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Monday, July 09, 2018, 10:51
US-China trade war: Have the costs been counted?
By Oriol Caudevilla
Monday, July 09, 2018, 10:51 By Oriol Caudevilla

According to Sun Tzu, “the greatest victory is that which requires no battle”. However, the Trump administration seems to have chosen the opposite path — battle (and war). We are not talking here of war as an armed conflict, but about a trade war. It is true that a trade war, per se, is less harmful than an armed conflict, but its consequences may be catastrophic in many ways with the potential to ruin the lives of millions of people.

Still following Sun Tzu, “who wishes to fight must first count the cost”. Has the US government actually counted the costs and considered all the possible outcomes?

In fact, President Donald Trump is about to start a global trade war, so this conflict is not only with China but also with the European Union and beyond. In this article, I will focus on the Sino-US trade tension, even though the consequences of Trump’s decisions will be global. The trade war between the US and China is about to get real. On Friday, the world’s top two economies exchanged fire by hitting US$34 billion of each other’s exports with new tariffs, which will quite likely start a vicious cycle of escalating retaliations.

These measures have unsettled markets and many companies have said that tariffs against China will affect consumers. The US National Retail Federation (NRF) issued a statement on June 15 in which they affirmed that tariffs are actually taxes on American consumers, since they will not reduce or eliminate what they consider to be China’s abusive trade practices.

The NRF and the Consumer Technology Association commissioned a study in which the experts found that tariffs on US$50 billion of Chinese imports, coupled with the impact of retaliation, would lead to four job losses for every job gained and reduce the US GDP by nearly US$3 billion.

But, why a trade war against China? President Trump and his advisers consider that tariffs are a necessary way to pressure China into abandoning claimed practices that they think are unfair, such as stealing intellectual property and forcing American companies to hand over technology. These accusations are denied and Beijing says they will not “fire the first shot” but, if necessary, will fight this war with measured responses. For now, Beijing plans to fire back by hitting more than 545 American products, such as cars, beef, seafood, dairy and agricultural products.

A US-China trade war would not only hurt these two countries: Investors consider this conflict could inflict much harm on the global economy. Economists at Pictet Asset Management in London created a model which estimated that a 10-percent tariff on US trade passed on to the consumer could tip the global economy into a state of stagflation and knock 2.5 percent off corporate earnings. But, at the same time, the economies of many countries tightly integrated into the global value chain will be adversely affected.

Economies like Taiwan, South Korea, Singapore or the Czech Republic could be even more vulnerable to the risks arising from this trade spat. For example, Taiwan is home to large electronic contract manufacturers like Foxconn, which manufactures Apple’s iPhone among others. Electronic integrated circuits accounted for 40 percent of Taiwan’s total exports.

So, how bad can it get? Nobody knows for sure, but the world economy will be marked by uncertainty — anathema to all businessmen and investors. If we take a look at past trade wars, the results were not encouraging at all. To cite one example, the US Smoot-Hawley tariffs in 1930 are often considered as having started a trade war, which led to a massive decline in global trade by 66 percent from 1929 to 1934, according to a study from the University of Western Australia. Needless to say, the concept of globalization was not that developed in 1930 when compared to today, so the consequences could be even more widespread and severe.

This trade war is the result of President Trump’s bet on protectionism and bilateralism instead of free trade and multilateralism which actually has brought great prosperity to America not to mention global influence. By insisting on bilateral deals, the US risks getting left behind (or even left out from key areas) within the world economic order. Trump obviously is entitled to choose which policy he prefers, but he should be aware of the consequences. In fact, it is hard to believe that he is and his principal economic advisers are known for their distorted economic beliefs.

Far more rational discussion is needed. If we read statistics like the ones from the NRF study (which is far from being an organization “suspected” of being pro-China), plus all the negative effects that this trade war will have globally, we can only ask: What is the point in such a trade war? Going back to Sun Tzu, has President Trump counted the cost before starting this fight? I doubt that Trump and his advisers have counted all the costs carefully before starting this meaningless fight, which looks more like a suicide mission than a carefully orchestrated strategy designed to generate overall positive outcomes.

Does suppressing the so-called China’s “unfair and abusive trade practices” justify all the harms that will be caused to the global economic system? Will it recoup the inevitable losses? The answer is clearly no. We must try to dissuade the US from pursuing this destructive unilateralism and trade protectionism, which have no place in an era of inextricable economic interdependency. A return to free trade is the only viable path to generate prosperity and equitable distribution of wealth in a world that ideally should be without economic borders.

The author is an expert on East Asian studies and on EU-China relations. He holds a doctorate in Hong Kong real estate law and economics and has worked as a business analyst for a Hong Kong publicly-listed company.

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