U.S., China on brink of trade war

“Once these tariffs start going into effect, it’s pretty clear the conflict is real,” said Robert Holleyman, former deputy U.S. trade representative under President Barack Obama and now a partner at law firm Crowell and Moring LLP.

“If we don’t find an exit ramp, this will accelerate like a snowball going down a hill.” Recent U.S. tariffs on steel and aluminum antagonized fellow rich nations and drew return fire from the European Union and Canada. Iconic American companies such as Harley-Davidson Inc. are among those set to suffer. The motorcycle maker said this month it may move production out of the U.S. to avoid EU tariffs on its bikes.

American businesses from Apple Inc. and Walmart Inc. to General Motors Co. all operate in China and are keen to expand. That hands Chinese President Xi Jinping room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade.

Trump is doubling down on his promise to put “America First” in the nation’s foreign and economic policies. He blames China for a bilateral trade deficit of $336 billion and for costing U.S. manufacturing jobs. Politically, the get-tough-on-China campaign is aimed at helping score points with the voters who propelled Trump to the White House even though some members of his Republican party — particularly those in farming states that could be hit by retaliation — urged a retreat. Failure that brings economic pain could cost Republican seats in November’s mid-term elections.

The tariffs could jeopardize an upswing that extended to nine years on his watch and pushed the jobless rate to the lowest in nearly half a century. U.S. and Chinese companies will now find it costlier to trade with each other, meaning less demand and higher prices. The International Monetary Fund warns an extended spat could undermine the strongest global expansion since 2011. The extent of the economic damage will depend on how far both sides go.

If the U.S. and China cool off after a first round of tariffs, the impact on their economies will be modest, according to Bloomberg Economics. Under a full-blown trade war in which the U.S. slaps 10 percent tariffs on all other countries and they respond, the economists reckon U.S. growth would slow by 0.8 percentage point by 2020.

The impact of the first round of tariffs on $34 billion in Chinese goods will be “quite small,” said Ethan Harris, head of global economic research at Bank of America Merrill Lynch. But he doesn’t “see the war ending until there are casualties.” “This plays out over the next few months, until both sides start to feel a little pain and realize this isn’t a bloodless march to victory,” said Harris.

JPMorgan Chase & Co. economists warn the biggest risk may come from the indirect impact of tightening credit conditions and business confidence, reducing scope for investment and hiring while undermining financial markets.

The Trump administration is reviewing whether to introduce duties on imported cars and trucks in a bid it says to protect U.S. national security. The threat deepened tensions with the EU, which warns that car tariffs would inflict pain across its 28 member states. Trump argues that his approach will force other countries to trade more fairly, reducing America’s $552 billion trade deficit and prompting employers to return to America.

But recent U.S. tax cuts and spending increases will probably buoy the dollar and the nation’s current-account deficit anyway, the IMF said this week. America’s hawkish trade agenda may therefore not deliver the results the president is seeking. That could set the stage for a prolonged conflict with Beijing, which has shown little interest in making fundamental changes to its economic model. Xi has balked at U.S. demands to stop subsidizing Chinese firms under his plan to make the nation a leader in key technologies by 2025.

Negotiations between the two countries petered out with the Chinese accusing the U.S. of blackmail. The U.S. imports much more from China than the other way around, giving the U.S. an advantage in a tariff dispute. That means Beijing could focus on introducing bigger regulatory or tax burdens on American companies who operate in China or want to tap its growing market.

It could even take the drastic steps of devaluing the yuan or reducing its $1.2 trillion holdings of U.S. Treasuries, measures that would hurt it as well as the U.S. In the past, the U.S. used its economic clout to win trade skirmishes with developing countries, said James Boughton, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ontario.

China, whose economy has grown tenfold since it joined the World Trade Organization in 2001, poses a much more formidable adversary. “The dynamic is different from anything we’ve seen,” said Boughton. “China has an ability to ride out this kind of pressure, to weather the storm, that a lot of countries didn’t have in the past.”