Odds against the U.S. in Trade War with China

You may have recently heard about the mounting tensions between the United States and China. Warnings have been issued (or tweeted), and it seems that both superpowers have hunkered down for a trade war.

The possibility arose in April 2017, when Trump directed the Commerce Department to investigate the effects of foreign steel. Later, he placed levies on Chinese-made solar panels and washing machines, and imposed a 25 percent steel tariff and 10 percent aluminum tariff on China and other nations in February and March of 2018. Another 1,300 products worth about $46 billion targeting Chinese technology, aerospace, machinery, medical equipment, medicine and educational materials are also being considered for another 25 percent tax.

Overall, Trump has threatened tariffs on about $150 billion worth of Chinese goods. These actions largely stem from Trump’s beliefs that the U.S. is being cheated by China.

In response, China has said that it will enact "corresponding measures of equal scale and strength against U.S. products." This has recently panned out in tariffs on grains, agriculture, food products, vehicles and aircrafts. Sorghum, a grain used for animal feed and brewing alcohol, was specifically targeted with a temporary 179 percent deposit fee due to the likelihood of future anti-dumping levies.

The obvious conclusion here is that the U.S. and China will both be harmed in any sort of trade conflict. This is due to the incredible economic link between the two countries, with the United States providing lots of money for investment and China creating many commercial products for the USA.

A series of tit-for-tat tariffs would raise import prices, hurt exports, make both countries lose jobs and hurt economic growth. However, even if it is purely theoretical, who would have the stronger hand in a trade war?

At first glance, it appears that the United States has the advantage. Due to a $337 billion trade deficit between China and the U.S., it would seem that there are many more goods for the U.S. to tax than there is for China. In fact, Chinese exports to the United States account for about 4 percent of the nation’s economy. In contrast, the U.S. imports from China are only worth about ⅔’s of a percent.

However, the situation is much more complicated than these statistics actually show. A majority of Chinese imports from the United States are simply agricultural produce and finished products that are made up of mostly American content and sold by U.S. firms. The products that the United States imports from China are often goods that are simply Chinese-assembled, but contain many foreign parts and are even made by American brands.

The fact that they contain many foreign parts means that tariffs may not affect China as harshly as it first appears. In the example of an iPhone X, only around 5 percent of the $370 manufacturing cost is created in China. With a $629 markup when it reaches the U.S., the largest portion of the profits go to retailers and Apple, meaning that they will be the ones most affected by levies on technology. As for the $26 billion of tariffs threatened on Chinese technology, even if this lowers exports by about one-fourth, that would result in a drop of roughly $6.5 billion which is only 0.05 percent of the GDP of a country growing at 6.8 percent a year. To the most extreme, a tariff on all Chinese products that caused a total 25 percent drop—in exports to the US, the country would still continue growing at 6.1 percent a year, quite a bearable statistic.

China’s counter-tariffs also appear to be much more targeted. With taxes on agriculture from the U.S. heartland such as soybeans—which China purchases about half of—and sorghum, China can leverage the United State’s democracy and hurt Trump voters in particular. With midterm elections coming up in November, if the already vulnerable Republicans lose control of Congress, that would certainly restrict Trump’s power on attacking China.

Overall, China is in a much more favorable situation than the U.S. It has more power to mitigate economic harms due to its control over the central bank, and has much more control over the state of the renminbi, the deflation of which will make Chinese exports more competitive. China can also compensate industries harmed by a trade war much more effectively than the U.S. and absorb political effects with almost no problem. For all that Donald Trump brags about his negotiating prowess, against a strong and centralized country that can just stall for time, he has almost no chance.

Looking to the future, China and the Trump administration will continue trade negotiations in the coming week as the two days Trump recently spent in China failed to produce a resolution.