IntelBrief: The First Shots of the Trade War
July 9, 2018
Bottom Line up Front:
• On July 6, the United States put into effect $34 billion in tariffs on Chinese goods.
• China immediately retaliated with an equal amount of tariffs, setting off what could be a nasty and completely unnecessary trade war.
• The trade war could turn catastrophic if President Trump follows through on his threatened $500 billion in total tariffs, equal to all Chinese imports.
• China views the tariffs not just as an economic tool but a tool of geopolitical subjugation.
Even with a much-touted strong economy, the U.S. administration has still followed through with tariffs that appear driven more by domestic political concerns than economic analysis. On July 6, 2018, the threatened $34 billion in tariffs against Chinese goods went into effect. President Trump has long railed against the very real imbalance in U.S.-China trade but has inflated the scale in many public statements, saying the deficit is over $500 billion when the highest it has ever been is a still-sizable $375 billion in 2017. There is a serious imbalance in trade between the two countries, with very real obstacles to entering the enormous Chinese market; companies usually have to surrender a degree of intellectual property rights not found in other markets. Yet, in the words of William Zarit, chairman of the American Chamber of Commerce in China, and many others directly involved in trade, ‘there are no winners in a trade war.’
The very public threats by the U.S. President—which he sees as a winning negotiation tactic—will likely not bring about Chinese accommodation for the simple reason that China does not see this primarily through an economic lens. Beijing views this latest spike in tensions as just another example of the U.S. seeking to delay what Beijing sees as its inevitable rise as a world leader. Through that lens, China will more than match any additional tariffs and is better suited in the near-to-medium term to withstand even a sharp downturn in trade. An example of how China might react to an increased and prolonged trade war is to look at its actions in the South China Sea; simply put, China is going to expand its military and literal presence in that area, regardless of pending international legal disputes or U.S. objections. Raising the issue so publicly also makes it much harder to back down, even when the course is proven to be not worth the risk.
The economic disruptions will be limited (though still painful to specific sectors such as soybeans and pork suppliers in the U.S) if the tariffs remain in this current round of tit-for-tat. However, if the U.S. ‘retaliates’ for the Chinese ‘retaliation’, then there is a real risk of a quick spiral towards what the Chinese government has threatened would be the ‘largest trade war in economic history.’ Given the mercurial statements and actions of President Trump, it is unclear how far the U.S. is willing to push an issue in which it likely has the weaker—though still formidable—economic and political hand. The U.S. administration views such uncertainty as one of its strongest tools, both in economic and diplomatic disagreements; yet a reasonable sense of certainty is a foundation of trade, a system that is far more global and decentralized—and impacted far more by technological change—than President Trump portrays in his public statements.
The trade war is emblematic of the current approach by the U.S. towards nearly all of its international challenges: deliberate confrontation over cooperation, viewing all agreements as transactional ‘deals’ in which the U.S.—despite the enormous and decades-long benefits these agreements have for the U.S.—is forever the ‘rube’ being taken advantage of by all other nations. This approach does have the advantage of bringing long-ignored issues to the fore but at a cost of cooperation and coordination on multilateral issues where the costs of going it alone far outweigh any possible domestic benefit.
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