On a New Trade War

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Over the course of the last decade the global economy has seen brutal, demoralizing lows and wonderfully captivating highs as it slowly but surely heated up en route to crushing the lethargic pace it kept in the few years following the 2008 financial crisis. While global growth has slowed in 2018, Goldman Sachs and Barclays have forecast American growth at 4% in Q2, spurred by new tax cuts and higher spending by both consumers and the government. However, the Trump Administration has expressed dissatisfaction with current trade deficits and recently announced a 25% tariff on $50bn worth of Chinese goods that went into effect at midnight on July 6th. Feeling slighted, China lodged a complaint with the World Trade Organization and retaliated with tariffs of equal size and plans to match any further increases. In the event of continuing escalation, it is not difficult to imagine that they have the potential to not only stun their own domestic growths but to bring the global economy to its knees once again.

Despite some softening due in part to the Federal Reserve raising interest rates and a strong US dollar squeezing emerging markets, the global economy entered 2018 with a more than healthy 3.1% growth rate highlighted by rapid expansion in South and East Asia after reaching an excellent 3.8% in 2017. The United States, China and the European Union are recording economic activity higher than they had 83% of the time since 2011 with the latter finally overcoming the Greek and Spanish debt crises that had resulted in anemic growth for a number of years. There is little doubt that the United States remains the undisputed leader of the world economy, however, making up just under a quarter of global GDP and an increasingly large portion of its energy supply amid the Shale Revolution and growing thirst for liquefied natural gas. But as the face of the developing world, China has been extremely ambitious in seeking opportunities to surpass the US and is taking aggressive steps to challenge its dominance over the next decade as part of the Made in China 2025 initiative that will “comprehensively upgrade Chinese industry” with a focus on manufacturing in areas such as automation, transportation, pharmaceuticals and more. Success here would result in significantly greater economic self-sufficiency for the Orient’s great power so it was no surprise that many of the tariffs levied by the Trump Administration targeted the strategic sectors listed in Mr. Xi’s grand plan for modernization.

In 1960, the United States made up a staggering $543bn of the global GDP's $1.37trn value after two World Wars devastated Europe’s infrastructure and working age population. 58 years, 11 Presidents and three unpopular wars later, its share has shrunk by nearly 50%. Frustration surrounding the decline came to a head during the election of 2016 when populist candidates Donald Trump and Bernie Sanders successfully capitalized upon negative sentiment by attacking the trade policies that have resulted in working class Americans competing with low-wage labor and cheap goods from China. What many members of the electorate who were and are captivated by their fiery rhetoric forget, however, is that America is still an unimaginably dominant force and could induce a global recession with relative ease if its leadership were to pursue a full-scale trade war with China. Just slightly less concerning would be the cost to the United States itself, namely rising prices of basic goods and the job losses that could eventually reach 550,000 in the wake of China’s retaliatory tariffs. On the other hand, it could also regress progress made in the advancement of globalization and nudge America away from its role as the world’s policeman.

Interestingly, the greatest immediate threat China’s retaliatory tariffs pose is to the agricultural states that make up much of President Trump's base. Goods they target include frozen beef, fresh and frozen pork, potatoes, tobacco, whiskey and more. This will place additional pressure upon the Chinese agricultural industry where increased demand could strain laborers and increase prices while price controls could lead to a famine amongst Chinese mainlanders. The Chinese may also have to increase their dependence upon other East Asian States with whom they have recently had tense relations due to disputes surrounding anything from commerce to territorial holdings. However, the strain could also push Mr. Xi to invest in greater agricultural infrastructure and education for impoverished rural areas, significantly improving the quality of life for those living far from the bustling streets of Beijing and Shanghai. Ultimately, because the United States buys from China almost four times as much as it sells there, Mr. Xi has significantly less capacity to cause damage and may need to look toward accelerating the diversification of his country’s economy in order to mitigate future risk.

Regardless of which side escalates the conflict to a full trade war, it goes without saying that the entire world will suffer for it. Combining for roughly two-fifths of the global economy and supporting a number of emerging nations as well, a battle between the two powers would inflict damage that would take years to recover from while placing unnecessary pressure on countless companies and enterprising individuals in the meantime. Dmitry Grozoubinski of the International Centre for Trade and Sustainable Development stated that a trade war would be akin to “blowing up your own cities and wafting the resulting smoke across the border in the hopes it will sting their eyes.” While this may be an exaggeration as it relates to the United States’ situation, it somewhat accurately describes the recklessness with which the affair has developed as the US Trade Representative is already prepared to levy tariffs on about nine-tenths of the roughly $500bn-worth of goods imported from China each year. Because China would not be able to match that, the White House hopes the imbalance will force Mr. Xi to yield to its demands, beginning with addressing the theft of American firms’ intellectual property and ending with the elimination of the bilateral trade deficit. Unfortunately Mr. Trump is likely overestimating his bargaining power, especially as China pursues greater autarky, and seems to misunderstand that America’s economy has evolved to the point that it is much better configured to design iPhones rather than assemble their components.

Most concerning is that it's unlikely that anyone will be able to diffuse the situation due to the respective temperaments and pride of Mr. Trump and Mr. Xi, both of whom are fighting over lasting economic supremacy as the world closes in on the 2020s. Because China is more prone to large-scale suffering in the event of a trade war, it would be in their best interest to open a dialogue regarding friendlier policies toward American businesses, especially curbing the theft of intellectual property, and build from there in an effort to de-escalate tension. Doing so would not only showcase a superior commitment to peaceful diplomatic solutions but could also provide Mr. Xi with the opportunity to lead the reconciliation effort and gain greater international credibility as the leader of an emerging superpower.

For now, the trade war may be contained but it is important to remember that this may not always be the case. Realize that it is difficult to determine a victor in events of great suffering, especially when they're not entirely necessary, and nearly impossible to do so when ones countrymen have suffered at the hands of the pride of an elected official.