On the Glide Path to Trade War
Trade war is more likely than not based on current social mood and geopolitical tensions. The U.S. is agitating for a conflict and it has the most to gain from one. Economists will tell you everyone loses in a trade war and they are correct from the view of dollars and cents. Global power is zero sum though, your gain is your enemy’s loss. If the U.S. pushes China into a depression through a trade war, the benefit will be a multi-decade delay in China’s rise to power. Perhaps even a “permanent” delay such as the one the United Kindgom gave to Germany in the 20th Century assuming the conflict ends in war.
China will lose a trade war with the United States for the same reason the U.S. suffered a longer Depression during the 1930s: it is the leading exporter. In a trade war, the import nation loses access to goods and services it doesn’t produce. If another trade partner can’t replace the goods and services, it has to make it at home. In contrast, the exporter who loses their customer has to slash prices to find another market. If it cannot find another market, it shuts down production.
The effect of a major trade war between China and the USA would be a redistribution of GDP growth away from China (and the China-bloc economies) and towards the United States (and its bloc).
Statistics show that the annual growth in exports from the U.S. to China averaged 11% in the past decade, almost twice the figure of Chinese exports to the U.S. Sixty-two percent of soybean, 14% of cotton, 25% of Boeing aircraft, 17% of automobiles, and 15% of integrated circuits produced by the U.S. have been shipped to China.
In addition, China is the second-largest export market of American agricultural products, buying 15% of the total export volume, according to U.S. government data.
Against such a backdrop, restricting imports of agricultural products and high-end goods would be a trump card for China as a counter action.
While those sectors are important for the U.S. economy and politically powerful, it’s unclear what voices might be on the other side. Steel makers and a host of other industrial firms, possibly firms hurt by IP theft, would line up on the other side. The U.S. could also easily subsidize farmers and Boeing because these subsidies already exist in the budget. The Congress can increase farm aid and give Boeing more military contracts.
The Logic of Strategy will also kick in: nations in East Asia and the South Pacific will have golden opportunity to slow China’s GDP growth and deliver a major blow to its soft and hard power projection. If a war escalates through a rolling buildup of retaliatory tariffs, starting with industries such as steel, it’s very likely the U.S. could be joined by many of the world’s major economies.
The loser from a trade war in the United States would be consumers who don’t earn wages:
According to data released by the US-China Business Council, trade with China has saved American families $850 in 2015 on average. Oxford Economics estimates that China’s low-price goods have resulted in a 1-1.5% lower price level in the U.S.
What does the Fed want more than anything (aside from real GDP growth)? Inflation.
At a time when Americans are expecting Donald Trump’s new trade policy to improve the current situation, the bilateral trade conflict would be damaging, said Lian Ping, chief economist of the Bank of Communications. Even small losses are unacceptable, he added.
This is a 180 degree incorrect interpretation of current social mood. If a trade war with China begins, Trump’s popularity will rise. The Democrats probably won’t attack him because to side with the enemy during a war is political suicide. If “Russia collusion” was bad for Trump, “Chinese collusion” will be many times worse amid tensions that are potentially heading towards war (unlike the Russia farce). Finally, those who favor American hegemony will be hard pressed to oppose a conflict with China. Many of Trump’s opponents today will turn into cheerleaders for a China confrontation.