How China is playing 3D chess against Trump on trade

It's undoubtedly true that President Trump's trade policy is foolish and destructive. It's also undoubtedly true that China is one of Trump's bête noires. But these two truths do not mean China is some sort of innocent. The Chinese government is itself a potentially dangerous economic and political force on the world stage.

Unfortunately, like I said, Trump is being foolish and destructive in dealing with China. He's probably going to get played.

As an example, let's take a steel mill in Smederevo, Serbia, that got bought up by a Chinese state-owned steel producer in 2016. As The Wall Street Journal reported, the plant was on its last legs before the purchase. But now "exports from the plant, which is backed by tens of millions of dollars from Chinese state banks and investment funds, are surging. And it has started shipping steel to the U.S."

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There are a few things to keep in mind here: Many major Chinese companies, like the steel manufacturer that purchased the Serbian plant, are state-owned. The Chinese banks that lend to them are also state-owned. And of course the state itself controls the supply of Chinese currency and can print all the yuan it wants. All of which means that many Chinese economic projects just don't operate by the same market rules we're used to in America and the West.

For instance, if a business is failing or can't compete on price, the banks can just loan it more money to keep it afloat. If those loans don't make the bank money, the government can just step in and recapitalize them. While it's a system that's structured to look like market transactions, at bottom it's still largely communist-style centralized economic planning. And it's the system the Chinese government has relied upon to successfully develop its country's economy and lift hundreds of millions of its citizens out of poverty.

But it's certainly not an infallible system. It doesn't risk bankruptcies or financial collapses the way our system could. But it does risk a big buildup of bad investments and overcapacity, and an eventual economic slump.

This is actually what gave us the problem of Chinese steel exports to begin with. One of the many ways China's government fought off unemployment from the global financial crisis in 2008 was by building a whole bunch of new steel plants. The country's capacity grew 700 percent, accounting for half the globe's steel output. But China's own domestic demand wasn't enough to buy up all that production, especially after its economy began slowing down around 2013 or 2014. So China relied on the rest of the world to buy its steel, by "dumping" exports on the global market. That drove down the worldwide price, leading to the collapse of jobs in other countries like America.

The U.S. government and the rest of the world were also well aware of this problem before Trump took office. Over 130 tariffs have been imposed by various countries to protect their own steel industries from China's dumping. Chinese steel producers have faced a 64 percent tariff at the U.S. border since 2001.

This brings us back to that steel mill in Serbia.

Even though it's Chinese-owned, it's not in China, so its steel isn't technically an export from China, which gets around all those tariffs. Nor is it an isolated incident: As the Journal reports, for the last few years, state-owned Chinese manufacturers have been buying up factories around the world. And thanks to that aforementioned system of bank-financing-as-government-subsidy, they can export at prices that undercut other countries' industries.

But what's more unnerving is this: You can't really explain this as an effort to create Chinese jobs. All these mills and plants are opening outside of China, after all. As damaging as China's policies have been to other economies, you could at least understand them as an effort to do right by Chinese citizens first and foremost. As Matt Stoller pointed out, this looks a lot more like a concerted effort to compete foreign competitors out of business and then become something close to the globe's monopoly supplier.

This is all also worth keeping in mind as China embarks on its "One Belt, One Road" initiative. This is basically a trillion-dollar effort by China to build up rail, shipping, pipeline, and other trade infrastructure around the globe. Obviously first and foremost, it's an effort to expand and facilitate China's own exports. But it could also grant the Chinese government new and powerful economic sway with other nations. Plans for One Belt, One Road run through as many as 70 countries — including India, Malaysia, Pakistan, Brazil, Indonesia, New Zealand, Russia, and Poland — that account for as much as a third of world GDP.

Is Trump up for combating this challenge?

At first blush, his new tariffs on steel and aluminum might seem like a justifiable response — they cover imports from all countries, and thus get around China's foreign expansion strategy. Unfortunately, 25 percent on steel and 10 percent on aluminum is also pretty low compared to the previous anti-dumping tariffs that targeted exports from China proper. But the bigger problem is that by targeting exports from everywhere, Trump is also making enemies of other countries whose cooperation he'll need to keep China contained.

The president may hate international institutions and multilateral agreements, but they're precisely the kind of coordinated effort between many countries necessary to protect economies around the world from China's ambitions.

Trump's predecessors must also take plenty of the blame for this. It was bipartisan elite enthusiasm for globalized trade, pushed enthusiastically by U.S. policymakers for decades, that lowered barriers to the free flow of capital around the world, while enabling monopolization and these sorts of trade games. All of that basically paved the way for China's current strategy.

Nor has America proven itself a particularly attractive alternative hegemon to China. From Vietnam to South America to Iraq and Afghanistan, the United States has a long history of outright military imperialism. It also had subtler forms of economic imperialism: The free-market policies the U.S. helped encourage are largely responsible for a global demand slump that projects like One Belt, One Road could fix. And the trade deals America has pushed to contain China, such as the Trans-Pacific Partnership, were loaded with pro-corporate giveaways at its own behest.

Nonetheless, the Chinese government remains a repressive and autocratic regime in its own right. Now it's showing classic ambitions towards international hegemony, but it's using the sneakier tools of trade and economics to get there. And so far, it doesn't look like Trump or anyone else knows what to do about it.