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US and China playing a gigantic game of chicken US and China playing a gigantic game of chicken over trade
(about 4 hours later)
When Donald Trump tweeted that “trade wars are good and easy to win” most commentators thought the US president was merely sabre-rattling. The prospect of a return to full-scale 1930s protectionism was thought to be minimal. Cooler heads would prevail.When Donald Trump tweeted that “trade wars are good and easy to win” most commentators thought the US president was merely sabre-rattling. The prospect of a return to full-scale 1930s protectionism was thought to be minimal. Cooler heads would prevail.
A month on the chances of a trade war between America and China have significantly increased. Trump has said he will slap a 25% tariff on $50bn of Chinese goods and Beijing has now responded in kind. It has drawn up a list of US goods also worth $50bn which it will target if the White House goes ahead with its action. A month on, the chances of a trade war between the US and China have significantly increased. Trump has said he will slap a 25% tariff on $50bn of Chinese goods and Beijing has now responded in kind. It has drawn up a list of US goods also worth $50bn which it will target if the White House goes ahead with its action.
At the moment, this is simply a gigantic game of chicken. If Trump withdraws his threatened tariffs, the Chinese have said they will do the same. A trade war is not inevitable, but the risk of sleepwalking into a damaging conflict that nobody really wants is there. For the moment, this is simply a gigantic game of chicken. If Trump withdraws his threatened tariffs, the Chinese have said they will do the same. A trade war is not inevitable, but the risk of sleepwalking into a damaging conflict that nobody really wants is there.
China’s tough approach has come as something of a surprise, and reflects a growing global self-confidence. Beijing has stressed that it doesn’t want a trade war but has also made it plain that it won’t be pushed around by the US. By putting soya beans on its hit list, China also served notice on Trump that it is willing to inflict economic pain on his supporters in swing states. While Trump spread his tariffs over a broad range of Chinese products, Beijing opted to target a small number of products including aerospace and chemicals. By putting soya beans on its hit list, China also served notice on Trump that it is willing to inflict economic pain on his supporters in swing states. China’s tough approach has come as something of a surprise, and reflects a growing global self-confidence.
For now, the economic consequences of this tit-for-tat action look much less serious than they were in the 1930s, when protectionism was a response to a deep slump. The global economy is growing more quickly than at any time since the financial meltdown of a decade ago, and it will take more than a 25% levy on a combined $100bn of imports to change that. The economic consequences of this spat still look far less serious than they were in the 1930s, when protectionism was a response to a deep slump. The global economy is growing more quickly than at any time since the financial meltdown of a decade ago, and it will take more than a 25% levy on a combined $100bn of imports to change that.
But this state of affairs may not last. First, there is a risk that the conflict will escalate. Behind the scenes, protectionist measures have been on the rise ever since 2008, with the US and the EU the main players. Trump does not seem inclined to back off and could both broaden his list of targeted imports to include sensitive sectors such as consumer electronics and broaden his list of targeted countries to include the EU and the US’s Nafta partners, Mexico and Canada. But this state of affairs may not last. First, there is a risk that the conflict will escalate. Given that the US’s annual trade deficit with China is close to $400bn, Trump thinks Xi Jinping has more to lose than he does, which is true.
Larry Kudlow, Trump’s chief economic adviser, was doing his best to lower the temperature, saying the US action was part of a negotiating strategy. But his boss is unpredictable. He could target a wider range of Chinese imports or include the EU and the US’s Nafta partners, Mexico and Canada, on his hit list.
Second, even the threat of a trade war has sent tremors through the world’s financial markets. The real thing will do even more serious damage to share prices and to business confidence.Second, even the threat of a trade war has sent tremors through the world’s financial markets. The real thing will do even more serious damage to share prices and to business confidence.
Finally, tariffs are the equivalent of a tax on consumers. They protect some industries but only at the cost of raising prices and reducing spending power.Finally, tariffs are the equivalent of a tax on consumers. They protect some industries but only at the cost of raising prices and reducing spending power.
Trump says that his action is a response to China’s unfair trading practices, including widespread industrial piracy, and he has a point. Back in the 1990s, the US was instrumental in creating the World Trade Organisation to deal with issues of this sort, but the current administration has little time for the WTO, preferring unilateral rather than multilateral solutions. Trump says his action is a response to China’s unfair trading practices, including widespread industrial piracy, and he has a point. Back in the 1990s, the US was instrumental in creating the World Trade Organisation to deal with issues of this sort, but the current administration has little time for the WTO, preferring unilateral rather than multilateral solutions.
All of which means that how this ends is now up to Trump. It may or may not be true that trade wars are easy to win. It is certainly the case that they are easier to start than they are to end. Over to you, Mr President. How this ends is now up to Trump. It may or may not be true that trade wars are easy to win, but they are certainly easier to start than they are to stop. Over to you, Mr President.
Global economyGlobal economy
EconomicsEconomics
Trump administrationTrump administration
ChinaChina
Donald TrumpDonald Trump
Xi JinpingXi Jinping
analysisanalysis
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