April 5, 2018

Trump's Tit-for-Tat Trade Policy Could Leave the Economy in Tatters

Veronique de Rugy

Senior Research Fellow

President Donald Trump claimed in a tweet that "trade wars are good, and easy to win." Unfortunately, the Chinese government's swift response to his administration's decision to impose tariffs on 1,300 Chinese goods with its own set of tariffs on U.S. goods sent to China tells us that his claim may be put to the test sooner than we think. The reality, I'm afraid, is that trade wars are always costly, and the pain is magnified when trade wars are waged against authoritarian regimes, such as the one in China.

Tariffs imposed by any government are, first and foremost, penalties on its own citizens who buy imports (or import-competing domestic goods, whose producers can then freely raise their prices to just under the new price levels set by the import tax). President Trump's tariffs are therefore penalties imposed on Americans. Yes, some Chinese companies will suffer from the imposition of these import taxes. But make no mistake; this policy set by Uncle Sam will force Americans to pay higher prices for goods they choose to buy, and it will also cost American jobs.

Likewise, the Chinese tariffs announced on dozens of categories of American goods (such as pork, fruits, soybeans, nuts and sparkling wine) are penalties imposed on the Chinese people buying U.S. goods, even though the retaliatory taxes are exclusively advertised as a way to hurt American firms. The bottom line is that this tariff fight between China and the United States is the trade version of arm-wrestling, wherein each country demonstrates how much it's willing to abuse its own citizens.

Yet in this high-stakes game, the Chinese government probably has the upper hand. China will be less likely to flinch than the Trump administration, largely because its officials bear no political costs for the tariffs and the costs they impose on the Chinese people. In fact, I'm sure the Republican legislators who will face American voters in November already understand how much heat they may get thanks to the reckless actions of this administration — actions that are being made worse by the ricocheting effects of Chinese retaliation.

Interestingly, when Beijing made its first announcement Monday, the stock exchange in China went up — signaling that at least for now, investors aren't worried about tariffs affecting the Chinese economy that much. The same can't be said of the Dow Jones industrial average, which went down, eliciting headlines like this one from Bloomberg: "Stocks' Second-Quarter Start Is the Worst Since the Great Depression." The president, who spent much of last year touting the stock market uptrend, has decided to remain very silent about its recent fall, along with investors' anxiety over this newfound uncertainty.

After all, no one knows how this will end. So far, the Chinese have been firm but moderate, targeting retaliation toward a small portion of U.S. goods exported to China. But they're sending a clear message that they won't hesitate to take further and more punishing action — against U.S. farmers in particular — if the president sets in stone the triggers to impose Section 301 tariffs as he has repeatedly said he wants to do.

It's true that having a trade bully in the White House who doesn't seem to care about (or understand) the dire price paid by the American people for his tactics has prompted some needed dialogue between the U.S. and China. However, can we trust this administration to close a deal fast enough to avoid the serious economic consequences of the current trade dispute? Considering its size and its impressive and growing economy, China isn't so easy to push around as other countries.

Negotiations require a good-faith effort and some discipline. It means that Trump may get only a small fraction of what he wants from the country, in spite of his aggressive tactics. Even if trade negotiators will be the ones leading the process, this president's tendency to fly off the handle on Twitter without caring about the consequences when he's not getting his way could jeopardize the efforts.

Time will tell us the answers to this question. But until it does, Americans will be held hostage and pay a heavy price. We should hope that this battle doesn't actually devolve into a full-fledged trade war with China, because we would then find out how wrong the president really is.