E Trump’s Tariff War With China May Have Some Unexpected Consequences

“The contours of US President Donald Trump’s trade strategy are becoming clearer by the day. America’s trading partners face dramatic threats. But, as the revamp of the United States-Korea Free Trade Agreement and the “reform” and renaming of the North American Free Trade Agreement (NAFTA) demonstrate, most countries need to offer only minor concessions to appease Trump. The only country Trump really cares about – his “public enemy number one” – is China.” (Daniel Gros, Who Wins in Trump’s Trade War? Project Syndicate, Oct 9, 2018)

Donald Trump’s version of populist economics has rarely had it so good. The American economy is roaring, the stock market has, up till recently, been very strong, and thus far protectionism has had only a negligible impact on growth.

Trump’s dictum that “trade wars are good” seems to be catching on politically since his supporters seem to accept that tariffs are an appropriate weapon to contain China’s economic ambitions. Is Trump’s belief in the value of tariff wars winning the day? As Daniel Gros points out, Trump is preoccupied with the US trade deficit with China, which amounted to about $375bn last year.

Trump believes that he has the upper hand in the trade conflict with China because the US economy is so strong, but is he wrong? Is China in fact in a better position to win, since in theory all it needs do to avoid any damage from the US tariffs is respond with a full-scale Keynesian stimulus?

Gros indicates that the consequences from a prolonged tariff war may be positive for some European economies and other Asian countries. With the US imposing higher tariffs on Chinese goods, European producers would enjoy a competitive advantage over Chinese producers in the US market. Likewise, in the Chinese market, both European and Asian producers will have a new competitive advantage over US producers.

“A substantial share of US-China trade is thus likely to be diverted to Europe, Japan, and other Asian economies close to the Chinese market. The European Union is likely to reap particularly large benefits, because it remains one of the largest trading partners of both the US and China, and because European producers are often US companies’ closest competitors.”

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Arthur Donner 10 months ago Author's comment

I found your article to be very insightful. As an aside, I have also long thought that the division between what is manufacturing and what can be classified as services to be very blurry. All the best.

James Hanshaw 10 months ago Contributor's comment

Interesting article. I put my own thoughts on this in seekingalpha.com/.../4168435-chinas-democracy-vs-u-s-tweetocracyhere

Frank Underwood 10 months ago Member's comment

Interesting, I had seen many arguments saying China would be hurt worse. I see your logic how it could likely be the other way around. I hadn't though about this aspect.