Flawed approach

Upon his return to the White House, President Donald Trump has championed "Make America Great Again", implemented "reciprocal tariffs", and initiated a trade war in an effort to bring manufacturing back to the United States, highlighting the severe structural problems in the US economy.

Since the 1970s, the US has experienced a significant trend of "deindustrialization", with the service sector now constituting over 80 percent of its economy. While a significant portion of this sector comprises productive services that underpin US technology and advanced manufacturing, it is evident that manufacturing has substantially contracted within the US economic framework.

Data from the World Bank reveal that between 1995 and 2023, the share of manufacturing value-added in the US economy declined from 16.5 percent to 10.3 percent. This is markedly lower than the 2023 figures of Japan (19.2 percent), Germany (15.4 percent), the Republic of Korea (24.3 percent) and China (26.2 percent). Consequently, a consensus has emerged in the US that the contraction of manufacturing has reduced jobs, stripped technological innovation of vital application contexts and momentum, and increased risks to supply chain security.

Additionally, there is the perspective held by the US president and his aide, White House trade adviser Peter Navarro, that the decline in manufacturing has necessitated a heavy reliance on imports. They contend that the US' current account deficit places the nation at a disadvantage, while countries with trade surpluses reap unfair benefits. Based on these fundamental insights, the US administration swung the tariff stick, making it clear that the goal of imposing additional tariffs was to repatriate manufacturing and realize the re-industrialization of the US economy.

A closer look at the US economy reveals its three key pillars: consumption that accounts for a substantial 70 percent of its GDP, the consistently high levels of national debt, and the US dollar's predominant position in the global financial system. To satisfy its vast domestic consumption demand, the US relies heavily on imports, which in turn generate a significant current account deficit. To finance this deficit, the US essentially exports dollars. These dollars then flow back into the US economy through investments from countries that hold trade surpluses. A large portion of these recycled dollars is channeled into purchasing US government bonds. These bonds serve as a crucial foundation for US consumption patterns and key macroeconomic indicators. Consequently, this dynamic establishes a dollar-centered international economic cycle.

Within such an economic framework, internal contradictions have accumulated and manifested in two key issues. One is the soaring national debt. The US is grappling with a staggering national debt of $37 trillion and annual interest payments exceeding $1 trillion, placing immense fiscal strain on the country. Especially after the second quarter of this year, it will face a peak in debt maturities and an urgent need to replace maturing debt with new debt. As a result, the US government expects the Federal Reserve to reduce interest rates to ease the burden of issuing new debt.

The other is its weakened production capacity. Despite high-tech industries and advanced manufacturing, the US economy has seen a significant contraction in its manufacturing sector, leading to an overall weakening of production capacity. Transforming the insufficient production capacity through the return of manufacturing has become a strategic priority for the structural adjustment of the US economy.

The current economic structure of the US has developed with a certain inevitability. At its core, the profit-seeking and self-augmenting nature of capital has driven US manufacturing to places with lower production costs and higher profits. Imposing tariffs on other countries is unlikely to transform the US economic structure. In fact, the US, with the dollar's core position and other advantages, has gained the most from economic globalization. However, the enormous wealth that the US has acquired through its financial, technological and other advantages has been distributed unevenly. This has led to domestic social division, the rise of populism and political polarization. Today's global economy is an interrelated whole. Unilaterally imposing tariffs in a bullying manner and disrupting the global industrial and supply chains cannot resolve the imbalances in the US economy and society.

The US administration's tariff measures echo the high-tariff policy implemented by president Herbert Hoover in 1930. However, a key difference is that the US was the global manufacturing hub back then, whereas today its economy is heavily dependent on imported goods. Thus, decoupling without securing alternative supply-chains is akin to economic suicide. The US administration's tariff-wielding has initially hit the US financial market, causing a synchronized decline in stocks, bonds and currency. This signals weakening confidence in the dollar and dollar-denominated assets, which in turn dampens dollar inflows.

Under the shadow of reciprocal tariffs, the US business community and consumers are gripped by panic. As initial inventories dwindle, the supply of certain intermediate goods crucial for US manufacturing still faces risks of shortages and even disruptions. Meanwhile, the import costs of consumer goods needed domestically are climbing, which could further drive up US inflation. As inflation expectations rise, the US Federal Reserve will find it increasingly challenging to make interest rate cutting decisions, and the immense pressure on national debt will be hard to alleviate. The US administration's move to raise tariffs is intended to bring manufacturing back to the country. However, the high uncertainty it has caused has had the adverse effect of dampening the motivation to invest in the US and undermined confidence in the US economy, thereby increasing the risk of stagflation and recession.

China firmly opposes the weaponization of tariffs and steadfastly upholds its legitimate rights and interests as well as international fairness and justice. Recently, the China-US high-level meeting on economic and trade affairs was held in Geneva, Switzerland. Both sides engaged in constructive communication and achieved substantial progress. The White House has committed to removing 91 percent of the additional tariffs imposed on Chinese goods and suspending the 24 percent reciprocal tariffs. In response, the Chinese side announced it would do the same.

The outcomes of this meeting satisfy the expectations of all parties and are in the common interests of China, the US and the world at large. The US side should thoroughly correct its erroneous approach of indiscriminately imposing tariffs and resolve differences through equal dialogue and consultation. By doing so, it can inject certainty and positive energy into the world economy, which is struggling to recover, through a mutually-beneficial and stable economic and trade relationship.

The author is vice-chairman of the National Institute for Global Strategy at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn.