Common sense dictates that Donald Trump’s tweet that “trade wars are good, and easy to win” cannot be correct. It should instead have read: “trade wars are the worst, nobody can win”.
Unfortunately, the entrepreneur turned US president – who cares little for rules anyway – has already fired the first shot of this war, targeting China’s trade and economic policies.
In the most significant of a series of trade measures undertaken by the US administration, Trump’s decision to levy a 25 per cent tariff on roughly 1,300 Chinese goods – worth an estimated US$60 billion – aims to punish China for what he claims are predatory practices regarding intellectual property theft and forced technology transfer. That move followed a six-month Section 301 investigation.
Trump has also directed the Department of the Treasury to come up with restrictions on Chinese investment in the United States.
But the launch of Trump’s long-promised anti-China tariffs will inflict as much pain on the US economy – specifically on American consumers and exporters of Chinese goods – as they will on China itself.
So far, China’s response has been more symbolic politically than substantive economically. Beijing has rolled out US$3 billion worth of additional tariffs on US goods, mostly targeting farm products, following earlier US tariffs on aluminium and steel imports.
Beijing is carefully calibrating its message – that it will stand up to the US, while refraining from escalating the spat into a confrontation that could threaten the world’s most important bilateral relationship in terms of the world economy.
Arguably, Trump’s actions themselves may represent more of a warning shot than the start of a full-blown trade war with Beijing – perhaps in the hope that a tough stand would bring major concessions from China.
Even if this is so, there is a risk of a mounting cycle of retaliation as both governments become addicted to trading blows. Both powers have the ability to inflict significant economic damage on the other, through both overt and covert actions.
The shocks of a trade war on this scale are bound to be felt across the globe. That much was evident when the White House’s announcement of the tariffs sent stock prices tumbling in major markets across the world.
A major trade war would hurt all involved in what is a globally connected supply chain.
As trade is a major contributor to global economic growth, any slowdown would drive up consumer inflation, weaken investor appetite and undermine confidence in consumption. Thus it would jeopardise the worldwide recovery.
A trade war between the world’s two largest traders would shake the foundation of the current rules-based trade architecture that has underpinned global stability, peace and prosperity since the end of the second world war.
Even more significant than the effect on trade is that such a dispute will nurture distrust and hostility between the world’s two most influential nations. Trump recently signalled a historic shift in Washington’s long-standing China policy – which has been around since Nixon – by declaring China a major competitor and, moreover, one that much like a rogue state or terrorist organ seeks to challenge America’s “economy, interests and values”.
A trade war between the world’s key economic rivals could easily morph into a political cold war between the world’s key political adversaries. We have been here before, nearly three decades ago, when the US-led free democracies took on the Soviet-led socialist bloc. We all know how that one ended. This time, who can tell? ■
Cary Huang, a senior writer with the South China Morning Post, has been a China affairs columnist since the 1990s