China Has More to Lose in Global Trade War Than US, Researchers Say
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If trade disputes between the United States and China spiraled into total export-import bans, both nations’ economies would be devastated. But China’s economy—reliant on exporting products that can be manufactured elsewhere—would suffer far more and for far longer, researchers say.
According to Dartmouth Professor Stephen Brooks, if the United States and its allies imposed “an economic cutoff” on China, damage to its economy would be five to seven times more than damage to the United States’ economy, and its gross domestic product would degrade 15 percent to 51 percent within a year.
All agreed that the United States—especially if working with the European Union, Japan, South Korea, and Taiwan—is better positioned to weather a “trade war” than China’s ruling Chinese Communist Party (CCP).
That assessment is contrary to the conventional wisdom that there’s no way for such countries to hurt China without hurting themselves as much, said Brooks.
China has since suspended restrictions for a year on the five it sanctioned in the October trade negotiations with President Donald Trump, but restrictions imposed on seven other rare earths remain intact.
The CCP’s manipulation of global minerals markets is, “by far, the best weapon China had,” Brooks said. “I don’t see yet anything nearly as close to rare earths as a super valuable weapon that China has.”
“Therefore,” he said, “China may well have just used its best weapon. If I was a Chinese strategist, I would have held actually that in reserve for what I would call a true crisis.”
If the United States expanded export restrictions on Chinese industries, they “would have such amazing power,” Brooks said. “In terms of things China needs from the U.S. and its allies to make what it wants to make, I can’t stretch my arms wide enough.”
Among the discoveries: “China’s economy is one-third smaller than it’s currently measured to be, not 3 percent—33 percent—which means China’s economy is more like half of our size rather than two-thirds,” Brooks said.
Noting that “the Soviet Union, at its peak of economic power in 1975, was at 57 percent of U.S. GDP,” Brooks said the assessment reached in his research is that “China is not yet as large relative to us as the Soviet Union was during the Cold War.”
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Few ‘Acute’ Vulnerabilities
Another finding, he said, is that 55 percent of global high tech profits are accrued by U.S. firms, while Chinese companies only account for 8 percent, confirming that China is not operating where technologies are developed but, instead, where finished products are assembled—a role and opportunity that other nations could assume.“There’s tons of stuff made in China. If you look at it geographically, China is very impressive,” Brooks said. “But if you ask, ‘What do Chinese firms themselves make,’ it’s much less impressive.”
Globalization favors the United States, Brooks said. “In the high-tech space, it’s essentially the U.S. plus its allies at about 85 [percent] to 90 percent [of global profits]. If that 90 percent cuts China off, China will fail,” he said.
Among the misperceptions is “counting things like the iPhone as part of China’s technological production,” Brooks said, when 32 percent of components come from the United States, 25 percent from South Korea, 12 percent from Japan, and 7 percent from Taiwan.
“Number five is China at 3.8 percent, roughly about $20 worth of value in the iPhone,” he said. “It’s not a Chinese phone but it’s counted as being a Chinese phone in all the data that we have, including when people say that China’s the ‘manufacturing superpower.’
“[T]he other problem is they’re putting all manufacturing in the same boat, so that includes semiconductor chips and chopsticks both together. And so really what you need to do is separate out the things that are really of crucial importance: the high-tech production,” he said.
“And if you look at high-tech production, the U.S.—not China—is the world’s manufacturing superpower. The U.S. is at 29 percent and China is at 16.”
Brooks added that “China is a very unique economy” in which investment as a share of its GDP has been at least 35 percent since the mid-1980s, despite diminishing returns without matching boosts in consumption. “No one else is like this, and it causes their GDP to be skewed and other measures to be skewed,” he said.
The book was “briefed more than 20 times” before publication by federal agencies, who “absorbed everything but added nothing,” he said. “The fact that our government had not done this [analysis] is quite shocking.”
It wasn’t always this way, he said, noting that “in the Cold War, the biggest part of the CIA was devoted to measuring the Soviet economy. We got rid of that. We’ve never brought it back. We need to bring it back.”
Moderator Kari Heerman, a Brookings senior fellow in economic studies, said what makes Brooks’ book different from most analyses is that it “focuses more on the offensive capability that the U.S. can wield, particularly in a conflict scenario with China,” by examining “widely misunderstood” economic data.
“This got us thinking, are there other areas in the economy where, if a foreign adversary chose to really put their metaphorical foot on our throat, it could threaten the basic functioning of society, the economy, [and] put a lot of lives immediately at risk?” he asked.
The answer is, O’Hanlon said, “It turns out, there aren’t that many acute supply-side vulnerabilities” that would cause mass economic upheaval in the United States in a trade war with the CCP.
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Generic Dependence in Pharma
There would be inconveniences, O’Hanlon said, such as in “stadiums and other large gathering places. Maybe some seats come from China, maybe some big display [screens] come from China. But if we have to forgo watching Washington [Commanders] lose a football game again because a screen’s been cut-off in a supply-side crisis, that’s not a big national security problem—it may even be good for my heart.”A vulnerability could be “dependencies on pesticides and insecticides where, say, China has a 25 percent market share,” he said. “That’s a gray area of national security vulnerability because if it’s 25 percent, that’s not 95 percent, and there probably are certain ways where you could afford to use a little less pesticide here and there, or do some crop substitution.”
The study examines “16 areas of critical infrastructure” as defined by the Department of Homeland Security and other agencies to identify “where the whole society has dependencies in the broader economy,” O’Hanlon said.
China isn’t producing breakthroughs but is producing generic drugs in volume, she said. A supply chain opportunity exists there for other nations, including the United States, if they could make this profitable and capture it.
“Think about generic drugs. [U.S. manufacturers] spend so little on it—there’s no profits in that market,” Wosinska said. “Sixty percent of Americans take 187 billion tablets [a year]; just tablets, not other formulations. But, you know, it’s a tiny amount of dollars in comparison” with specialized U.S.-produced pharmaceuticals.
“We have tremendous reliance on China for antibiotics,” she said. “We don’t have to” rely on them when “there are European manufacturers that make not only API [Active Pharmaceutical Ingredients] but they ferment the precursors, the intermediates, and … have enough capacity to serve the U.S. market.”
They’d be “more expensive than Chinese versions” but dependence on China is “sort of a choice,” Wosinska said. “We have done it to ourselves. We continue to choose it.”
India is vying to be “the pharmacy of the world,” she said, but because its generics are derived from China-processed APIs, the tariffs imposed by the United States on Indian goods, totaling around 50 percent—from baseline duties, “reciprocal” tariffs, and penalties for purchasing Russian oil—are hampering the development of alternates to China.
“The Indian government has been really trying to get more of the API [production] to de-risk themselves from China, and we benefit from this. But putting the tariff on Indian manufacturers would basically force them to go for lowest-cost” APIs, Wosinska said. “Where do they find the lowest cost? In China.”
Tariffs are useful in protecting key domestic industries and developing diverse supply chains, she said, but must be thoughtfully applied.
“Do we want to think about India as an ally in pharmaceuticals?” Wosinska asked. “If we were to choose ... between India and China, we probably should really think [about] how we can work with [India]. I get very nervous about the tariff conversation around India because of that.”
Brookings Metro Senior Fellow Mark Muro offered “two hawkish reasons for lowering our tariffs.”
First, he said, “we need our allies on board with us if we’re going to have a united front vis-a-vis China.
“Secondly, if we want to de-risk from China,” Muro said, “then we can’t be having China have lower tariff rates than many of the other countries where we want firms to be moving into.”
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