These Trade Jabs Don't Mean War. Yet.

China's most effective retaliations to Trump's tariffs won't be economic.

So is a trade war upon us? President Donald Trump announced last week that the U.S. would place $60 billion worth of tariffs on Chinese goods, but what does that mean for the future of world trade? This conflict seems more likely to remain a modest spat than to blossom into a slugfest.

First of all, China responded to Trump’s $60 billion in tariffs with a $3 billion tariff retaliation, 1/20th of the initial amount. That’s a sign that China is seeking reconciliation rather than escalation. In any case, the $60 billion is less than 3 percent of China’s global exports, and the move could lower its gross domestic product by as little as 0.1 percent.

Don’t be surprised if the penalties are smaller yet. It is common for Trump to talk big, seeking the impressive headline or tweet, but to follow up with much less. Steel import restrictions were talked up at the beginning of March, but after all the exemptions granted, they don’t cover most U.S. steel imports. Don’t be surprised if Trump ends up granting China tariff exemptions to various American importers. In addition to helping the stock market, that would give Trump another political carrot and stick. As for the pressures on the Chinese side, the Wall Street Journal reported Monday that talks to improve U.S. access to Chinese markets are quietly under way. And the market responded positively.

China, of course, knows that Trump’s actions don’t always match his rhetoric, and so they are likely to hold back on their retaliation. Why send your best punch back when you don’t know how badly you’ve been hit?

The Chinese leadership also knows that the logic of a trade war favors the U.S. Chinese economic growth is likely to continue to slow down, which will be one of President Xi Jinping’s biggest political problems. He is probably willing to ignore some of Trump’s antics to keep his domestic economic situation manageable. Having just seized additional power, Xi is the one in the more vulnerable position. Trump just doesn’t seem that interested in positioning himself optimally for re-election, instead preferring to pursue his various crusades and rhetorical wars.

Keep in mind that the U.S. is a relatively large buyer in many markets; in economic lingo, it has some monopsony power. So if it cuts back purchases of, say, Chinese toys, China cannot simply reroute those now-surplus toys and sell them to Canada or Indonesia at the same price. This gives the U.S. significant power in trade conflicts. And China cannot throw around its weight as a buyer in similar fashion because it does not import on the same scale.

The Chinese don’t have that many ready American targets for economic retaliation. Aircraft are one of the major U.S. exports to China, where market demand for domestic flights is rapidly growing. Beijing has a backlog of about 400 orders with the Boeing Co. It could try to switch some or all of those orders to Airbus SE, but that would mean delays. Airbus would also know it could increase its prices and the Chinese would have to pay. As a buyer, China doesn’t have as much leverage in this market as it might appear.

The U.S. has many more targets when it comes to restricting foreign investment, as there is plenty of Chinese capital that would love to flee. The Chinese government already limits the activities of the big technology companies and many other U.S. multinationals in China, so they don’t have as many extra sticks in this regard.

The reality is China has margins for responding to the U.S., but they are mostly not in the economic realm. China could ratchet up the pressure on Taiwan, cooperate less on North Korea, pursue further expansion in the South China Sea, or work harder to court European nations and pull them further away from the American orbit. I expect some combination of those to occur, in modest form. That’s one reason Trump’s China tariffs are ill-conceived.

Will then Trump’s trade war be effective on an economic front? Very likely not. The U.S. trade deficit with China already is mismeasured, and it is much smaller than it appears in the numbers. Given how much they save and how much we spend, some bilateral trade deficit is probably inevitable. Most of all, for historical reasons, China is extremely unlikely to “give in” to foreign influence, seeking to pry open its borders. The U.S. has in fact been trying since the late 19th century, usually without great success.

What we’ll get is more expensive imports, more domestic political uncertainty and more trouble on the foreign policy front. That’s all for the worse, but still I don’t see a major trade war in the offing.