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The Trade War’s Biggest Losers

Smaller countries caught in the middle are being forced to choose sides.  

The Trade War’s Biggest Losers
U.S. President Donald Trump, right, and Xi Jinping, China’s president, greet attendees waving American and Chinese national flags during a welcome ceremony outside the Great Hall of the People in Beijing, China. (Photographer: Qilai Shen/Bloomberg)

(Bloomberg Opinion) -- Debate continues about how much the costs of this trade war fall on China vs. the U.S., but the American contributions to that debate are overlooking some of the biggest victims: the countries “caught in the middle.” The current trade war is making it harder for many countries, and many businesspeople, to maintain even a partly pro-American stance.

Take Pakistan, for instance. It has recently been revealed that Pakistan has borrowed $6.5 billion from China this fiscal year alone, and China is also a major infrastructure supporter and Pakistan’s biggest foreign direct investor. Furthermore, China is Pakistan’s main counterweight in its rivalry with India. These are the facts on the ground.

The reality is that ties between Pakistan and China are going to be strong. Pakistan does not really have the option of thumbing its nose at China.

Now consider the Pakistan-U.S. relationship. America is the world’s strongest military power and the dollar is the global reserve currency. It is the U.S., not China, which is the leading importer of Pakistani goods. Meanwhile, the U.S. has sold plenty of arms to Pakistan, and not so long ago staged an invasion on Pakistani territory to capture Osama bin Laden. The U.S. also shares intelligence with Pakistan and coordinates some drone attacks and Afghanistan policy with Pakistan. It’s a very complicated relationship, full of tension, but again neither side can just walk away from it.

In this setting, many Pakistani businesspeople work with both China and the U.S. Now President Donald Trump is essentially telling them to choose sides. Will they do business with Huawei or not? Will they work to open up the Chinese economy or not? And so on.

If you’re Pakistan, on the actual matters under consideration, you will side with China. Pakistan is not going to ban Huawei or push China to open its markets to major U.S. tech companies. China will get its way on those issues, and win some very public victories in the Pakistani public arena. Pakistani leaders and businesspeople who sided with the U.S., or expressed strong American loyalties, will feel burned. Their side just lost a very big debate, centered on a conflict that did Pakistan no good in the first place and was at least in the proximate sense started by Trump.

In other words, the U.S. is making it harder for many foreigners to be on its side, even partially. Over time, it is limiting its own soft power in the countries caught between America and China — and soft power is the one area in which America still has (or is it, already, had?) a big advantage over China.   

In the longer run, the countries caught in the middle are more likely to support measures that weaken U.S. control over the global financial system, as applied through SWIFT, dollar-based clearing, and the U.S. ability to enforce international sanctions. Eventually a lot of America’s harder incentives for cooperation will erode as well.

The responses to the trade war run deeper yet. If you are a country in South or Central Asia, your secondary response to the U.S. trade war pressure may be to raise the level of your own hypocrisy. You will try to claim all the more strongly that you are assisting the U.S. in non-trade war related aspects of the relationship, for example in intelligence sharing. Such declarations may or may not be true, but since abandoning the U.S. relationship probably is not an option, you have to offer something extra to America, if only at the rhetorical level.

It is not obviously a good idea to ratchet up the pressure on these other facets of America’s foreign policy relationships. Maybe those professions of common interest were overstated to begin with, but still: Now there will be even less transparency and truth-telling between nations. That increases the chances of mutual disappointment and eventual recrimination.

For another example of a country caught in the middle, look at Singapore, which also must maintain good ties with both China and America. To the extent Singapore is made to choose sides, a key underlying premise of its foreign policy collapses. Yes, more honesty is preferable to less, and maybe America resents it when other nations use are “two-faced” about their support of U.S. policies. But the reality is that a successful foreign policy relies on a lot of “creative ambiguity.” It is not obvious that “forcing Singapore to choose” is going to redound to the benefit of the U.S.  The same is true of South Korea.

Too often large nations think only in terms of other large nations. But many of the biggest losers in this dispute between China and the U.S. are the smaller players, and America’s relations with them. That may well be the biggest legacy of this trade war.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."

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