China may have the most to lose, but the U.S. bargaining position is more politically vulnerable
By: CHARLESHANKLA
President Donald Trump recently escalated his trade war with China, threatening to impose a 10% tariff on the remaining $300 billion of untaxed Chinese imports.
If the new tariff goes into effect in September as promised, virtually all Chinese exports to the U.S. would be subject to levies ranging from 10% to 25%. China retaliated by letting the value of its currency fall to the lowest level in more than a decade and halting all crop imports.
Many Americans like me are now wondering: Is there any end in sight?
How to win an economic war
As a scholar of trade policy, I’ve repeatedly made the point that free exchange is a positive-sum game — meaning every participating country can benefit — rather than zero-sum, as Trump seems to believe. This is why commercial disputes are certain to harm all participants.
I believe the United States could have avoided its current predicament by using the World Trade Organization’s existing dispute resolution process to address its justifiable concerns with Chinese behavior.
Still, from the perspective of a single country, starting a trade war could potentially be justified if the end result ultimately shifts the terms of trade in its favor.
Such a victory can only be achieved when the country has more bargaining leverage than its opponent — in other words when it can impose more pain on its adversary than it experiences itself.
And the longer the trade war continues, the more concessions that country will have to win in order to compensate for the damage caused.
So, after nearly 18 months of escalating disputes between the U.S. and China, where are we? Is either side winning, and can any concessions justify the economic harm that both sides have already experienced?
China’s pain
First and foremost, it has become increasingly clear that the trade war is hurting the economies of both countries. Neither will emerge from this conflict unscathed.
Unfortunately, however, the last 18 months have done little to clarify who is winning — that is, who is hurting less and can credibly hold out for longer.
Take China. Before the trade war, it was already facing a number of significant challenges, first among them how to effect a transition from its current reliance on cheap manufacturing to the production of higher value-added goods. China’s political stability is also somewhat precarious, as evidenced by recent events in Hong Kong and Xianjing, as well as Chinese leader Xi Jinping’s authoritarian crackdown.
Moreover, China’s economic growth has slowed to a 27-year low of 6.2%. And perhaps more ominously for the country, there are growing signs that foreign companies from America and elsewhere are looking outside China as they expand their sourcing, production and distribution activities.
Of course, China’s growth rate still makes it among the fastest-expanding economies in the world, so the recent slowdown can hardly be termed a crisis. And the shift away from China, limited as it is, began before the trade war, spurred on by rising prices, intellectual property theft and other issues.
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