The escalating trade war between the United States and China poses crucial, though unanswerable, questions: Is this the beginning of the end of the post-World War II international trading system, or will the present arrangements survive, as they have for 70 years?
Almost certainly, historians will judge favorably the postwar expansion of trade (it has never been completely “free” but has been liberalized substantially by removing many tariffs and quotas). It helped lift hundreds of millions of people from abject poverty and cemented the Cold War alliance of democratic societies against communism.
Now, however, two problems cloud its future.
First, global economic growth has slowed considerably, while inequality has increased. International trade and investment — a.k.a. “globalization” — are now blamed (often unfairly) for these setbacks.
Second, China has burst onto the global economy, rising from a backward country four decades ago to become the world’s second-largest economy. But its ascendancy, aside from challenging the United States (still No. 1), has been controversial, because China practices mercantilism: government policies intended to give its companies an advantage in global markets.
President Trump portrays these policies — subsidies, trade preferences and the illicit acquisition of foreign technologies — as monstrously unfair to U.S. workers and firms. Unless China overhauls its economy to make competition more even-handed, Trump vows to do the job himself by imposing stiff tariffs on Chinese exports to the United States (in effect, taxes on China’s U.S.-bound exports).
That’s where we are now. Trade negotiations between the two countries have broken down, and Trump has announced 25 percent tariffs on a long list of Chinese exports, including soybeans, semiconductors and plastics. When fully phased in, the affected exports would total about $50 billion. The Chinese said they would retaliate with similar tariffs on the same amount of U.S. exports.
Trump responded by asking the U.S. trade representative to prepare a further list of $200 billion of Chinese exports to be hit with 10 percent tariffs. If China retaliated, Trump threatened to add an additional $200 billion of Chinese exports.
Nothing like this has happened since World War II. If this isn’t a “trade war,” what is it?
Whether it portends an end to the postwar trading system is unclear. Many economists are skeptical. They also doubt the trade war will plunge the U.S. economy into recession. The direct effect of the tariffs — which will raise prices, inspire retaliation and dampen some production — is “tiny,” says Nariman Behravesh, chief economist for IHS Markit, a consulting firm.
Do some simple arithmetic, he says. A 25 percent tariff (tax) on $50 billion of Chinese exports totals $12.5 billion; 10 percent on $200 billion of exports is $20 billion. Together, that’s $32.5 billion, not much in a $20 trillion U.S. economy.
Economist Mark Zandi of Moody’s Analytics agrees but warns that imposing tariffs on most Chinese exports (about $500 billion last year) could cause a recession. So could some of Trump’s other trade proposals, which include a 25 percent tariff on car imports and a repudiation of the North American Free Trade Agreement (NAFTA) with Mexico and Canada. The car tariffs alone could cost as many as 550,000 jobs, Zandi says.
There is a real dilemma: China’s mercantilist policies are bad, but so are Trump’s proposed remedies.
The view that the present trade war won’t become more destructive assumes that China and the United States will find a middle ground that would allow both to declare victory. But this is hardly guaranteed. “Even though it’s an authoritarian country, public opinion [in China] matters,” says economist David Dollar of the Brookings Institution. China’s leaders can’t be seen as capitulating to Trump. Trump probably feels the same way toward China.
The defining characteristics of the postwar trading system have been reductions in trade barriers and the adoption of jointly agreed-upon rules, now enforced through the World Trade Organization (WTO), about what is fair trade and what is not. The United States played the leading role in this global project, though there has long been frustration with the rules’ complexity and their slow-motion operation.
“The United States seems to be giving up on the WTO rules — which we helped create. Other countries may do the same,” says Douglas Irwin, a Dartmouth College economist and author of “Clashing Over Commerce: A History of U.S. Trade Policy.”
This would signal an unraveling of the postwar trading system and its replacement with a hodgepodge of bilateral and regional trading agreements — many already exist — with what consequences no one knows. The history of warfare is a long string of miscalculations by combatants on all sides. The same may also be true of trade wars.
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