on the US, particularly with respect to rare earth mineral exports to the US and soya bean imports from American farmers – an important support bloc for Trump.
Trump eventually cried “uncle” (Trump always chickens out), having made no significant gains, but having helped China to diversify its import and export markets.
Export restrictions
America’s export controls on high-tech products, particularly the high-end Nvidia and AMD workstation GPUs (the kind needed not for gaming, but for artificial intelligence computing), have also largely failed.
China defeated them in at least five ways.
First, it invested heavily in improving the silicon from Huawei and other domestic manufacturers. Restricting high-tech exports only provides an incentive for foreign rivals to step up their game.
Second, it built datacentres using larger numbers of weaker AI chips to achieve the same results that smaller numbers of top-end chips would have achieved. Linear algebra is linear algebra, and computing power is computing power.
Third, new datacentres using the GPUs that were forbidden to China sprung up in the Philippines and other locations near China, to serve the Chinese market.
Fourth, it developed AI models that were more efficient, like DeepSeek, to achieve results comparable with America’s top models using far less computing power.
And fifth, as it always does against government bans and restrictions, the market prevailed: a massive black market in high-end AI developed, so China was richly supplied (albeit at higher prices) with export-restricted GPUs.
The upshot is that China is now a stronger rival to the US in AI, and less dependent on the US, than it would have been absent the export restrictions imposed by the Biden and Trump administrations.
The market finds a way
Governments think that they have great economic power, and they do wield some fearsome weapons (such as the monopoly on printing money, the power to tax, and force wielded at border posts).
However formidable the obstacles governments place in the way, however, the market finds a way to satisfy demand, for the right price. If it cannot do so directly, it will find indirect routes. If it cannot do so cheaply, it will raise prices a little. If it cannot do so legally, it will find illegal ways to meet demand.
We see this dynamic played out over and over again, and politicians never learn.
They think that a prohibitionist policy works to suppress drugs. Instead, they just create black markets operated by criminals, who make enough profit to out-gun the very governments that prohibited the drugs in which they trade.
They think that import tariffs work to protect domestic industries, but all they do is reward poor domestic quality and inefficient local industries, at the cost of raising domestic prices and creating the justified perception that imports are superior to local products.
They think that banning trade in wildlife products works to protect wildlife. Instead, they lead to rising prices, incentivising poaching networks that are armed to the teeth, complete with military-issue rifles and helicopters. Meanwhile, legal markets for animal products, like wool, never pose an existential threat to the species from which they are derived, and never lead to mercenary gangs of knitters roaming the countryside terrorising sheep farmers.
Free traders win
The modern world, with its global communication networks, advanced computing power and sophisticated supply chains make old-school trade and industrial policy even less effective than they once were.
Free-trading countries always win, even if they’re led by communists.
The market is often personified or anthropomorphised as an entity that can be controlled, restricted, managed, harnessed, or regulated.
In reality, it is a far more abstract concept, used to describe the interaction of billions of people, some grouped together in millions of cooperative organisations, all with a myriad different sets of knowledge and skills, and an infinite variety of needs and wants, engaging in trillions of voluntary transactions aimed at satisfying that demand.
It isn’t an animal that anyone can control, or harness.
If you block a part of the market in one place, trade will simply flow around the blockage. It might be more expensive or less efficient than if the government had not imposed the blockage in the first place. It might even provoke violent retaliation from the government. Ultimately, however, the market finds a way.
It is ironic that the free trade and globalisation that the US once championed, and which has brought so much prosperity to so many around the world, is now the means by which America’s perceived enemies are able to defend against the last remaining superpower’s newly hostile trade posture.
Trade wars never benefit anyone. They always harm both parties to the hostility. However, America’s trade war is uniquely stupid, in that it serves only to hasten that country’s demise as the world’s leading economic powerhouse.
[Image: A Chinese flag flies amongst skyscrapers (public domain photo)]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
If you like what you have just read, support the Daily Friend