We’re Number Two!

How Trump ceded the future to China

*Excluding Canada and Mexico

Source: Yale Budget Lab

Does Donald Trump realize that he has ceded world leadership to China? Probably not: During his recent Asian trip, foreign leaders flattered him and showered him with personal gifts, so he came home with his ego even more inflated than usual. Nobody close to him would dare tell him that if you look at the substance of what he agreed to, it amounted to an ignominious retreat. When Chuck Schumer pointed out the reality of what Trump didn’t accomplish, his reaction was hysterical:

Well, if this be treason, make the most of it. The whole world knows what Trump’s sycophants won’t tell him: His confrontation with China has ended up demonstrating Chinese strength and American weakness.

Now, I am not a mercantilist. Trump may imagine that the world economy is a zero-sum game, where one nation’s gain is another nation’s loss. But it isn’t. China’s astonishing rise since the economic reforms of Deng Xiaoping hasn’t made America poorer. If anything, the rapid ascent of a nation of 1.4 billion people from desperate poverty to middle-income status (per capita, China still lags America and Europe) has made us richer, expanding world markets and providing us with manufactured goods that would be far more expensive to produce at home.

But China’s rise has created geopolitical problems. As recently as the 1980s all of the world’s largest economies were democracies, allied to the United States both by formal treaties and by shared political values. Democracies as a group still dominated the world economy in the early years of the 21^st century. But now China’s economy, measured by the real quantity of goods and services it produces, is bigger than America’s and much bigger than any other nation’s:

Source: International Monetary Fund

In addition to being huge, China’s economy is in some ways more advanced than you might expect given that it is still only a middle-income nation. As I explained yesterday, China dominates renewable energy, one of the most important technologies of the 21^st century, and it is giving America serious competition in information technology too.

Why is any of this a problem? China isn’t evil, and while I love my country I don’t believe that America and its allies have any inherent right to rule the world. But by historical standards America was a relatively benign hegemon, largely because we were more than a nation: we were an idea. And the Pax Americana, for all its many failures and sometimes grievous sins, was on balance a force for freedom. Calling us the leader of the free world was more than political boilerplate: It described something real, despite the many blots on our record.

China, by contrast, is not a democracy: It’s an autocratic regime, and those who expected the growth of the Chinese middle class to lead inexorably to political liberalization have been proved decisively wrong. Nor does China seem to stand for anything beyond China.

So China’s rise threatens the liberal, generally pro-freedom world order America helped build. What should we do about it?

The Biden administration took the potential threat from China’s rise much more seriously than most people realize, and tried to implement quite strong policies to contain that threat. In particular, it acted on three fronts:

1. Support for renewable energy: The Inflation Reduction Act provided subsidies for green energy — both for its use, e.g. purchase of electric vehicles, and for domestic manufacturing of key equipment like batteries. These subsidies were intended to serve multiple purposes, including promoting renewables and helping depressed regions, but one goal was to dent China’s dominance of important technologies.

2. Support for advanced technology: The CHIPS Act provided subsidies for advanced technology, especially semiconductor manufacture, with the goal of keeping the U.S. at the cutting edge and reducing our dependence on foreign suppliers.

3. Export controls: The Biden administration imposed controls on exports of both semiconductors and semiconductor manufacturing equipment to China, with the goal of choking off Chinese access to the future of AI and high performance computing.

Would these policies have been effective at constraining China, helping the U.S. maintain a technological edge? We’ll never know, because the Trump administration has abandoned all of them.

America is no longer contesting dominance of renewable energy, because Trump and company hate wind and solar power. They aren’t just canceling the subsidies, they’re trying to kill renewable energy in general.

Trump has harshly criticized the CHIPS Act and the whole idea of using subsidies to promote domestic manufacturing. He prefers tariffs. And as the chart at the top of this post shows, he initially imposed very high tariffs on China. (The tariff rate shown was for April 15 — not the initial “Liberation Day” tariff, but the revised tariff imposed a week later, after Scott Bessent, the Treasury secretary, and Howard Lutnick, the Commerce secretary, convinced Trump to completely revise his plans while Peter Navarro, the trade czar, was in another meeting.)

But now Trump has slashed tariffs on China. According to the Budget Lab’s estimate, tariffs on China are now similar to tariffs on other countries excluding Canada and Mexico. For example, China now faces tariffs not significantly higher than those imposed on our erstwhile allies in the European Union.

And Trump has suggested that Nvidia, which produces the most advanced AI chips, may be allowed to sell to China after all.

So basically Trump has backed down in his confrontation with China. If this was a trade war, China won. Why?

A large part of the answer is that the Chinese had more leverage over us than we did over them. We are or were an important export market for China, but China has a near-monopoly on rare earths, which are crucial for much advanced technology. And China’s limits on rare-earth exports to the United States were a much bigger problem for us than Trump’s tariffs were for them.

Trump didn’t cause this imbalance, which successive U.S. administrations have failed to address. But he was clearly oblivious, imposing punitive tariffs without any apparent awareness that China could strike back.

Trump has also proved willing to be moved by Chinese promises to resume purchases of U.S. soybeans. You might say that he ceded the future to China in return for a hill of beans. This is especially amazing when you bear in mind that China made similar promises to buy U.S. goods during the first Trump administration and never came close to delivering on those promises.

More generally, despite tough talk about China, Trump’s tariff spree hasn’t focused clearly on the key geopolitical issue of rising Chinese power. Instead, he’s been busy imposing tariffs on Brazil because he doesn’t like its domestic politics — they dared to try and convict a former president who attempted a coup — and on Canada, because the province of Ontario aired a TV ad that upset him. Trumpian tariff policy has been less America First than Ego First.

All in all, this whole confrontation has been a demonstration of Chinese strength and American weakness. Add in the way that Trump has alienated our allies, and it seems fair to say that America is no longer the world’s leading power. Unless a future president can engineer a miraculous recovery in our global stature, the future now belongs to China.

MUSICAL CODA

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