US can’t win Trump’s trade war

The US could probably extract major concessions from China on trading issues because the Chinese don’t want a trade war with their best export customer. But the US can’t win the trade war Donald Trump is planning to wage – and it kicks off today.

That’s when the first chunk of Trump’s new tariffs on Chinese exports to the US – a 25% import tax on $50 billion (R680 billion) of Chinese goods – goes into effect, and Beijing retaliates with similar tariffs on $50 billion of American exports to China. That’s just a drop in the bucket in terms of the size of either economy, but it’s also just the opening salvo in the war.

Trump has already said Chinese retaliation would be “unfair” and if China goes ahead, he will slap a 10% levy on an additional $200 billion of Chinese goods. (He subsequently reduced that amount to $100 billion, but who knows?) And China has already said it would respond with measures of a “corresponding number and quality” if the US goes ahead.

This is where the real tit-for-tat escalation starts – and it’s hard to see how it can be stopped. Trump is trapped by his own pugnacious rhetoric and China’s President Xi Jinping is trapped in two ways.

One is Trump has already imposed big tariffs on exports to the US by the European Union and by America’s neighbours Canada and Mexico. They have all responded by imposing similar tariffs on US exports of equal value.

Xi can hardly do less, even if China’s real interests might be better served by not responding in kind to the new US tariffs.

The other factor is that Beijing is starting to see American trade policy as part of a deliberate attempt to stop China’s emergence as a great industrial and technological power – and a real peer rival to the United States.

Trump does not think in geostrategic terms, but the Chinese may well see his actions on trade as inspired by those who do. If they come to that conclusion, their willingness to go all the way in a trade war may be greater than the financial experts think it is.

China’s exports to the US amount to about 40% of its total exports, whereas only 5% of US exports go to China, so an all-out trade war would hurt China more. Xi, however, is far more able to ignore the resultant job losses and higher prices than Trump is – especially because the Americans who were hurting worst would be his political base.

Alternatively, China’s indebted economy may turn out to be more fragile – and a war could drive the country into a deep recession.

There’s a reason trade wars went out of fashion after the Second World War.

The first era of free trade – 1870-1914 – was also the Long Peace, when no European great power fought any other for almost half a century. That peace was destroyed by World War I, but the trade wars of the 1930s certainly deepened the Great Depression and facilitated the rise of fascism and a second world war.

And then came the Second Long Peace, from 1945 to the present, when once again free trade reigns. I’m not saying Trump’s assault on free trade is going to lead us down the path to a great war again. Many other factors go into making such a catastrophe possible. But he may be putting one of the key factors back into place.

Gwynne Dyer.

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