Something is going to go down

Erald Kolasi warns of an inevitable US decline as China commands the trading top spot and the tie between the toppling of trade leaders and conflict.

Trump’s recent trade war is a symptom of American decline, not its cause. Global trade networks are not merely economic phenomena involving decentralised market players competing to win the game of supply and demand. They do not spontaneously emerge and persist solely due to Ricardian comparative advantage or economies of scale and network effects, as claimed by the New Trade theorists. Trump’s new trade wars highlight how trade systems are, at a fundamental level, political projects shaped by imperial and geostrategic considerations. With the United States entering an era of decline, trade has become a means to an end for the American ruling class, a last-ditch effort to shore up the American imperium.

Global trade dynamics have always been influenced by imperial grand strategy on the geopolitical chessboard. Political and military power are not merely external phenomena that intrude on autonomous economic systems. They are fundamental elements of any stable global trade order.

Military and political power have always been the principal forces shaping global markets and trading systems.

Trade dynamics

“We cannot carry on trade without war, nor war without trade.” This infamous comment from the notorious Dutch imperialist Jan Coen underscores the extent to which the rise of capitalism was entangled with war and imperialism on the global stage. Military and political power have always been the principal forces shaping global markets and trading systems.

In 1806, Napoleon launched the Continental System against Britain, hoping to cut off European trade with the British and cement his political control over the continent. Enforcing the continental blockade proved to be a monumental task that the French could never master, leading to common violations among subject nations. Russia’s repeated breaches were a major reason for Napoleon’s decision to launch a disastrous invasion in 1812.

Beyond war, imperial powers typically embrace open trade during their ascendant phase and then turn against it as they decline.

During World War I, the Royal Navy enforced a massive naval blockade against Germany, severing its access to international trade and contributing to major shortages of consumer goods in the German economy. However, wars are not significant solely because they constrain trade during phases of intense violence. They also shape post-conflict trading regimes, as the dominant victors rewrite the rules and institutions of a regional or global order. To the victor go the spoils of trade.

Beyond war, imperial powers typically embrace open trade during their ascendant phase and then turn against it as they decline. Britain embraced free trade in the mid-19th century when it dominated global manufacturing, but gradually shifted against it later on as competitors like Germany and the United States caught up.

Economic historians such as John Nye have noted that Britain’s relationship with free trade in the 19th century was more complex than conventional wisdom suggests. Britain largely removed or reduced tariffs on manufactured goods, an area where it had significant comparative advantages, thus facing no real competition from others globally. However, it maintained numerous tariffs on consumption goods, such as rum, sugar, and most notably French wine, which encountered substantial entry barriers in the British market. Only the Cobden-Chevalier Treaty in 1860 abolished the major tariffs both sides had imposed on each other, yet Britain continued to levy tariffs on various goods throughout the 19th century, with its average tariff rates exceeding those imposed by France for most of the century.

The United States also embraced free trade after World War II when it dominated global industry, as much of Eurasia lay in ruins from the war and needed a significant amount of time to rebuild. An open trade system became a symbol of political stability in the new American imperium. It helped that American manufacturing dominated the global economy in the immediate post-war period, making it easy for American policymakers to support free trade, since it practically meant that other countries would open their markets to inexpensive American goods that faced little competition. However, as countries like Japan and Germany reindustrialised and ascended the value chain, producing increasingly advanced industrial products and vehicles, American companies encountered greater competition and lost market share, even domestically in the case of the auto industry, when Japanese cars flooded the American market as cheaper and more fuel-efficient alternatives. 

Frustrated by its deteriorating position, the United States adopted a more aggressive trade strategy. In the 1980s, the United States pressured Japan to accept the Plaza Accords, which were designed to strengthen the yen so that Japanese exports would no longer be as competitive as before. The exact consequences of the Plaza Accords on the Japanese economy are still debated, but they signalled a new hostile direction from Washington, which had previously allowed its key allies some economic leeway as a means of building a strong bulwark against the Soviet Union in Eurasia.

The New Cold War

With the fall of the Soviet Union in 1991, the United States was on top of the world, or at least it seemed that way. Once Japan faded as a competitor in the 1990s, Washington supported another round of trade expansion, allowing China to join the World Trade Organization in 2001. This opened up the United States to a flood of cheap Chinese goods (the “China Shock”) and prompted a wave of offshoring from American companies, although rising automation was also a critical factor in the gradual loss of American manufacturing jobs. Few American policymakers, however, anticipated the true extent of China’s meteoric rise, and this sudden emergence on the global stage quickly shattered Washington’s sense of superiority.

American ruling classes have come to believe that they need to stop or slow down China’s rise at nearly all costs and by almost any means, including initiating an all-out effort to sabotage.

The United States subsequently shifted towards a path of preserving its strategic hegemony, a process that began with Obama’s Pivot to Asia and continued under Trump and Biden. Obama was imposing tariffs on Chinese tyres as early as 2009. Over the past decade in particular, the American ruling classes have come to believe that they need to stop or slow down China’s rise at nearly all costs and by almost any means, including initiating an all-out effort to sabotage China’s technological development by imposing sanctions and export controls on advanced technology. We are now in the early stages of a New Cold War, this time between China and the United States. It’s precisely in the context of this broader geostrategic rivalry that America’s turn against free trade begins to make more sense, as US elites now believe that the current global trading system is benefiting China more than any other nation, and thus US trade policy has shifted towards the active and deliberate sabotage of the existing international system. It’s the decline of American hegemony that’s responsible for the breakdown of the global trade order.

Washington’s desperate gambit is unlikely to succeed this time around. China has rapidly emerged as the greatest industrial powerhouse in world history. China consumes 30% of the world’s energy, produces 55% of the world’s steel, nearly 60% of the world’s aluminium, one-third of the world’s motor vehicles, one-third of global manufacturing output, 51% of the world’s coal, over 60% of all electric vehicles, over 80% of the world’s solar panels, and the list goes on. Furthermore, due to China’s vast domestic market, a rapidly increasing proportion of Chinese manufacturing output is consumed internally. Moreover, China’s dominance in intermediate industrial parts and goods is so comprehensive that no matter where in the world industrial manufacturers relocate their final production of consumer goods, they will still need to import many of the critical components necessary for final manufacturing from China.

China can easily offset any corporate revenue losses from this trade war.

Furthermore, China’s state capacity is immense. The Chinese state can swiftly generate hundreds of billions of dollars in domestic demand through monetisation via lending from state-owned banks, as the financial system in China is under government control. The world’s four largest banks by assets are all Chinese and wholly owned by the government. China can easily offset any corporate revenue losses from this trade war. Moreover, China is not within Washington’s strategic orbit; it is neither an American satellite nor a puppet regime, unlike most countries in Western Europe. This indicates it cannot be pressured into submission, a fate Japan experienced in the 1980s. In contrast, the United States is internally divided. Even many Senate Republicans disagree with Trump’s tariff strategy. There are also significant internal rifts within the Trump administration, not to mention that the country is approaching multiple political and constitutional crises.

Under these circumstances, a new trade war is unlikely to reverse America’s decline. If anything, it will rapidly accelerate it, but what follows the current order is anyone’s guess. China is the world’s manufacturing superpower, but will it accompany its industrial strength with military might? Will it resort to gunboat diplomacy to expand its trade networks? Will it pressure and coerce trading partners into establishing a new international order? And how will the United States respond? Let us hope that Jan Coen’s dictum foreshadows merely a trade war, and not a real one.