Posen Says Prospects of Genuine U.S.-China Trade War Quite High

(Bloomberg) -- Adam Posen, president of the Peterson Institute for International Economics, said the prospects of a genuine trade war between the U.S. and China are “actually quite high.”

At a lunch hosted by the United States Studies Centre in Sydney on Wednesday, Posen said Donald Trump’s criticism of the trade deficit has been a consistent theme of his for years and one he’s determined to address as president.

“This is his conviction,” Posen said of Trump. “I think we should be quite realistic that this is going to get much, much worse before it gets better.”

Talks between the world’s biggest economies broke down last week after the Trump administration demanded steps to curtail China’s support for high-technology industries, a person familiar with the situation said. Still, renewed pledges from President Xi Jinping on Tuesday to open sectors from banking to auto manufacturing drew praise from Trump, while China’s central bank governor Yi Gang on Wednesday outlined detailed plans to open up the financial sector.

Posen predicted the pattern would be one of Trump ratcheting up pressure on China and Beijing responding with “a package of goodies” to ease tensions. These might include: agreeing to buy Boeing Co. planes instead of Airbus SE ones; U.S. cars instead of European ones; if the administration agrees to let them invest in the U.S., then the Chinese would put some money into the country; and if Trump wants the dollar lower, the Chinese wouldn’t react.

None of the measures “will have any economic utility, really,” Posen said. “But Trump will take them. Trump will say thank you very much. He’ll go out and say ‘ha-ha, I cowed the Chinese. Weak Obama, weak Bush. They never did this, I got this.’”

Then, Posen predicted, three to six months later Trump will do the same again. “He’ll say ‘I’m going after you, look, it worked. Why shouldn’t I do more?’”

The Chinese will show forbearance for some time, he said, but eventually enough will be enough “and they’re going to whack the U.S.”

Who, then, will be hurt worse in a trade war?

“The economic damage to China will be much worse than for the U.S. But both lose,” said Posen, president of Peterson since 2013 and prior to that a member of the Bank of England’s Monetary Policy Committee from 2009 until 2012. “The political sustainability of pain is much less in the U.S. than in China.”

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