Punitive American tariffs on China would leave everybody worse off
DONALD TRUMP vilified the Chinese government on the campaign trail, accusing it of manipulating China’s currency, stealing America’s intellectual property and “taking our jobs”. This hostility was not just posturing for the election season. In 2012 he had falsely accused the Chinese of inventing the concept of global warming—to make American manufacturing uncompetitive, he said. Tensions are high: Xi Jinping, the Chinese president, reminded global elites assembled at Davos that “no one will emerge as a winner in a trade war”. If America targets Chinese trade, China will hit back. So what might a trade war between the two economic powers play out?
There are two ways in which talk might translate to action. Mr Trump might try simply to enforce the rules of global trade in the court rooms of the World Trade Organisation (WTO). Since America has no bilateral trade deal with China, WTO rules define what is and is not allowed. Mr Trump might, with some justification, accuse China of boosting its economy with subsidies and flooding some American markets with cheap imports. He will find that the Obama administration had already initiated a number of legal cases against China at the WTO. His underlings have suggested that the Trump administration might go further, for example by launching cases against suspected Chinese dumpers, rather than leaving it to American industry. Crucially, however, while the Chinese would probably retaliate, perhaps suddenly finding health-and-safety problems with American food exports, this chain of events need not descend into a trade war. The rules of the WTO are designed specifically to handle this kind of dispute. If it finds that China is indeed not playing by the rules, then there are clear limits on how America can retaliate. If the system works as it should, any recriminations would be contained.
But a rules-based, WTO-sanctioned tit-for-tat is not what economists have in mind when they think of the worst-case scenario for trade between America and China. The big fear is that Mr Trump decides to bypass WTO rules, or ditch them altogether after a decision does not go his way. A 45% tariff on Chinese imports would effectively act as a tax on electronics and clothes made in China. If prices rise domestically then American shoppers will feel the pinch—particularly poorer ones. American companies relying on imported inputs from China would suffer too (some companies do not mind having their inputs subsidised by the Chinese government). A blanket tariff of 45% on Chinese imports would clearly violate WTO rules, and the Chinese would not wait for an official ruling to retaliate. A strategic move would be to curb Chinese imports of American soyabeans—this would rile the American ambassador to China, who comes from Iowa, a farming state.
There would be some winners from a trade war: in the short run the American government might well see more tax revenue, and some American companies would enjoy being sheltered from foreign competition. The biggest casualty may not even be the American consumer. After the second world war, rich countries coordinated to avoid a race towards higher tariffs, creating the General Agreement on Tariffs and Trade, which in 1995 grew into the WTO. By clubbing together they recognised the destruction of the 1930s, when countries erected trade barriers to protect their domestic economies but ended up harming themselves as a result. A trade war would mean abandoning an institution that recognises that countries are stronger when they work together.
Examination from “The Economist”