How intense can the trade war between the United States and China become?

 

Trump has suspended his global trade war with all countries except China. This confirms that the US-China trade war will intensify over the next two years. The new Trump administration has already imposed high tariffs on Chinese goods. But both sides were initially keen on a deal, which would at least reduce tensions. After the US election, Beijing sent several delegations to Washington in the hope that it would give them a sense of what concessions Trump was looking for and how to start talks. They formally proposed a number of things to make it competitive, from currency valuation to guarantees of dollar-centricity and industrial investment in the US.

Trump, for his part, has praised Xi Jinping as “an amazing guy” and has repeatedly hinted at an early meeting between the two. In February, he suggested that the US, Russia and China start nuclear arms control talks, so that the three countries could later halve their military spending.

A deal is no longer likely. Instead, the US and China have reached a tense point that could spell disaster for both. Trump has announced that China will be punished for unfair trade practices by imposing an additional 34 percent tariff on top of the existing average 42 percent tariff. Such high tariffs will make some Chinese products uncompetitive in the U.S. market. More importantly, this latest move has given the Chinese leadership the impression that the Trump administration is not interested in negotiations; it wants to destroy China’s economy.

China has now decided to fight back, in contrast to the limited response to previous tariff increases. China has increased tariffs on U.S. exports to a total of 34 percent, which will cost U.S. companies about $143.5 billion. China has also imposed new restrictions on exports of some strategically important minerals, added some U.S. companies to a blacklist, and announced an antitrust investigation against DuPont.

The Trump administration believes that China’s economy is so weak that it has no impact on the economic conflict. It believes that being cut off from the U.S. market will simply divert China to other export markets and worsen relations with Europe, Japan, and the global south.

But such overconfidence could lead to serious miscalculations if the trade war intensifies. China’s economic policymakers have ample room for fiscal stimulus to boost domestic demand, if they choose to use it. So far, they have refrained from doing so, as they have been trying to maintain momentum on their economic structural reform agenda. Faced with the urgency of international disputes, they might well open the door.

Trump, on the other hand, may have stepped back from his economic assault on the world, but he has not abandoned it. This means that the US economy and economic relations with other trading partners are facing an uncertainty that could cause significant damage. China’s growth could pick up at a time when the US is grappling with rising inflation and slowing growth.

How far could this conflict go? The most likely outcome of a sharp divergence between the US and Chinese economies is a severe disruption to global supply chains. Many companies will simply close, but large smuggling networks will begin to emerge as Chinese manufacturers seek access to the American market and American manufacturers look for key components that have suddenly disappeared. Some Chinese goods will go to Latin American countries, most of which have been spared the US tariff hike.

This will set the stage for a more intense trade war. The US will want to crack down on smuggling. China will target strategically important goods so that they do not reach American manufacturers. Both sides will begin to increase pressure on third countries to maintain their influence, which will create the risk of proxy conflicts. Most worryingly, both sides may be tempted to more directly attack each other’s national security sensitivities.

Jake Warner: Acting Director of the East Asia Program at the Quincy Institute in Washington, DC