Escalation of a China Trade War Is a Truly Dreadful Idea

With its decision last week to take the first step toward a trade war with China, the Trump Administration is starting to seem more and more like the Sonny Corleone character in the Godfather, anxious to go to the mattresses. What’s needed is a wise consigliere to explain to the president that this is business, not personal – and all of the business and economic arguments are against starting a battle that both sides would lose. The battlefield would be strewn with injured industries, workers and consumers – American as well as Chinese.

Perhaps the most dispiriting aspect of any emerging trade war is the fact that China’s leadership understands the potential consequences better than their counterparts in Washington. As President Xi Jinping said a few months ago “no one will emerge as a winner in a trade war.” Those who remember the tumult and carnage of the cultural revolution and the misery brought by a series of five-year plans can only lament the ironic fact that China is now acting like the adult in the room.

The administration’s biggest current complaint is that U.S. companies doing business in China are pressured to share intellectual property. But that is something they agree to voluntarily, to do business there. They feel the benefits are worth the cost. Since its their businesses, and their intellectual property, aren’t they in the best position to judge?

Then why do some politicians find it is popular to bang the drums of trade war? Because of the widespread misperception that the U.S. and China are purely economic competitors. In fact, the two countries – like any two trading partners – are not just each other’s customers. They are also each other’s suppliers and investors, employers and employees, bankers and borrowers. A trade war with China would hurt not only Chinese manufacturers, but many U.S. manufacturers – as well as suppliers and distributors, including retailers. Apple, for example, is in competition with Dell and HP, not with Foxxconn, which assembles the iPhone. No doubt, some Walmart shoppers who buy products made in China at bargain prices are hurt when jobs go to China, but they all benefit when they pay bargain prices for goods that are made there.

Of course, the ability to export is important. And some may look at the $350 billion trade deficit with China and ask ‘what do we have to lose?’ The answer: A lot. From 2007 to 2016, the Institute of International Finance reports, China’s trade surplus with the United States dropped from 8.7 percent of its GDP to just 2.2 percent.

That’s largely because China’s economy grew considerably – making it a more valuable customer. While it has a trade deficit with China, the U.S. has a surplus with the country in trade in services – and at $57 billion, its about 40 times what it was in 2006.

Make no mistake, the China market is a valuable and growing one. Just ask the two U.S industries that would likely be hit hardest by any trade war with China: Computers and electronic equipment products, and agricultural products. Between them they export more than $30 billion per year to China, according to an analysis by Wells Fargo. Exports to China are the equivalent of 4.5 percent of the output of the U.S. computer and electronics industries. Agricultural exports to China are the equivalent of 4 percent of U.S. agricultural production. Soybean producers alone export $12.8 billion per year to China.

Or ask U.S. airplane makers, who export more than $13 billion worth of goods to China, or automakers, who sell almost $10 billion worth of goods.

Trade wars are not new, although they are usually limited to one sector at a time, and they have always proven to be counter-productive. The most recent example occurred in 2009, when President Obama slapped a 35 percent tariff on tires from China. The Peterson Institute of International Economics found the tariffs hurt Americans in many ways. To begin with, China fought back, as they would in any trade war today. American chicken producers got caught in the middle, losing $1 billion in sales when China imposed penalties on chicken parts from the United States. American consumers paid an even steeper price. The price of a tire went up on average more than 25 percent, from $31 to $39, at a cost to Americans of $1.1 billion. U.S. tire makers, facing less competition, felt free to raise prices by more than 3 percent. And when consumers must spend more on one product, they have less to spend on others. The tire war’s blow to the consumer pocketbook cost the U.S. economy the equivalent of more than 3,700 retail jobs, according to a Peterson Institute study.

What was actually gained by the tire tariff? Nothing. While tire imports from China declined, they rose significantly from every other country that exports tires to the United States. Tire jobs didn’t go to U.S. companies, they went to the countries that could produce them almost as cheaply as China. Einstein is reputed to have defined insanity as doing the same thing over and over again, and expecting a different result. The only difference between the tire war of 2009 and a wider trade war between the United States and China would be that a new battle would be bigger, and more costly to both sides.

Open trade between the United States and China benefits both countries. To again paraphrase The Godfather, it is an offer that neither side can refuse.