We May Win A U.S.-China Trade War, But It Could Be Very Costly

President Trump this week has begun a tit-for-tat trade battle with China that has sent the stock market into a spiral and left economists and policymakers on both sides of the aisle scratching their heads.

It all began several days ago when China implemented approximately $3 billion in tariffs in response to the steel and aluminum tariffs implemented by the administration last month, which affected China significantly in particular. The Trump Administration then began the process of implementing a 25% tariff on over 1,300 imports totaling approximately $50 billion a year in trade, citing China’s continued alleged lack of protection for American companies’ intellectual property rights despite repeated promises to do so.
 
China responded in kind, implementing similar tariffs on $50 billion of U.S. imports to China. Trump then escalated the battle by announcing he was considering tariffs on another $100 billion in Chinese imports, with China responding again to match and saying it would fight “to the end” in this trade battle.
 
To compare, in 2016 the U.S. imported over $462.6 billion in goods from China while exporting $115.6 billion in goods to China.
 
The President’s surrogates, including his new National Economic Council Director Larry Kudlow, have suggested that the tariffs are not meant to be a permanent state of affairs. Rather, they say, the tariff battle is meant to be a heavy-handed negotiating tactic to convince China to better play by the rules and norms of international trade.
 
Even though President Trump embraced openly protectionist sentiments on the campaign trail and throughout much of his life, his policies since taking office have more often lean towards enforcing fair trade, with the occasional exception such as his proposed border adjustment tax that didn’t pass Congress. These past few months however we’ve seen increasing actions that, while they could still be interpreted as being meant to encourage a level playing field, are starting to turn towards protectionism.
 
Long-standing U.S. demands that have been met with varying degrees of success in recent years include allowing China’s currency to have a free-floating exchange rate, increase human rights and labor standards, and give U.S. companies both greater intellectual property protections and more market freedom to operate within China.
 
In recent years and months China has apparently begun to move in a more economically friendly direction to American companies, such as with reforming their financial services sector to allow greater foreign ownership of domestic institutions. This would essentially allow foreign banks to operate with far greater independence in China and increase the flow of Chinese capital to and from the wider world.
 
China also promised to finally increase intellectual property protections, which the U.S. Trade Representative recently estimated to cost the U.S. a staggering $225 billion to $600 billion annually. It is the seeming slowness or ineffectiveness of those promised increased protections from back in November that appears to be the spark for the current trade conflict.
 
It is nearly impossible to determine who will prevail, if anyone, in the end from this high-stakes international economic and political battle. Any diplomatic incident where both sides risk seeming weak if they concede is difficult to resolve with any alternative but a return to the status quo, and this saga seems to likely be little different.
 
Furthermore, this trade war looks to potentially be far more damaging to U.S. businesses and consumers. While the previous tariffs were on items such as washing machines and solar panels, and then more important materials such as steel and aluminum, these tariffs cover what appear to be over a thousand products and counting, ranging from food to toys to raw materials.
 
For a long time the United States has faced the difficult situation of benefiting greatly from our trade relations with China but also systematically at times seemingly being exploited as well. On one hand, the United States has over the years gained much in terms of lower business costs and consumer prices, and thus increased efficiency. On the other hand, the benefits to the United States would have been and could still be far greater were China to play on a level playing field in terms of regulatory frameworks and market forces.
 
For all of our sakes, hopefully the trade battle between the United States and China soon resolves, ideally with the President’s hardball negotiating tactics resulting in a more level and fairer trade relationship. If the trade war doesn’t subside soon however, we may be facing rapidly increasing costs and prices across a multitude of sectors.