The spiral rise of tit-for-tat tariffs between the US and China threatens to spill beyond the world of trade

By Cary Huang

Since the time of Adam Smith and David Ricardo, mainstream economic theory has held that free trade is the best policy for all and that trade wars are mutually destructive. Yet with the US and China escalating their threats of tariffs on each other’s goods, the probability of a full-blown trade war between the world’s two largest economies is rising.

When US President Donald Trump announced plans to impose 25 per cent tariffs on US$50 billion worth of Chinese imports, Beijing retaliated swiftly with moves of the “same scale and intensity”, imposing tariffs on US$50 billion of US products. Beijing also said all previous US-China trade negotiations would be invalidated.

In the days since, Trump has twice raised further tariffs targeting US$400 billion in Chinese imports, raising the total to US$450 billion in tariffs, a figure that approaches total annual Chinese exports to the US.

China imported US$129.89 billion of US goods last year, while America bought US$505.47 billion from China, according to US figures.

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China, then, cannot match America’s moves on tariffs alone. However, it is possible that Washington and Beijing may also take non-tariff measures, such as putting restrictions on investments, or retaliating against each other’s firms.

By June 30, the White House is expected to unveil restrictions on Chinese investment in the US. Most probably, these measures will prompt a response in kind from Beijing. Also, the US Congress is nearing agreement on a bill mainly aimed at limiting Chinese investments in the US. According to the US Bureau of Economic Analysis, US investment in China amounts to US$627 billion, while Chinese investment in the US is only US$166.8 billion. In this regard, US firms might suffer more harm than Chinese entities if both countries resort to such tactics.

The escalation of the trade conflict will inevitably have a significant impact in China, the US and elsewhere. The immediate effects include a negative impact on economic growth and upwards pressure on consumer inflation for both countries.

For the US, the economy has only just recovered from the financial crisis of 2008. For China, the trade war comes at a time when the economy is clouded by various issues including a sharp slowdown in capital investment growth, an assets bubble, a problematic property market, a mounting debt burden and rising credit defaults.

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In addition, an escalating trade war might also affect entire regions in the global supply chain, given that many Chinese technology exports contain value-added parts made by foreign firms. A full-scale trade war would dampen the global recovery.

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While markets have focused on the record trade deficit that Trump has repeatedly asked Beijing to “substantially” reduce, the administration’s main objectives are to look for major changes in China’s development model, its macromanagement and a host of what US Secretary of State Mike Pompeo and White House trade adviser Peter Navarro refer to as China’s “predatory” trade practises.

The specific targets include Beijing’s “made in China 2025” programme, forced technology transfers, allegedly rampant intellectual property theft and a state-led capitalism that grants state-owned enterprises monopoly status.

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Trump’s tariffs are akin to an economic declaration of war. China’s nationalistic leadership is more likely to accept some economic pain than show political weakness by caving in to the US.

Thus, the spiral rise of US-China trade conflicts might go beyond the world of business. It has the potential to escalate into a full-blown, cold-war style confrontation in all areas between the world’s leading free democracy and the world’s last major communist nation.

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