Everyone pause and take a deep breath.
Donald Trump is right -- the United States is not in a trade war with China. Yet.
As the rhetoric has come thick and fast between Washington and Beijing, the mainstream media’s breathless news coverage has made it appear as if a tariff Götterdämmerung has already begun. To be clear: it has not. Hardly any new duties have been levied. At most, the world has entered a kind of July 1914 moment, with the clouds of trade conflict gathering ominously but with no shots yet fired. though fiscal artillery of progressively larger calibers are being primed. Soon enough, we will know whether or not that is going to be the correct historical analogy. For now, the war exists only in words, with a lot of posturing by adults who should know better. It would be best for all if that’s actually as far as it goes, as the only real way to win a trade war is not to fight it.
For many, the line between words and actions has been erased. Beginning with Trump’s early March Twitter indiscreet bravado (“trade wars are good, and easy to win”), continuing with the announcement of tariffs first against steel and aluminium, and then against approximately $50 billion in imports from China, and then with a possible further round on $100 billion more, financial markets have embarked on rollercoaster swings with each new salvo, keying off everything from tweets to detailed tit for tat lists published by first the U.S. and then by the Chinese of exactly which products would be subject to what duties.
This is the grown-up version of kicking sand in the other kid’s face.
Time for a reality check: the announcement of levies against global steel and aluminium imports in early March led to the implementation of those levies on March 23rd, except for the fact that a full 50% of all U.S. steel imports (Brazil, South Korea, Mexico, Canada and others) were then exempted from those punitive tariffs. China then announced retaliatory tariffs as high as 25% on $3 billion of U.S. goods. Here too, the reporting has often been nothing but alarmist: 25% tariffs on $3 billion of goods amounts to $750 million.
What has actually happened? The U.S. is levying perhaps an additional $5 billion of tariffs on global steel and aluminium, which China is responding with less than $1 billion of its own. As a proportion of the nearly $19 trillion U.S. economy, that amounts to less than 0.0003%. As a proportion of the combined U.S. and Chinese economies, the number is less than insignificant.
Even the larger figures recently threatened, on $50 billion of Chinese goods including consumer items such as flat screen televisions -- and China’s proposed retaliation on an equivalent dollar amount of U.S. exports including pork and soybeans -- represent perhaps $25 billion tax on a reciprocal trade relationship that last year amounted to nearly $700 billion. Let’s say that goes even higher based on recent escalating rhetoric and threats. The numbers are still modest in the greater scheme of things. If this is meant to be July 1914, it is a July where the third cousin twice-removed of the Archduke of Austria-Hungary was assassinated, a couple of battalions of Austrian and Serbian infantry were dispatched to the border and the rest of the continent enjoyed its summer holidays largely unbothered.
If Shakespeare were to describe this current state he would mostly likely refer to it as “…but a walking shadow, a poor player. That struts and frets his hour upon the stage. And then is heard no more. It is a tale. Told by an idiot, full of sound and fury…” (requisite apologies to the great Bard).
The words being uttered just now are indeed mere shadows of the truly destructive actions that we rightly fear, and it is vital that we all take a collective deep breath and resolve to make a concerted effort to distinguish threats, bluster and modest action/reaction from a global trade war that echoes the fundamental economic realignment of the 1930s. The infamous Smoot-Hawley Act of 1930 levied duties of close to 60% on nearly 20,000 products, leading U.S. trade with the world to plunge by nearly 75%. Now that was a trade war. What we are seeing today might indeed be the first signs of one, but we are a ways off from an all-consuming conflagaration.
That makes it an opportune time not to cross the “red line” drawn by this recent series of actions. It may well be, of course, that the raucous and unpredictable Trump administration has in this arena found an outlet for its tendency to speak loudly and carry a stick of dubious size. China’s response to the threat of broad tariffs has been to immediately threaten its own retaliatory measures, while simultaneously agreeing that now is the time to revise many past practices. One of the main goals of these announced tariffs is to retaliate against China for years of forced intellectual property transfer (outright theft to some US observers) as well as dubious requirements that companies setting up production lines or business in China must have a joint venture partner with a significant stake and then transfer IP to that partner.
While China released its own list of possible tariffs, high-level government officials have also signalled their willingness to review its past mercantile trade practices. In other words, they are obliquely admitting that they have been caught with their fingers in the proverbial cookie jar. Shame on us in the West who have been too mesmerized by the shiny towers of steel built by millions of indentured workers imported from the Middle Kingdom’s vast rural hinterland, lulled by the allure of the world’s largest ‘untapped’ consumer market, to the extent that everyone from businesses to past governments have turned a blind eye to virtually unlimited trademark/copyright infringement and unrestricted cyberwarfare seeking to hack into our most valuable treasures from the very people we are looking to do business with.
Thus, it might be that, as new economic adviser Larry Kudlow has said several times, there will be no material tariffs, and hence no resultant trade war. If indeed that is how the next few months unfold (and by law it will be months before any of the non-steel and aluminium tariffs are actually put in place), then the White House will have succeeded in using the very threat of tariffs as a (crude) tool to compel some changes in the U.S.-Chinese bilateral economic relationship. That undoubtedly will be treated as a victory, as it should be. The problem that would follow is that Trump would most likely trumpet it so loudly it will make one’s ears bleed.
And yet, even ending years of Chinese infringement of American intellectual property will not do much to ensure U.S. competitiveness or prosperity in years ahead. Nor will a somewhat more open, less-than-closed Chinese market for American goods. China is undoubtedly becoming a domestic economic powerhouse, making much of what it needs for itself and spending tens of billions on artificial intelligence research, clean energy innovation and next-generation telecommunications, along with the trillions it intends to invest in global and domestic infrastructure. After all, the nominally communist regime literally has the license to print money and publish whatever economic figures it so desires, regardless of burden of proof. U.S. tariffs may annoy China, and they might dent the $700 billion in U.S.-China trade, but the endgame will not be a glorious recreation of the 1950s with America a global hyperpower and the rest of the world struggling to catch up. That ship has sailed a few administrations ago.
The problem with trade statistics is that they are themselves highly problematic -- we, like Trump, tend to fixate on the hundreds of billions of dollars of U.S deficits, when in fact a large percentage of that is U.S. companies assembling items nominally “made in China” and then selling them in America. For example, the vaunted iPhone is perhaps the best example. It is treated as a U.S. import from China at its announced import price of more than $200, but as many economists have shown, only a fraction of that actually goes to China. The rest is distributed among global suppliers and Apple itself, but arcane “country of origin rules” make it seem otherwise. That is true for almost all products other than commodities and agricultural goods. The current trade numbers reflect supply chains of the 1950s but how goods are actually made in the 21st century.
That is in part why China’s possible tariffs against U.S. commodities could hurt more than U.S. tariffs against Chinese goods: American pork and soybeans are basically all-American commodities, whereas a substantial portion of Chinese imports have parts from countries around the world sourced by American companies domiciled in the U.S.
The final problem with the tariffs is that China is the cold reality that the fastest-growing export market for American goods and perhaps the largest remaining potential market for U.S. services. Those services include Chinese tourism to the United States and Chinese students studying here, whose economic ripple effects are surely under-reported (a Chinese student paying rent shows up in no trade number one knows of). And those numbers don’t include China investing tens of billions in the U.S. to buy companies with its surplus dollars, nor its trillion-dollar investment in U.S. bonds.
These promising, fast-growing economic avenues are threatened not just by U.S. tariffs but by a plethora of White House policies that make the United States less welcoming to foreign capital and business. Those include more onerous restrictions on student visas and more limitations on foreign investment, such as the recently nixed $100 billion semiconductor deal, which would have seen Qualcomm acquired by a Singaporean company with deep business ties in China. Yes, as the administration is fond of reminding everyone, the United States remains a global market like no other, but with multiple economic centers emerging, the U.S. is not nearly as central as it was. Foreign countries and businesses have many more options and more markets than ever before, and the more friction the U.S. creates (or is seen to create), the more attractive those options become.
Starting a trade war with a series of pallid actions therefore constitutes the ultimate mistake. It interferes with one of the fastest-growing import and export markets in the world for the United States without generating nearly enough actual revenue to make a material difference except to already vulnerable domestic American industries and consumers that are purportedly protected. It does little to halt China’s future trajectory as a domestic innovator with its own intellectual property that relies less on the United States than in the past, and punishes China for acts already committed that cannot be retroactively reversed.
Trump’s intemperate rhetoric may prove successful in the very modest sense of preventing some of the past abuses from recurring. Yet, given the changed nature of China’s economy, that won’t matter nearly as much going forward even if the abuses continue, but some adjustment on China’s part would at least restore a level of foundational trust between the two countries. That would certainly be for everyone’s benefits. It would also be a small step for such a large threat, compared with the much greater harm that might result. If, on the other hand, we do stumble into an actual global trade war, the U.S. is unlikely to emerge stronger and China is unlikely to weaken measurably. The only way for Trump to win his trade war is to learn from the guns of August and never fight it.