The Likeliest of Trade Wars

BRANDON COLLIGAN, PUSHING FORWARD

Along the campaign trail, then candidate Trump had used harsh language to describe the state of the U.S. trade imbalance. He infamously stated that China was “raping” the United States on trade, an unsavory way to describe the massive trade imbalance that America suffers, particularly with China. Calling this imbalance one of the ‘greatest thefts of all time,” he subsequently said that China couldn’t be blamed for taking advantage. This was no doubly a testament of the transactional nature of Trump’s views on international diplomacy and trade. Once elected, President Trump has continued to play a series of good cop, bad cop with China to offset some of this rhetoric. In November President Trump had his first visit with Chinese President Xi Jinping during which he backed off of most of his protectionist rhetoric to the relief of free-trade advocates. Now, six months later, President Trump enacted his first series of major tariffs. Impacting over $60 billion worth of Chinese products, he has launched the first strike in a potential U.S.-China trade war.

There are a few reasons why the administration has chosen now as the appropriate moment to strike. Periodic escalation in trade tensions between U.S. and China had always been neutralized in the past. This was likely due to the influence of quote ‘globalist’ peacekeepers in the White House. Continuing both the balance of global trade, and pressure on the Chinese to maintain sanctions on North Korea was the foremost priority. No longer. Large turnover in the administration has left the free-trade bench empty against encroaching protectionists. More importantly, a recent national security investigation on the impact of U.S. steel imports on military aircraft production gives President Trump a more tangible excuse to impose tariffs on external producers. True to form, Trump started with a high-ball offer. Stating that U.S. tariffs would be imposed against all who benefit from the U.S. trade imbalance, he later scaled back his position. Lacking legal justification for full scale tariffs, along with the risk of retaliatory measures by U.S. allies, the tariffs have now been scaled back to direct threats against national security. Foremost of these allies is China.

The recent move to impose sanctions was an easy political move for Trump. He is not the first American politician to rip China for unfair trade practices, and certainly won’t be the last. Not only is this a popular political talking point in trade-averse states, but it is also a way for Trump to shine light on other major grievances with China. The narrative to impose these sanctions has changed from a national security concern to that of penalizing China for failing to address its own illegal actions against private U.S. firms. Under the Section 301 dispute it was difficult for Trump to maintain the argument that American allies such as the European Union are a threat to U.S. aircraft production. Limiting the scope of who is impacted by sanctions allows the United States to hit beyond steel and aluminum imports. While this limits the risk of upsetting relations with U.S. allies, it further escalates already fragile relations with China. Picking a fight with the world’s second largest economy and fastest growing nation is dangerous. Not only due to the threat of increased trade retaliation by China, but also the threat of losing the only economic leverage that the United States has against North Korea. This two-level game is a risky one for President Trump. While China has reasons of its own to be cautious of a trade war, it won’t be afraid to hit back against U.S. sanctions.

Escalation

Following the announcement by the White House to impose tariffs on $60 billion worth of imports, China soon followed suit with its own retaliatory measures. Beijing announced that it would target 128 American products valuing just over $3 billion. While these are small in comparison to tariffs imposed by the U.S., they are politically hard hitting. These products include soybean, ginseng, and fruit imports — industries of vital importance in states that hold much of Trump’s political base. It is unlikely that the Chinese chose to impose tariffs on these imports by accident and likely steals a page out of the European Union’s trade war playbook.

The scope of Chinese retaliation has been small thus far. It’s foreign ministry has openly stated that it wants to be careful to upset the current balance of U.S. China relations. Ironically, China will most likely take this case to the WTO. Since the Trump administration took this action under a domestic national security provision, it will have many multilateral trading partners concerned. While America with its sheer economic may avoid litigation, opens a pandora box of protectionism under the measure. Using a national security provision has long been avoided by other nations due to the risk of other trade partners using the same measure. If the U.S. and China continue to ramp up protectionist, tit-for-tat trade measures could get dirty. As for the legitimacy of the U.S. action, there may be a throwdown at the World Trade Organization.

Market Risks

For many American firms, a trade war is a worst case political risk for doing business outside of the United States. While certain U.S. corporations may be relieved by exemptions for Mexico and Canada under the recent tariffs, others with supply chains and operations in China are less enthused. Even corporations with no production ties to Asia will have to deal with tariffs on their exported products to Chinese markets. Intellectual property theft, fair market access, state-ran competition, and data sharing have long been legitimate problems for private firms trying to do business in China. Yet the policy approach taken by President Trump will do little to address these issues. Tariffs primarily impact export-heavy U.S. industries that are not associated with such issues. While the United States should take measures to combat Chinese theft of intellectual property, these tariffs will do little to incentive any change to the status quo. Chinese retaliation is the inevitable byproduct of such measures — and U.S. firms and consumers will be the collateral damage.

 

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