Even Trump may ultimately retreat from the cost of the China trade war

The president’s bullish advisers may be taking a hard line, but the chances of a deal are better than they look

During Donald Trump’s campaign to be president, he regularly cited China’s export subsidies as “evil”, and in his manifesto he pledged to “cut a better deal with China that helps American businesses and workers compete”.

The president turned decades of musings into a policy mission after his son-in-law, Jared Kushner, handed him a book by the academics Peter Navarro and Greg Autry – Death by China – which set out to explain how China manipulated the global trade system for its own ends.

Navarro has since become Trump’s trade tsar and – with Robert Lighthizer, the White House’s chief negotiator – provides the intellectual underpinning for Trump’s attempt to prise open China’s markets.

Autry was cheerleading for Trump on the BBC’s Today programme last week after the president increased the tariff from 10% to 25% on Chinese goods worth $200bn on Friday, including transport equipment, chemicals and an array of foods.

The message from the White House was that backsliding by Beijing over previously agreed liberalising trade reforms meant another $300bn of Chinese imports could soon be added to the list, which would effectively cover all imports to the US from the world’s second largest economy.

Autry said that it would be better if countries traded with each other without barriers, but that the global economy could still grow in a world of high tariffs – or at least the US could.

He likened the situation to the 19th century and Britain’s preference for free trade, which he said was pursued to its detriment when countries such as the US hid behind a protectionist wall of tariffs. After the second world war, the US had followed the free-trade lead set by the UK and that had been a mistake, he said. Free trade had been Britain’s downfall while protectionism played a large role in America’s success.

That is not a view of history shared by many economic historians. There were too many other factors at play in the 19th century that could have been more important, from slavery in the US providing farmers with free labour to Britain’s burgeoning empire, which became so costly to maintain.

White House observers are not sure that Trump has even read Navarro’s book, given that his goals appear to be so narrow: for example, declaring China “a currency manipulator” and putting “an end to China’s illegal export subsidies and lax labour and environmental standards”.

Donald Trump
Trump’s senior trade advisers are thought to be at the heart of the renewed tension between the US and China. Photograph: Evan Vucci/AP

Lighthizer and Navarro are more concerned that Beijing tear up laws that force foreign companies to go into partnership with – and hand over technological knowhow to – domestic businesses when they sell goods in China. They also want to agree an arbitration process that bypasses communist-party-controlled arrangements.

These more structural issues are at the heart of Navarro’s book and are the crux of the current dispute, which those close to the president say is being driven by Lighthizer.

Most analysts believe there would be a high cost to both sides from higher tariffs, though the impact on the global economy might be cumulative as economies in Europe and the US lose momentum. A fall in trade might knock between 0.2% and 0.3% off global GDP, says Angus Armstrong, a former head of macroeconomics at the National Institute of Economic and Social Research. “That doesn’t sound like much, but if it happens when there’s a broader slowdown, it adds to the momentum and can make matters much worse,” he says.

Analysts at the Oxford Economics consultancy say the likely cost of the tariff rises – arising from lost Chinese demand for US goods due to retaliatory measures and extra expense for US consumers – would rebound on the US and hurt key states and industries, rippling out to the rest of the world. “The Trump administration’s tariff hike will cost the US economy $62bn in lost output by 2020, or 0.3% of GDP, relative to the expected level of US GDP in our baseline forecasts,” the analysts say. “The cost to the global economy will surpass $360bn in foregone output relative to what would otherwise have been the case under our baseline for 2020.”

Bo Zhuang and Eleanor Olcott, economists at the consultancy TS Lombard, say the costly implications for both sides of a prolonged fight means a deal is still likely.

“Even if the tariffs remain in place, the fundamentals call for a deal. Trump will maintain talks with China, just as he has done with North Korea following the fallout from the Hanoi summit. The rising bankruptcy rate of US farmers and greater volatility in the markets will sharpen his resolve for a deal,” they say.

“Some commentators have said Beijing will now call for boycotts of US goods and place non-tariff barriers on US goods. At this stage, we believe that such harsh retaliatory measures are unlikely. This week’s events have pushed back our timeline for a deal but the conciliatory language and the measured response from Beijing is reassuring,” they add.

To some extent, Trump is already winning. The US trade deficit with China decreased to the narrowest in almost three years in March – $28.3bn – as imports slowed and exports advanced.

That turnaround offers Trump a chance to claim his trade war was yielding desired results. Add to that the clamour from Iowa soya bean farmers, who are already suffering from lost sales in China due to counter-tariffs, and the pressure on Trump to agree a deal could be overwhelming.

Contributor

Phillip Inman

The GuardianTramp

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