Trade friction between the U.S. and China hasn’t led to the end of globalization. Instead, it has changed the flow of goods and services around the world, to the great benefit of some countries and the disadvantage of others. The key factor in determining the effects of the U.S.-China decoupling on other countries lies in whether those countries are able to produce goods that can substitute for the goods made in the two dueling giants. That has been the case for Mexico, South Korea and Thailand, which have all benefited from the competition between Washington and Beijing by substituting goods previously made in China for the U.S. market.
For this reason, to prevail in the bilateral trade war, the incoming administration of U.S. President-elect Donald Trump will need to consider how its policies affect Washington’s allies, partners and neighbors. Victory will go to the side that is best at persuading other countries that its version of globalization is the most attractive and alluring. In the past few months, however, China has been much smarter and more strategic in dealing with both the standoff with the U.S. and the effort at persuasion among third countries.
To begin with, it has retaliated against the U.S. for already imposed trade restrictions, while also announcing a raft of measures to better insulate the Chinese economy against new tariffs, in anticipation of even more conflict under Trump. In December, China announced an anti-trust investigation into chip company Nvidia and banned the export of some rare earth minerals crucial to the production of advanced semiconductor chips and other products. Just last week, Beijing announced new export controls targeting 28 U.S. companies, most in the defense sector. And Chinese media reported that Beijing may also restrict the export of lithium battery technologies, which would hurt plans for China’s automotive industry to expand globally but might keep manufacturing and key processing of needed inputs in China, at a time when the domestic economy is struggling.