The relationship between human prosperity and trade has traveled across layers of centuries. It began with a barter system in prehistoric times and evolved into a more sophisticated system with the use of currency and trade routes like the Silk Road and maritime paths. Over the years, the global trade economy was revolutionized with the rise of industrialization and colonization. Digital commerce and free trade agreements are modern-era trade mechanisms.
In the contemporary age, trade is also used as a weapon; for instance, the rise of the People’s Republic of China(PRC) is creating a Thucydides trap-like situation for the United States of America(USA). This geo-economics contest is compelling President Trump to impose protectionist policies on China. These policies might create a theoretical competition between the mercantilist perspective of Thomas Mun and the complex economic interdependence of Neoliberal institutionalism.
Trump imposed a 145% tariff on Chinese goods as a response; China retaliated with a 125% tariff on American products.
According to Donald Trump, the most beautiful word in the dictionary is “Tariff,” and “Make America Great Again” was his favorite slogan during the election campaign. Trump 2.0 imposed another trade war on the world to curb the challenge of the growing Chinese markets. The policy was designed under the mercantilist thought that revolves around the promotion of domestic industries to increase exports and the use of protectionist measures to decrease imports. According to the BBC report by Jennifer Clarke, during this economic conflict, Trump imposed a 145% tariff on Chinese goods as a response, and China retaliated with a 125% tariff on American products. These mercantilist ideas have caused economic chaos for both rivals.
An increase in tariffs contributed to the escalation of inflation. According to a report by City National Rochdale, inflation in the US rose to 1.0 to 1.5 percent points, with GDP growth reduced to about 1.0%. Besides these depreciations, a sector-specific drop is also witnessed as evidenced by a report by Charlotte Kramon black haircare industry, which holds around $3.2 billion shares, has been impacted by this silent battle. Whereas in Georgia, as The Guardian reported, the hospitality and film industry is facing logistical delays and financial risks because of the fluctuating tariffs. A Stock market that is crucial for grabbing investment has also experienced a decline, with significant sell-offs observed, indicating investors’ concerns over the escalating tensions.
On the other hand, the Chinese economy has also felt the aftershocks of these mercantilist developments. The report of the Economist Intelligence Unit suggests the increase in tariffs has caused a 20% reduction in China’s exports to the US, with an anticipated deceleration in GDP growth of 0.6 points during this period. The same report stated that to respond to current challenges, China initiated a stimulus package amounting to RMB 4.1 trillion per year to deal with tariff shocks and to support domestic needs. Electronics manufacturers faced a decline in profit margins. Some of these industrialist considered relocating their production sites to other countries to escape tariffs however, China’s well-developed systems, like transport, electricity, and diversity of labor, still gave an edge to the Chinese economy.
Inflation in the US rose to 1.0 to 1.5 percent points with GDP growth reduced to about 1.0%.
This economic chaos has also resulted in global supply chain disruptions that have affected the tech and construction industries with increased costs and a decrease in exports. Other countries like Canada and Mexico exhibited a reaction to US tariffs by imposing their tariffs on US imports. These measures further complicated the international geo-economic relations, creating an uncertain global environment around the globe.
In light of Neo-liberal institutionalism that emphasizes complex economic interdependence among states in an anarchic world, where the actors should focus on grabbing relative gains rather than competing aggressively to secure relative advantage. In the era of Chimerica, a term coined by Niall Ferguson, the US and China developed close economic cooperation based on mutual interdependence. The US got access to cheap and functionally diverse manufacturing. This earned lower production, high profits, and availability of affordable goods to the US, whereas China’s industries and exports got a boost, accelerating GDP and increasing the production of jobs. Both countries experienced a win-win.
A critical question that may arise here is that, is the neo-liberal institutional order or the mercantilist view is applicable in today’s world. Mercantilism was useful when nations needed to accumulate wealth and expand their empires, but once global economies experienced integration and globalization, mercantilist ideas began to hinder innovation and economic growth.
The same applies to Neo-liberal institutionalism as it is still relevant but is struggling because of strategic rivalry between the US and China, which is giving up thrust to relativism. Furthermore, the mechanisms of the World Trade Organization (WTO) are sidelined, creating mistrust in tech, military, and security issues. This is creating an atmosphere of de-risking and decoupling, which is evident from trade war 2.0. But the Neo-liberal institutional order does not merely focus on requiring full trust; rather, it thrives on institutional cooperation to get the maximum benefit out of crises.
China initiated a stimulus package amounting to RMB 4.1 trillion per year to deal with tariff shocks.
Trump’s slogan of making America great again is patchy, as he is unclear whether he wants to drag the US into an industrial era. American businessmen have revolutionized and are obvious from the conversion of the “Steel Belt into Rust Belt” as manufacturing has been outsourced to grab cheap production and high-profit margins.
If the intention is to regress to the industrial or agricultural age, the notion is highly irrational and profoundly misguided. A realistic and strategic recommendation to the US and China in this regard is that both should create corridors of cooperation in arenas like climate, nuclear proliferation, and crisis management. A pragmatic approach to economic hedging is needed instead of fully decoupling.
Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.
