We’re heading ever closer to all-out trade war

We’re heading ever closer to all-out trade war, by John Stepak.

On Friday, Donald Trump released a list of $50bn-worth of Chinese goods that will face a 25% import tariff, with the aim of recouping “the annual cost of China’s state-backed theft of US intellectual property”, reports the FT. China retaliated by saying that it would impose tariffs on $50bn-worth of US products.

So, last night, Trump said that he had asked US trade officials to find another $200bn-worth that will earn a 10% tariff. These tariffs, he said, will go ahead unless China ditches its retaliation plans.

China didn’t react too cheerfully. It denounced the US as acting “irrationally” and warned of “strong, powerful countermeasures”.

It’s admittedly harder for China to retaliate by imposing more tariffs, as it only imported $130bn of goods from the US last year. However, as the FT points out, it has plenty of other options. For example, it could “make life harder” for the likes of Ford and GM, “for whom China is their largest market.” All the other US companies operating in China could be in the firing line too.

Investors are realising that Trump is quite serious about reducing the US trade deficit with China. And unlike on Europe — where tariffs and trade barriers are broadly the same on both sides of the relationship — Trump has a point on China. As Raoul Leering of ING points out, on average, China’s tariffs on US imports are a good bit higher than America’s tariffs on imports from China.

Moreover, US demand for Chinese products “contributes… five times as much to their GDP as their demand for US products adds to US GDP”. So, on a narrow level at least, this is a trade war that the US can, if not “win”, at least come away better off than its rival. …

China is a big market and a lot of companies in the US won’t be happy about the idea of being effectively shut out of it.  …

Protectionism also means that companies have a smaller global pool of labour to choose from. That means higher wages, all else being equal. So it drives up costs too.