Trade War Winner Is Who Loses Least as U.S. Duties Loom

(Bloomberg) -- U.S. President Donald Trump’s assertion that trade wars are “good, and easy to win” is fake news if economists are to be believed.

The victor in an economic war of attrition will instead be which nation loses least. The first salvos are set to be launched this week as America and China prepare to slap duties on each other, risking a spiral of tit-for-tat tariffs that imperils global growth.

“Everybody will lose in absolute terms in a trade war,” said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington. The question is who “will win in relative terms.”

Bloomberg Economics reckons the looming U.S. tariffs on $50 billion of Chinese imports and a like-for-like retaliation from Beijing could cost China about 0.2 percentage point of gross domestic product and the U.S. a little less, a manageable amount in both instances.

Read More: Bloomberg Economics crunches the trade war costs

It’s where the dispute goes next that poses a bigger threat. The direct cost to the world’s two biggest economies is probably the most straightforward forecast. From a breakdown in the global supply chain to a ratcheting up of military tension over the South China Sea, the collateral damage represents an incalculable unknown.

“I’ve got a fairly high anxiety at this point about how this is all going to play out,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg Television in June.

If the U.S. expands its crackdown to $250 billion of China’s exports, then the growth impact on that economy could be up to 0.5 percentage point, the Bloomberg economists estimate.

In a full-blown global trade war, they reckon a 10 percent increase in U.S. tariffs and a similar response from the rest of the world would mean by 2020 that the U.S. could lose 0.4 point and China 0.2 point. The U.S. loses more because it would face the wrath of all its trading partners and if financial markets crumble then the cost to it could double.

Judging by the financial markets, investors seem to think the U.S. has the upper hand. The Shanghai Shenzhen CSI 300 Index is down about 14 percent this year, hit by an economic slowdown and rising trade tensions. The Standard & Poor’s 500 Index, in contrast, is up almost 2 percent, buoyed by a strong economy. While U.S. companies are benefiting from a tax-cut boost to earnings, Chinese firms are suffering as deleveraging dents the supply of credit.

One thing in the U.S.’s favor is that its economy relies more on demand from home than abroad, meaning trade barriers will exert less of a pinch. Exports amounted to almost 12 percent of U.S. GDP in 2016, compared with close to 20 percent for China, World Bank data show.

America also has more to shoot at -- a point made repeatedly by Trump. It imported $505 billion of goods from China last year but sent only about $130 billion in the other direction.

The president is also hoping costlier imports will drive companies to increasingly base their operations in the U.S. rather than low-cost China, supporting domestic demand and providing more jobs for American workers.

In a June 19 paper for the C.D. Howe Institute, economists Meredith Crowley and Dan Ciuriak argued that Trump is “weaponizing uncertainty”: Companies that want to be sure of selling in the U.S. are being compelled to set up shop in America.

Beijing, though, is far from defenseless. U.S. companies sold $280 billion worth of goods and services in China last year through their local subsidiaries, according to Deutsche Bank AG.

Those operations are vulnerable to government-inspired buyer boycotts, customs delays and other restrictions on their business -- the same sort of tactics China employed in past disputes with South Korea and Japan.

“No U.S. product sold in China, or U.S. company invested in China, can be considered safe from its retaliation,” said Yanmei Xie, a China policy analyst for Gavekal Dragonomics in Beijing.
 
The Asian country also has room on the fiscal and monetary policy fronts to support domestic demand and offset damage to the economy from U.S. tariffs. Its central bank said last week it’ll use comprehensive policy tools to steady its economy and stabilize market expectations.

As a last resort, it could even pare its holdings of U.S. Treasuries or allow the yuan to decline further, pushing up U.S. interest rates and making American exports to China costlier.

Perhaps Beijing’s biggest advantage is political. Trump, the elected leader of a democratic nation that votes for its lower house every two years, has already gotten grief from farm state lawmakers and others who’ll be hurt by Chinese retaliation; on the other hand, Chinese leader Xi Jinping cemented his hold on power in March with the repeal of term limits.

“President Xi has an almost infinite amount of political capital inside of China,” Nathan Sheets, chief economist for PGIM Fixed Income and a former U.S. Treasury undersecretary for international affairs, told Bloomberg Television.

The impact of U.S. tariffs will also be spread throughout Asia since China often acts an assembly point for parts from the rest of the region before products are shipped to America.

Taiwan, Malaysia and South Korea would be particularly hurt, though companies as far afield as Chile, South Africa and Germany also might feel the fallout, Bloomberg economists Fielding Chen and Tom Orlik wrote in a recent note.

Indeed, German automaker Daimler AG cut its profit outlook on June 21, saying fewer Chinese customers will buy made-in-Alabama Mercedes-Benz SUVs, because of retaliatory duties Beijing is slapping on cars imported from the U.S.

The ripples from the trade battle are certain to spread further, with greater casualties, the longer the skirmish between the world’s two biggest economies lasts and the more it intensifies.

“This really is a standoff where both sides think they have the upper hand,” Sheets said. “That’s one of the things that scares me about it.”

©2018 Bloomberg L.P.