Trade wars are damaging, so why is Trump fighting one with China?

Unlike a sporting event in which one side prevails and the other is defeated, there’s no guarantee that either side will win as the U.S. and China engage in an escalating dispute over tariffs.

In fact, in trade wars, both sides often lose – and bystanders get hurt, too.

To be sure, there’s a possibility of a big win if China quickly lowers trade barriers and tariffs. That’s what President Donald Trump is hoping for by slapping a 25 percent tariff on $34 billion in Chinese imports, with another $16 billion on the way within weeks. He’s also threatened 10 percent tariffs on an additional $200 billion in the near term and yet another $200 billion if necessary.

With all that pressure, he’s betting that China will cave because it relies more on American buyers than the other way around.

And theoretically, China is more vulnerable because of the $375 billion trade imbalance that has long irked Trump.

But the reality is that trade wars often bring about unintended consequences.

“Simplistic win-lose equations” don’t apply to trade disputes, said Charles Skuba, an international business professor at Georgetown University’s McDonough School of Business.

Skuba, who served in a trade capacity under President George W. Bush’s administration, noted that pure economic data suggest “China has more to lose.”

“However, when you dig deeper, we would find that in an all-out trade war … there are more economic casualties,” he said.

Blow-for-blow tariffs typically lead to direct hits as well as collateral damage. Chinese imports potentially subject to Trump’s latest tariffs range from baseball gloves to seafood to oxygen to raincoats.

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All the tariffs that have already taken effect and those threatened would shave U.S. economic growth by half a percentage point over the next year if they remained in place, said Mark Zandi, chief economist of Moody’s Analytics. China, he said, would sustain a similar pullback in growth.

Greg Daco, head of U.S. economics for Oxford Economics, reckoned China would suffer even more because trade represents nearly 20 percent of its economy while it makes up about 14 percent of the U.S. economy.

Yet the U.S., China and Europe all would topple into recession if Trump imposes all the tariffs he has threatened on top of those already levied – a total $560 billion in duties – especially since the moves would decimate stocks and consumer and business confidence, Daco said.

Here’s a breakdown of the risks and rewards of the trade battle:

Risks: American companies cut jobs as they move production to foreign markets to avoid Chinese tariffs on U.S. goods.

All of the tariffs already imposed or threatened in the U.S.-China dispute would mean 700,000 fewer U.S. jobs, Zandi estimated.

Production is already shifting overseas in another trade clash as Harley-Davidson recently announced plans to move some U.S. production to foreign operations to avoid European Union tariffs on American bikes.

Chinese companies could use the same strategy, closing factories in that country, laying off workers and moving production into the U.S. to avoid tariffs and be closer to American customers.

About 700,000 to 1 million jobs could be lost in Chinese cities, said Daco of Oxford Economics.

Rewards: If Chinese tariffs on American goods are lowered as a result of successful negotiations, the long-term effect could be positive for U.S. workers.

That’s because lower costs should translate into higher profits and higher sales.

Risks: China retaliates by dumping its massive holdings of U.S. government bonds, a move that would likely boost borrowing costs in the U.S. for consumers, businesses and the federal government and cause tumult in financial markets. 

China is the No. 1 foreign investor in U.S. Treasuries, with holdings of $1.18 trillion at the end of April, according to the Department of the Treasury and Federal Reserve.

The problem, however, is if China opts for what Wall Street dubs the “nuclear option,” the Chinese will also suffer financial pain, said Peter Hooper, chief U.S. economist at Deutsche Bank in New York.

“Even with trade tensions continuing to escalate, we don’t see it as a likely scenario,” said Andrew Hunter, U.S. economist at U.K.-based Capital Economics. “It wouldn’t be in China’s interest.”

Other risks: U.S. companies that do business in China face increased restrictions, damaging their sales and profitability.

That would have a ricochet effect for American consumers, weakening pension funds and 401(k) investments, as stocks suffer losses.

For example, Silicon Valley automaker Tesla was recently forced to raise prices on California-made cars sold to Chinese customers after China raised its tariff on vehicle imports from 25 percent to 40 percent in retaliation to Trump’s moves.

“The reality is that many U.S. firms rely on Chinese customers for their current and future sales growth,” Georgetown’s Skuba said.

Rewards: China agrees to lower barriers to entry, enabling freer access for U.S. companies. This could include lifting requirements to share profits and intellectual property with Chinese companies.

“President Trump has this partially correct – we need to pressure China to move forward more quickly on their market liberalization and to basically allow American companies more access and to prevent more abuses,” Skuba said.

Risks: China retaliates by refusing to help the U.S. negotiate a drawdown of nuclear weapons in North Korea. China could also bolster its economic ties to other Asian countries, including South Korea, Japan and Thailand, to counterbalance the U.S.

China has a political edge in this respect because President Xi Jinping can impose sweeping unilateral action without facing the political backlash that might occur in the U.S.

“Xi is in for life; Donald Trump has a midterm election to worry about,” David Rosenberg, chief economist and strategist at Toronto-based Gluskin Sheff, wrote in a report. “China plays the long game in any event and at all times.”

Rewards: Other countries, fearing economic losses in their own trade war with the U.S., agree to concessions under the premise that if the U.S. is willing to risk its lucrative relationship with China, surely it will do the same with them.

Mexico, for example, is likely watching the China trade war closely, said political economist and Wharton professor Mauro Guillen. Mexico is currently renegotiating the North American Free Trade Agreement with the U.S. and Canada as Trump demands a better deal.

“Whenever you’re announcing that you’re going to be imposing these tariffs, you’re sending a message,” Guillen said. “The big question for me is, who is the intended audience?”

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.

 

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