Time for a trade war to clear the air?

When I started writing this blog over the weekend, it was meant to be prospective. Plunging into a trade war might clear the air by actually demonstrating — after endless informed and uninformed speculation — the consequences of such an event for the US, China, and Europe.  After Monday, “prospective” was no longer valid as President Donald Trump announced that he had ordered US Trade Representative Robert Lighthizer to add an additional $200 billion in tariffs on China, beyond the $50 billion and $100 billion the US had proposed previously. A tit for tat conflict is unfolding before our very eyes: Trump’s latest mercurial move is in direct response to his fury over Beijing’s response to his original tariff levies on a total of $150 billion in Chinese goods. (According to The New York Times, the grand total of threatened tariffs has reached some $450 billion.)

In a statement, the president claimed that China’s retaliation was evidence that Beijing was determined to keep the US at a “permanent and unfair disadvantage.” As Politico argues, on China, Trump has decided to “go big or go home.” In turn, China accused the US of blackmail and vowed to respond in kind with both quantitative and qualitative responses. At this point, the battle clearly transcends economic issues and has become a test of political will on both sides.

(As an aside, the Trump administration is going big across the world on trade. Analysts have concluded that the Trump administration has now declared war on nations from which the US obtains more than two-thirds of its imports — $600 billion from Mexico and Canada, more than $500 billion from China, and $450 billion from the European Union.)

Yet before accepting instant dire predictions of the consequences of a developing trade war, note should be taken of recent analyses of the larger macro impact of potential trade conflicts — particularly between the two giant economies, China and the US. These paint a much different picture. Last week, Megan Greene of The Financial Times pulled together results from a number of models predicting the impact on the world economy and some individual countries from Trump’s projected trade actions. Most found “an almost imperceptible shift in gross domestic product growth in the US, China and global economies.” For the US and China particularly, given the impact of the steel and aluminum tariffs and the $50 billion tariff tit for tat, models projected a one- to two-tenths drag on GDP over a five-year period. Even factoring in a $100 billion tit for tat, the drag on GDP is almost imperceptible after five years. (Obviously, these projections were concluded before the Trump administration’s latest tariffs, but still, the results would not change appreciably.)

Similar effects are forecast regarding the potential collapse of the North American Free Trade Agreement. Although Mexico would suffer great losses, the US and Canada would barely notice changes in their growth patterns.

Overall, Greene asserts: “In the event of a trade war, the models suggest a benign — boring, even — global growth picture.”

The trade conflict and growth models are not wrong — but as Greene also points out, they cannot take into account the disparate impacts on specific sectors and regions within domestic economies. (The analytic situation here is similar to the China labor hit after 2001: While the US economy steamed ahead until 2007, large portions of the Midwest and older manufacturing areas plunged deeper into labor market depression.) Nor can these models measure the political backlash that will inevitably arise from these sudden market-closing tariffs.

A subsequent blog post will explore in greater depth the potential impacts a US-China trade war could have on US high-tech sectors, particularly on information and telecommunications technology companies. But before that analysis, here are the governing political assumptions that seem to be guiding US and Chinese political leaders — and the potential miscalculations.

On the US side, Trump and his top aides believe the US economy ($20 trillion) encompasses so much market power that no country (even China) can stand up against it. This fixed principle has been evident since the 2016 campaign; but today, even free trade–leaning economic advisers, such as White House Council of Economic Advisers Chairman Kevin Hassett, have bought into the idea. Hassett stated that “a lot of forward momentum” would protect us from Chinese trade actions. They also believe that China’s huge exports ($500 billion) to the US put the US in better position to cut off Chinese exports, while Beijing has much less working room to reduce US exports ($130 billion).

In terms of the likely tit for tat ping-pong, the US is underestimating the significant damage Beijing can inflict on US companies beyond tariff walls. Chinese officials are masters at regulatory protection and at shifting standards, health and safety barriers, public order and national security rationales, and non-transparent orders. And how about reciprocal blocking of iPhone sales in response to the US banning smart phones from ZTE Corporation and Huawei Technologies?

On the Chinese side, there is the calculation, openly touted by Chinese officials, that their authoritarian regime has greater discipline and leeway to withstand US economic attacks. They also believe that the Trump administration will face a backlash from US corporations and consumers that will force it to back down. In a democracy, elections are always just around the corner.

There is evidence that such pressures are rising. But what Beijing may have underestimated is the strong animus against China in Congress (just ask ZTE). Whatever their loathing for the Trump administration, even Democrats have applauded the president’s moves on China.

This brings us finally back to the headline above. With both sides dug in, it may well be that only a trade war will settle the matter — and prove (or not) each side’s governing assumptions.