Why the West is losing the trade war?

Last weekend we witnessed the first opening shot of the Sino-US trade war. After months of threats, the two countries have imposed protective tariffs on imports worth $ 34 billion on categories of products aimed at the soft underbelly of each of the superpowers.

President Trump imposed tariffs on technology products, signaling that he could harm the “Made in China 2025” program, a program promoted by the Chinese government to transform China from the world’s largest factory into a technological superpower. China, for its part, focused on automotive and agriculture, key industries in the Trump states. Layoffs and unemployment in those industries and states are political points Trump cannot afford to lose, and companies such as Hurley Davidson and General Motors have already warned that they will have to lay off workers if the situation will deteriorate.

Both superpowers have a lot to lose in an escalating trade war. On the face of it, when we look at the numbers, US imports from China are greater than the volume of Chinese imports from the US, and President Trump seems to have a stronger leverage advantage vis-a-vis China. Can this bring President Xi to surrender? If you know China then you know the answer is No. China of today is a nation that has regained its pride after the hundred years of humiliation of the opium wars and the Chinese regime will not be able to yield to the West again. But not only China’s pride prevents a withdrawal from the escalation we witness, yet it also being a strong and calculated rival, with good chances of winning this battle.

Let us take as an example one of the industries in which China chose to focus on this customs war – soybeans, a major staple food in China. Soybean exports to China account for two-thirds of total US agricultural exports to China. China attacked this industry on three fronts. In addition to raising customs on the import of beans from the United States, it announced a generous grant policy for Chinese farmers growing soybeans. So far, the import of American soybeans allowed China to buy them at a relatively cheap price, and local crops have been not so profitable to grow. Now, with the government supporting the farmers, China is signaling that it is willing to finance the competition and build a local market for itself. In order to deal with the immediate shortage and expected price increase from the higher tariffs imposed, the government abolished customs duties on imports of beans from countries such as India and Bangladesh, thereby preventing the impact of the trade war on Chinese citizens.

This example illustrates one of the main differences between President Xi and President Trump. While Trump is tied to the democratic process and is subject to the free market economy and the reactions of the various elements in it, president Xi controls all the links in the chain and has the operative power to exert all the governmental, public and private elements and harness them for the national cause. In fact, the Chinese government has a wide variety of tools at its disposal and it will not hesitate to use them.

The Achilles’ heel of Westerns in such cases is their lack of understanding of China; the Westerner views the Chinese with Western glasses, while the Chinese is not subject to the same rules and atmosphere. As far as China is concerned, the war of trade and customs is another battle in the war for its status as the world’s largest superpower. The Chinese government uses its almost unshakable administrative stability as a leverage in the struggle to Chinese independence in American controlled markets. In dealing with China, one should think as a Chinese, understand all the tools at the disposal of the other party and anticipate moves in advance in order to formulate a strategy. Only time will tell whether these moves were indeed observed by the American administration and whether they could respond accordingly.

About the Author
Adi is the founder and CEO of Valoo, a fintech startup. Valoo's product serves the largest high-tech companies in Israel, and Valoo's investor community includes leading angels in Israel, international funds and family offices. Adi was recognized by Forbes as one of the most promising young Israelis (30Under30). Adi has founded a global strategic business consulting company, which provides services to clients from Israel and the world working with the Chinese market, with branches in Beijing and Shanghai. Adi holds a bachelor's degree in business administration with a specialization in finance and risk management, a bachelor's degree in law and a master's degree in law with a specialization in business law from the Interdisciplinary Center and also graduated with honors in Chinese language studies at BLCU University in Beijing.