Trump's Trade Wars Could Get Very Ugly

April 6, 2018 Topic: Economics Region: Americas Tags: ChinaSecurityEconomicsTariffsSanctionsTradeWar

Trump's Trade Wars Could Get Very Ugly

Both sides stand ready to inflict considerable pain on the other—even as they talk about talking.

President Trump has started a dangerous game with these tariffs. Rather than use more quiet means to move China from less-than-fair trade practices, he has chosen to play an all or nothing game—or what looks like one. It may yet yield positive results. But China’s leadership is no less afraid of risk than Trump. While willing to talk, it has countered the American tariffs with some of its own. Now both countries are stuck in a negotiation where failure will result in something more destructive than disappointment, for the U.S. economy, for China’s, and for the world economy generally. What is more, the destruction will occur while they talk and perhaps even if the resulting outcome is positive.

Though candidate Trump talked a lot about tariffs, his recent announcements had a larger purpose than simply fulfilling promises. They were meant to pressure Beijing as seldom before into making concessions, to ease restrictions on entry into that economy and its financial markets, to eliminate Chinese insistence that foreign firms secure a Chinese partner to do business there, and most galling of all, to blunt demands that foreign partners transfer patented technology to their Chinese counterparts. If they were simply delivery of a promise, their announcement would not have occurred simultaneously with a call from Treasury Secretary Steven Mnuchin to congratulate China’s Liu He on his rise to vice premier. Nor would the White House have coupled the announcement as it did with a letter to Beijing from Mnuchin and U.S. Trade Representative Robert Lighthizer inviting talks. Since China has long resisted any softening of these positions, it is also understandable why the White House sought a way to shock Beijing, but it does not make it any less dangerous.

The ploy seemed to work for a while in late March. Beijing voiced an uncharacteristic eagerness to talk. But true to past practice, China’s leadership has quickly upped the ante, countering the announced U.S tariffs with its own on 106 American products, including cars, chemicals and agricultural products. Beijing’s proposed 25 percent tariffs would affect an estimated $50 billion in annual U.S. sales to China, just matching the estimated $50 billion in Chinese sales here that Trump’s 25 percent tariffs on 1,333 Chinese products aim to impact. Now both sides stand ready to inflict considerable pain on the other even as they talk about talking.

The problem with this approach is that it leaves little alternative to trade war unless both sides can quickly succeed at what are by any standard difficult negotiations. What makes the matter even more dangerous is that the issues under discussion have proved so intractable in the past that the prospects of success remain limited. Now that the White House has chosen the tariff route, Beijing and Washington will either find some way to resolve long-festering problems or the nations will find themselves indefinitely facing economically destructive constraints, since there seems to be little likelihood that either country would climb down on tariffs should talks fail.

The worst part is that the situation does economic and financial damage immediately—regardless of the ultimate outcome. Threats to trade have already caused financial markets to roil and to fall around the world. Even if by some miracle the talks are ultimately successful, the longer they take the more the damage will creep into the real economy as businesses, afraid of future problems, curtail expansion plans and hiring. The past year has seen considerable global economic improvement on the hope/expectation that new policies in Washington and elsewhere would improve the business environment. Spending on expansion in the United States has accelerated from a standstill, as has hiring. Such signs to varying degrees have also been seen in Europe and other major markets. Now all this stands at risk. All that has to happen to cause harm is that the talks take time.

Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York based communications firm. His latest book, is Thirty Tomorrows: the Next Three Decades of globalization, Demographics, and How We Will Live.