The unwinnable trade wars

President Trump fired the first round of an ominous trade war with China with tariffs on its high-tech goods, steel and aluminium imports last month. The move was preceded by Trump’s boast that, “trade wars are good and easy to win”. China, in retaliation, has imposed tariffs of up to 25% on 128 US imports, during the current week.

China’s primary set of tariffs was mild and in response to American tariffs. The US has, however, already announced a further imposition of duties worth close to $60b on Chinese imports and plans to limit its investment in the US, in retaliation for what it calls ‘years of intellectual property theft’ and ‘unfair competition from China’s state-led economy”. If this threat is acted upon, the Chinese reprisal is bound to be exponentially harsher as well. China is America’s third-largest export market for goods and the next round could target about $60b in American soybean, civilian aircraft and industrial supplies in a tit-for-tat escalation of tariffs.

This sharp escalation of economic hostility is just the beginning of a protracted and vicious trade war between the world’s largest economies. Trump’s decision to ‘bring back American jobs and curtail American losses making it ‘Great Again’ strikes a chord with many of his naïve followers. China’s ‘President for Life’, Xi Jinping, is all powerful now and would surely not bend to what China believes is ‘unreasonable coercion’ from the US.

Not only will the war be destructive for the two economies with no winner, it will have negative consequences for many other nations and billions of consumers, globally. For America punishing Chinese exporters will be costly and damaging to its own import-consuming industries and in fact, may suffer more economic damage than China. The average American household items like toys, furniture, footwear, cell phones, even tooth brushes and kitchen items made up more than 50% of close to half a trillion dollar worth of Chinese imports last year to the US. That means the normal American family would get a direct kick in their monthly budget from these tariffs.

The shrewd Chinese trade war strategy had been in the making since the election of Donald Trump and is seemingly designed to hurt him personally as China has specifically targeted exports from politically-sensitive areas for Trump. China had bought soybean worth $14b from American farmers last year and has now viciously targeted the product. Trump had won eight out of 10 soybean exporting states in the last election, including Michigan and Wisconsin that were major ‘swing-states’ in the vote. Kentucky and Florida were again key swing-states in the election and their major exports whiskey and orange juice have also been targeted by China in the tariff increase. The auto industry relied heavily on cheaper Chinese steel and aluminium and would now suffer the consequences, dragging Detroit negatively in the election equation. Other steel exporters to the US include Canada, the EU, South Korea, Brazil, Russia, Taiwan and Turkey, all of which might retaliate against the US.

Pakistan would be indirectly, negatively affected by this war. Our heavy economic reliance on China and strategic financial ties with the country are now inextricably bound in the context of CPEC. As part of its protectionist policies, the US is seeking strict visa policies for Chinese students and professionals. While acquiring a US visa is already most difficult for Pakistan, the trade war is sure to make matters worse for students, businessmen and professionals. Pakistan’s placement on the FATF’s terror financing watch list, stoppage of payments under the Coalition Support Fund and refusal of Bretton Wood institutions to bail out Pakistan due to US influence are all politically-motivated actions that can be seen in the context of Pak-China strategic relationship.

The trade war between the two giants would trigger a slowing down of economic activity worldwide. If Trump foresees a victory in this endeavour, it will surely come at an unacceptable cost, making it indistinguishable from defeat. The US strategy of economic confrontation seems like a house of cards on a crooked table.

Published in The Express Tribune, April 9^th, 2018.

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