As President Donald Trump heads to G-20 meetings in Japan next week, companies and foreign governments are bracing for a world in which the foundation of global trading rules is upended.
And they fear being forced to take sides between the reigning global superpower and its rising rival.
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“What we’re witnessing here in the backdrop … is what’s happened in history before when No. 2 is on the verge of overtaking No. 1,” said Goldy Hyder, the CEO of the Business Council of Canada, a group of chief executives of 150 major Canadian companies. “In more than half of those episodes, it’s actually ended in war — and so we clearly can’t afford for this episode to end in a war.”
“So how do we avoid that?” he said.
Hyder said in an interview for POLITICO’s Global Translations podcast that businesses are responding to the uncertainty with caution and with consolidation, to “build critical mass as a defense mechanism for what’s going on and position yourself for what could be a bumpy ride.”
The U.S.-China trade fight, coupled with the Pentagon’s stated view of China as a geostrategic threat — with ambitions to “displace” America “to achieve global preeminence in the future” — adds another layer of concerns for countries like Canada who fear a replay of Cold War dynamics.
The tension is already present for Canadian Prime Minister Justin Trudeau — who is set to meet with Trump and Congressional leaders on Thursday — in the case of two Canadians who were detained in China after Canada cooperated with a U.S. extradition request for an executive of the Chinese tech firm Huawei.
The U.S.-China confrontation “has created apprehension, it has created angst” and a concern about competing Cold War-style spheres of influence, Hyder said.
“When I was in Davos earlier in the year, I heard this phrase ‘the Asianization of Asia.’ The idea that Asia doesn’t really need us. They have enough people, they have enough resources and/or access to them. Their whole Belt and Road Initiative is acquiring a lot of capacity,” said Hyder — noting that western countries should avoid creating “isolated blocs around the world.”
While American companies have inundated the Trump administration with warnings this week that a new round of tariffs on $300 billion of Chinese goods could break the U.S. economy, companies engaged in global trade must decide whether to shift supply chains away from China — perhaps to other countries in Asia, said Dan Ujczo, a trade lawyer with Dickinson Wright.
“The companies I work with are saying, ‘Look, we don’t have time to wait for the politics and policy to figure out we’re moving production to another country because we have to have this product in our supply chain,’” he said. “We’re not going to buy our way out of this with purchasing so we’re going to have to start reconfiguring our supply chains. And I think ultimately that’s the goal at USTR and at the White House.”
Canada, America’s No. 2 trading partner, is already looking to other markets. While the Canadian government and businesses are pushing for ratification of the U.S.-Canada-Mexico-Agreement, they are simultaneously making a concerted effort to reduce their heavy reliance on the U.S. — including entering into trade agreements with other countries and providing government funds to promote trade in new markets.
They’ve even renamed a Cabinet post to underscore their new approach.
“We’ve recognized that there is a shift here,” Hyder said. “Our minister is now called the ‘Minister of Trade Diversification’ — the previous title may as well have been the ‘Minister for United States Trade.’”
“We’re doing everything we can to take advantage as a business community of new agreements that have been reached — the Canada-Europe Trade Agreement, the Trans-Pacific Partnership.”
The country’s strategy toward China, however, is less clear. “One of the areas that we in the business community have been calling out for is what is the China strategy? What is it for Canada? What is it for the United States? What is it for Europe? How do we work together and manage that?”
Uncertainty around tariffs — including a potential new round against European allies — and the fate of individual trade deals such as the USMCA are not the only factor driving uncertainty. The multilateral organization that has provided the foundation for stability in global trade for the last few decades, the World Trade Organization, is also in limbo. The WTO treaty covers 165 countries, including the U.S., and applies to 98 percent of world commerce. But the Trump administration has hamstrung its ability to adjudicate disputes and police violations of trade law by refusing to appoint judges to the body that serves as the final court of appeal for trade disputes.
The White House “seem[s] now to be threatening the very existence of a dispute settlement system,” said James Bacchus, a former chairman of the appellate body at the WTO, said in an interview on the podcast.
“This could well bring the entire dispute settlement system to a grinding halt,” said Bacchus, director of the Center for Global Economic and Environmental opportunity at the University of Central Florida.
“If the WTO is undermined, then the world is on its way to economic collapse, period,” he said. “And yet this particular issue gets less attention on a day-to-day basis than all the dustups that the president has created elsewhere in the global economy.”
While the U.S. administration has argued that China has violated its trade obligations by engaging in illegal subsidies and intellectual property transfers, Bacchus argued the WTO was a better method than tariffs for reforming China’s practices.
“Where cases have been brought against China in the WTO and where China has lost, China has routinely complied with those rulings. China has arguably a better record of complying with adverse WTO rulings against them than the United States does in complying with rulings against us. The first recourse should have been to go to the WTO in concert with our allies to bring these claims against China,” he said.
If the strategy of Robert Lighthizer, the U.S. Trade Representative, is to use tariffs to pressure China to make structural changes to its economy and to protect America primacy in technology, it’s still uncertain whether tariffs will create the necessary leverage.
Lawrence Lau, an economist and former president of the Chinese University in Hong Kong, who has been quantifying the potential impacts of tariffs on the Chinese economy, warned in a podcast interview that they should not be overstated.
By his calculations, even if Trump slapped tariffs on all imports from China, the impact would only amount to 2.4 percent of Chinese GDP — on an economy that in 2018 grew at a rate of 6.6 percent.
“What I’m trying to tell people is that there is really no need to panic because the damage is actually limited,” said Lau, author of “The China-U.S. Trade War and Future Economic Relations.”
While he estimates that China will lose more economically than will America, he warns, “It’s not an intolerably high number,” he said. “And I think the Chinese can be caught up with increasing demand in other areas. So that’s why I think it’s going to be OK. The sky is not falling.”
The Chinese government is attempting to keep a low-key attitude to the trade conflicts — even banning Lau’s book because of the phrase “Trade War” in the title — and avoiding the phrase until recent weeks.
“You cannot mention the word ‘trade war’ in China. It’s always called ‘trade friction.’ … So friction is actually on a much lower scale of conflict than the war.”
Lau argues that China is already moving away from some of the practices targeted by Lighthizer — removing requirements on joint ventures, setting up special courts to enforce protections around intellectual property – in part driven by domestic innovators who are now filing, by his estimate, 300,000 patents per year. “So you have all these people who want their rights protected. So you have a domestic constituency… they will actually demand that their rights be protected.”
He hopes that the talks between Trump and Chinese President Xi Jinping in Japan will lead, at best, to more talks.
“Going back to the status quo ante — meaning no tariffs on both sides — I think that is a little bit too ambitious,” said Lau. “But I think what could happen is that both sides will agree to continue talking — and while they are talking, the new tariffs can be deferred.”