US vs China: who prevails in a trade war?

The tariffs imposed by US President Donald Trump earlier this year push his country closer to a trade conflict with China. Looking at the history of trade wars, a US victory could prove elusive

 
Identifying a decisive winner from the rounds of sanctions that China and the US are imposing on one another will be far from straightforward
Identifying a decisive winner from the rounds of sanctions that China and the US are imposing on one another will be far from straightforward 

On March 2, 2018, US President Donald Trump posted the following on his Twitter account: “When a country… is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down [$100bn] with a certain country and they get cute, don’t trade anymore – we win big. It’s easy!” The tweet, alongside a plan to apply duties of 25 percent on imported steel and 10 percent on aluminium, has become another example of the gradual deterioration of trade relations between the US and China, the ‘certain country’ referenced in the tweet.

Precursors to war
While Trump’s tweets are usually not much more than banal politicking, his posts about trade have so far amounted to tangible policies. At the beginning of 2018, the Trump administration began slowly putting pressure on China, imposing safeguard tariffs on some minor imports like washing machines and stainless steel flanges. The Chinese Ministry of Commerce expressed frustration at these tariffs on a number of occasions. Tensions reached a boiling point on March 22 when the US proposed a 25 percent tariff on $50bn of Chinese products, alongside the filing of a complaint with the World Trade Organisation alleging that China’s intellectual property practices were benefitting the country to the detriment of US competitiveness. Responding, China released its own list of tariffs, matching the US’ figure across products ranging from soybeans to aircraft. Threats have escalated further, with the US now considering imposing $150bn worth of tariffs on more Chinese goods.

Throughout history there are examples where a trade war has ultimately hurt the participants more than it benefitted them, with the US being no exception

On April 4, Trump tweeted: “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US. Now we have a Trade Deficit of [$500bn] a year, with Intellectual Property Theft of another [$300bn]. We cannot let this continue!” He continued: “When you’re already [$500bn] DOWN, you can’t lose!” In reality, trade wars are difficult to define, rarely positive and attempts to identify a winner are almost impossible. Throughout history there are examples where a trade war has ultimately hurt the participants more than it benefitted them, with the US being no exception.

Defining the conflict
Unpacking the concept of a trade war is surprisingly difficult. Douglas Irwin is the John French Professor of Economics at Dartmouth College and author of several books about trade, including Clashing over Commerce: A History of US Trade Policy. Speaking to World Finance, Irwin said economists have two difficulties with identifying the winners of a trade war: “One is there is no unique definition or generally accepted definition of what a trade war is, or what it constitutes. And second of all [is] the idea that you’re ‘winning’ or ‘losing’ as a result of trade. Economists generally believe that trade is mutually beneficial and that if you stop trade, you hurt your trade partner, but you also hurt yourself because the price of your imports will go up for consumers.” 

A basic definition is that a trade war occurs when countries try and damage each other’s economies through the imposition of tariffs, quotas or other restrictions on imports and exports. They are typically rooted in protectionism, with the justification for instigating a trade war often the protection of local industries from an unfair advantage had by an international competitor. Another reason may be to balance out a trade deficit, a situation where imports are far larger than exports and so represent wealth flowing out of a country. When a country subject to tariffs launches its own retaliatory tariffs, this confrontation could be considered the beginning of a trade war.

However, trade wars are not usually this clear cut. ‘Wars’ typically have winners and losers, but identifying the victor of a trade war is not always possible. Countries have multiple trading partners, making a targeted and damaging trade strike difficult to achieve. Engaging in a trade war will almost certainly hurt the country imposing the tariffs, as well as the target. In many cases, trade wars never move beyond the mere threat of tariffs and are effectively over before even starting. As a consequence of this, settling on an exact definition of a trade war is a challenge, and Trump’s suggestion that they’re “easy to win” is manifestly wrong.

The lessons of history
Given the detrimental effects of a trade war on a country, the usual hope is that the threat of tariffs is not followed by their actual imposition. Irwin said there are relatively few examples of two countries engaging in major retaliatory trade actions against each other, but there are some smaller examples that are similar to the current situation between the US and China: during the mid-1980s and early 1990s, the US and Japan were locked in something of a trade war. At the time, the US had a significantly large trade deficit with Japan, and also alleged that Japan was engaging in unfair trade practices and industrial espionage. The threat from the US was clear; unless you meet our terms, there will be a host of trade restrictions put in place. 

“Because Japan was an ally, and to some extent dependent on the US market and wanted to keep the US happy, Japan [was] willing to negotiate, though not always happily,” Irwin said. “But [it] did try to reach an accommodation with the US, so the US did not have to impose those tariffs as many times as they were threatened: sometimes agreements were reached.” 

An interpretation of the trade war between the US and Japan could be that the US was ultimately the victor. The US got much of what it wanted from Japan, such as voluntary export quotas, penalties for unfair trade practices and the liberalisation of restricted Japanese imports. It also never grew to become a fully fledged trade war by the traditional definition. Japan may have only begrudgingly come to the negotiation table, but it did so before imposing tariffs of its own. Neither economy suffered significantly from the conflict, suggesting that, more often than not, the most desirable outcome for a trade war is to halt it before it even begins.

While there are similarities between then and the US’ current trade disputes with China, such as allegations of corporate espionage and unfair practices, Irwin said there are also major differences: “The big difference with China today is that China is not an ally of the United States and has already threatened to retaliate. Japan never threatened to retaliate or counter retaliate against the United States. So, the risk that this will be an un-won trade war – one where it’s damaging to world commerce without achieving the goal of more open markets – is much higher than the case with Japan in the 1980s.”

The fog of war
Many of the times where the US has engaged in an indecisively concluded trade war, significant economic damage has followed in its wake. Dr Marc-William Palen is a lecturer at the University of Exeter and author of the book The Conspiracy of Free Trade: The Anglo-American Struggle over Empire and Economic Globalisation. Speaking to World Finance, Palen said that Trump and the Republican Party’s current position has a number of similarities to its stance in the mid-19th century: “Following the Civil War’s end in 1865, the Republican Party tied its ideological sails to economic nationalism. It became the party of big business and protectionism. The GOP stuck to protectionism throughout most of its history, and only began abandoning it after the Second World War, and only gradually at that.In other words, Donald Trump’s protectionism isn’t an anomaly; it’s a return to the Republican status quo.” 

During this period, there are cases where attempts by the US to protect its own economy backfired. In the late 19th century, Republicans dominated the White House and the party was still proudly protectionist, prompting the US to repeal its reciprocity treaty with Canada in 1866. Palen said Canadian conservatives consolidated around their own national policy of protectionism in 1879, prompting exactly the opposite of what the Republican Party desired. “Some American companies like Singer Manufacturing, Westinghouse, [the American Tobacco Company] and International Harvester realised it was cheaper to move their production to Canada rather than pay the high import taxes. Sixty-five US manufacturing plants had relocated to Canada by the late 1880s. So, in this case, far from halting outsourcing, protectionism created it.”

When trade wars escalate to retaliatory sanctions, the only real winner that emerges is any country that is not participating

When trade wars escalate to retaliatory sanctions, the only real winner that emerges is any country that is not participating, as was the case between the US and Canada. “Trade tensions reached a breaking point in 1890, when Republicans passed the highly protectionist McKinley Tariff,” Palen said. “Agricultural exports to Canada fell by half from 1889 to 1892. And when the Republicans passed the even more protectionist Dingley [Act] in 1897, Canada decided that the best response was a combination of tariff retaliation and establishing closer trade ties with the British Empire rather than with the [US]. America’s loss was the British Empire’s gain.”

By far the most famous example of tariffs not working as desired for the US was the Smoot-Hawley Tariff of 1930. Sponsored by Senator Reed Smoot of Utah, who was chairman of the Senate Finance Committee, and Representative Willis Hawley of Oregon, the chairman of the House Ways and Means Committee, the act raised the US’ already high import tax to an average of 40 percent across all industries. It was designed to protect US businesses from competition in Europe, wherean economic recovery was occurring after the war. The stock market crash of 1929 made protectionism even more appealing to Americans, and the act passed in the Senate by a narrow margin. “It raised duties on hundreds of imports, following which Canada responded with tariff increases of its own, as did Europe,” Palen said.

This tit-for-tat trade discrimination left the US isolated and unable to tap into global markets, effectively making a recovery from the Great Depression far more difficult than it necessarily needed to be. Due to the economic damage the tariffs wrought in other countries, the US also became deeply unpopular internationally. “To provide but one example, the Italians responded violently to the Smoot-Hawley Tariff,” Palen said. “American-made cars were attacked on Italian streets, and US-made car sales plummeted. Tariff duties were increased on US goods, plunging US exports to Italy from $211m in 1928 to $58m in 1932. Italy quickly signed a commercial treaty with Soviet Russia in August 1930, followed by a non-aggression pact two years later, demonstrating again the unpredictable geopolitical fallout from trade wars.” Again, the winners of the trade war were those on the periphery, who were able to fill the holes left in the market.     The impact of the Smoot-Hawley Tariff was such that the US changed its laws, and the act became the last trade act to pass through Congress. Trade negotiation was then delegated to the president; the system is still in place today. The Smoot-Hawley Tariff also led to another definition of what a trade war is. “Political economist Joseph M Jones Jr, in a widely cited study from 1934, examined Europe’s retaliation,” Palen said. “His study warned of the trade wars that can arise when a single nation’s tariff policy threatens specialised industries in other countries, which can arouse hostility and retaliation.” 

The 1960s saw the next major trade battle in the US’ history: the European Union was establishing agricultural policies for the recently formed common market, prompting the price of chicken to significantly drop. European countries began introducing price controls and placing tariffs on imported chicken. Factory farming had made chicken a major US export, so in response President Lyndon Johnson imposed tariffs on Europe. In particular, a 25 percent tariff was placed on light trucks.

Irwin said the winner of this trade war is indeterminable: “Europe refused to open up [its] market to US chicken, and we [the US] never got rid of our tariffs. The question is, who won that? They’re not taking our chicken, we’re not buying vans from them, in fact we still have this 25 percent tariff in place today… It’s hard to say anything was accomplished.” The tax in place is unlikely to be repealed since US automakers have successfully lobbied for it to remain, since it puts them in a favourable position.

A threat to peace
Since the General Agreement on Tariffs and Trade was signed in 1947, and later the World Trade Organisation established, global trade has surged while tariffs have, on average, been in gradual decline. Trade is far more transparent than it was before, and supply chains now cross borders far more easily. A trade war between China and the US would certainly destabilise this. 

In terms of supply chains, Irwin said he believes they may be disrupted temporarily, but will change to accommodate. “I think what will happen is there will be a movement of resourcing to other countries in South-East Asia, away from China. So, we might start getting our apparel from Vietnam, or see electronic component assembly operations set up in Vietnam… It would be trade diversionary, I think, rather than a permanent loss of imports from those countries.” Once again, the real winners of a trade war may be the countries that simply choose not to participate.  Negotiations have been ongoing, and Trump has already emerged with some surprising announcements. A delegation to China in early May yielded little progress, but Trump has since expressed a willingness to work out a deal that would save ZTE, a Chinese technology company that has stated it will be forced to close under the current sanctions relating to national security. An employer of 75,000 people, the rescue of ZTE could be a significant bargaining chip in negotiations, albeit from a predicament brought on by the US in the first place. 

Palen said a predictable outcome of the trade war would be higher prices for American consumers, which will be felt most by the poorest. “[With] Trump’s new tariffs, these winners will likely be US steel and aluminium producers, in the short term at least. But the losers – American and world consumers, [and] businesses that rely upon global supply and demand chains – will far outnumber the handful of winners, that’s for sure.” 

Based on US history, major trade actions like those that have been proposed recently will have far-reaching and unpredictable consequences

What is more uncertain is how a trade war between the US and China could change the world’s economic and political stability. Based on US history, major trade actions like those that have been proposed recently will have far-reaching and unpredictable consequences. Palen said the parallels between now and late 19th century Republican policies are remarkable and also historically unprecedented. “Granted, Trump’s xenophobia, protectionism, jingoism and populism parallel the GOP of the late 19th century. They might well have been taken directly from this earlier era’s Republican playbook. What is historically unprecedented today is that, with Trump in the White House, the United States – the leader of the global economic system and main advocate of trade liberalisation since 1945 – is now the first to advocate turning away from the very system it helped create. We’ve never witnessed anything like this before. As a result, the uncertainty that this holds for the future of the global economic order is at least as worrying as the GOP’s revival of late 19th century protectionist politics.”

No one wins
It will be challenging to identify a winner from the fallout of the rounds of sanctions that China and the US are throwing at one another, since there is not a clearly defined goal for either side. Both economies will suffer from the tariffs, and neither is likely to see a significant redevelopment of their local industries. The concerns of the US regarding alleged intellectual property theft by Chinese firms may be addressed, but whether that will result in a reduction of the trade deficit is unknown. Based on the US’ history, the damage from a fully fledged trade war could be significant