China Will Do Everything In Its Power To Avoid A Trade War
“Because China has a higher export-to-GDP ratio than the US, its leaders are more concerned with defending the global trading system than with preserving any particular bilateral balance. By eschewing escalation in response to the Trump administration's widening tariffs on its exports, China avoids jeopardizing the system. (Barry Eichengreen, Can a Trade War be Averted?, Project Syndicate, April 10, 2018)
Barry Eichengreen argues that Donald Trump’s aggressive imposition of tariffs on China’s imports will not result in a wider trade war. Indeed, it is in China’s interest to avoid a trade war with the U.S.
The crux of the argument that Trump’s impact on international trade may turn out to be more limited than he would like is based on three rather related premises.
First, despite all of his initial flamboyant threats, Trump has been forced to almost immediately adopt a more nuanced and softer approach. That is, he exempted Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea from his steel and aluminum tariffs.In the process, he minimized the impact on those exporting countries and addressed the concerns of U.S. metal importing groups. As well, it should also be recalled that the immediate reaction of foreign governments and the financial markets was very negative to the announcement of steel and aluminum tariffs. The stock market, which Trump believes is with him, clearly is not supportive of his protectionist instincts, and will continue to serve as a moderating influence on Trump’s trade initiatives
Secondly, Eichengreen reminds us that so far China’s response to the trade irritants has been carefully calibrated, and in each case almost exactly matched the scope of the US provocation. China clearly has more to lose than the U.S. if bilateral trade ground to a halt, since China runs a huge trade surplus with the U.S. Of course, a full trade war between the two largest economies in the world would hurt each economy, and the effects would negatively spill over to other countries.
Finally, China has now adopted the mantel (perhaps rather cynically) of being a champion of free and open trade. Obviously, given the trump Administration’s “America First Agenda”, the U.S. can no longer pretend to be a supporter of global free trade or its umbrella organizations such as the WTO.
Ironically, the U.S. does have justifiable grievances against China on trade and investment issues, particularly as it relates to technology and intellectual property disputes.
Eichengreen recommends that China maintain its calm and steady reaction to Trump’s provocation. He also suggested that China could accommodate some of the legitimate American trade complaints by relaxing its joint-venture investment rules and strengthening intellectual-property protections.
China Generates A Huge Trade Surplus With The U.S.
Disclosure: None.
I agree with the thesis that China will make concessions. But given our large trade deficit with China and the tremendous size of its market, how can those concessions not have a significant impact on the U.S. economy?