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Does Anyone Win in a U.S.-China Trade War?
USAgNet - 02/20/2019

A looming March 1 deadline to prevent another round of escalating tariffs between the United States and China is more fraught than typical trade disputes. If that wasn't already clear to observers, U.S. President Donald Trump made it abundantly so during his State of the Union address on Feb. 5.

Trump said any trade deal with China "must include real, structural change to end unfair trade practices, reduce our chronic trade deficit and protect American jobs."

It remains to be seen how palatable such changes might be to China's government following two days of talks in Washington, D.C., on Jan. 30-31 between U.S. and Chinese negotiators. Those talks reportedly produced little progress, though China did end the talks with "soybean diplomacy" -- a promise to buy an additional 5 million metric tons of U.S. soybeans.

On the other hand, China has already signaled its intention to retaliate with new tariffs once the 90-day trade truce between the two countries negotiated by Trump and China President Xi Jinping expires on March 2, if the U.S. moves ahead with stated plans for a massive round of tariff increases on Chinese imports.

The stakes are high as United States Trade Representative (USTR) Robert Lighthizer and Treasury Secretary Steven Mnuchin traveled to China in mid-February to continue talks.

To help understand the underlying issues of the trade dispute and what could happen to the two nations' economies if a trade war escalates, Dr. Ha Jiming, economist and former vice chairman and chief investment strategist at Goldman Sachs in China, recently spoke to the University of Virginia Darden School of Business chapter of the Adam Smith Society. He focused on what would happen when the tariffs were raised and which countries could advance as a result of the conflict.

The Office of the USTR has promised a tariff rate increase from 10 percent to 25 percent on $200 billion worth of Chinese products on March 2, which comes in addition to a 25 percent tariff already placed on $50 billion of goods such as vehicles and semiconductors last summer. The U.S. government said it would impose the tariffs as part of its "continuing response to China's theft of American intellectual property and forced transfer of American technology," and to reduce its trade deficit with China and bring jobs back from overseas.

Ha predicted a 25 percent tariff would lead to an overall 0.1 percent decrease in China's gross domestic product (GDP) growth. While this would cause some problems for the world's economy, Ha said, he predicted a more negative outcome if the tariffs encouraged China to retaliate with additional tariffs -- perhaps up to a 1 percent decline in China's GDP. When the USTR announced the tariff increase on the $200 billion of Chinese products in September, China quickly announced it would raise tariffs on $60 billion of U.S. goods, once the new U.S. tariffs were enacted.

If the trade war deepens, Ha said the Chinese government could depreciate its currency and the U.S. dollar would become stronger, making the exports of U.S. goods more expensive, which could neutralize the U.S. goal to close the trade gap. Changes in the value of the currencies of the world's two largest economies could potentially exert significant pressure on both the Chinese and U.S. stock markets. Darden Professor Robert F. Bruner predicted a similar potential for a currency-driven shock in a recent Darden Ideas to Action article on threats to the U.S. economy.

Ha said China and the U.S. will likely try to limit dependence on the other, in the event of a full-blown trade war. The World Trade Organization indicates that the U.S. is the largest importer, having imported physical goods totaling $2.4 trillion in 2017 compared to $1.8 trillion for China. But what is the U.S. importing and who are the major contributors?

Ha cited data from the UN Comtrade international statistics database from 2016, which indicate the top products imported to the U.S. were electrical equipment, mechanical equipment, furniture, clothing, toys, cars and accessories, plastics, and footwear. China is a leading exporter in all of those categories except cars and accessories, Ha said.

While Trump has said his intent with the tariffs is to relocate industries back to the U.S., Ha said he was not so sure the measures would result in that outcome. Ha believes there could be a relocation of the supply chain, but industries would likely relocate to another export leader such as Mexico.


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