Can Trump Win an Escalating Trade War Against China?: QuickTake

(Bloomberg) -- U.S. President Donald Trump intensified an ongoing trade war by rolling out 10 percent tariffs on $200 billion worth of Chinese exports to the U.S., while threatening levies on another $267 billion of Chinese goods. He previously had imposed 25 percent tariffs, which act like a tax on imports, on $50 billion worth of Chinese products, and could soon run out of ways to enact more duties: The total of imposed and threatened tariffs is now $517 billion, yet the U.S. only bought about $505 billion of goods from China last year. China is hitting back with tariffs of varying amounts on U.S. goods. The U.S. also has levied duties on steel and aluminum imports from most countries, including allies Canada, Mexico and the European Union, which also reacted with tariffs of their own. It adds up to an all-out trade war, one that risks gumming up global supply chains, raising consumer prices, stalling economic growth and tying the World Trade Organization in knots. What’s less clear is whether it will end the way Trump wants.

1. What is a trade war?

The dictionary says it’s “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.” Trump’s tariffs and the retaliation by other countries, both threatened and enacted, meet this definition. But so do centuries of protectionist skirmishes by numerous countries in countless sectors. What makes this a full-blown trade war are Trump’s singling out of China for retaliation, the tit-for-tat actions by the U.S. and its closest allies over metals tariffs, and Trump’s invocation of national security to justify some of his moves -- which could open a Pandora’s Box of similar claims by other nations.

2. What happened in previous trade wars?

One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 that is often blamed for deepening the Great Depression. The law, which effectively hiked U.S. tariffs by an average of 59 percent, initially was meant to protect American farmers. But many other industries lobbied for protection, and Congress agreed. The tariffs caused other countries to retaliate against the U.S. and each other, which resulted in higher prices on many manufactured and consumer goods. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade fell off a cliff.

3. Who wins in trade wars?

Trump has said the U.S. has a stronger economy and can outlast China in a trade war. The U.S. economy is by many accounts booming and China’s is showing signs of stress. But the longer the dispute goes on, the more both sides will see casualties. For Trump, those could include key constituencies, such as consumers who are accustomed to buying lower-priced goods made in China. Already, many companies are warning of lower profits because of higher prices for raw materials, supplier disruptions and sales declines. The U.S. also has begun a $12 billion program to bail out farmers hurt by China’s and other countries’ retaliatory tariffs on U.S. exports of soybeans, corn and other crops. Tit-for-tat tariffs “so far have only produced increased costs for American businesses, farmers, importers, exporters and consumers,’’ a coalition of about 150 business and trade organizations told the Trump administration.

4. Why is Trump inviting this fight?

In a March 2 Twitter post, he declared trade wars “good, and easy to win.” Trump later said duties on Chinese imports are justified after decades in which China tilted the playing field, including by devaluing its currency and forcing American companies to share their technology. He has repeatedly pledged to reduce the U.S. trade deficit -- the difference between what the U.S. imports and what it exports. But by the end of 2017, the deficit had risen to $566 billion from $505 billion in 2016, and it has kept on rising. Stepping back from trade deals like the North American Free Trade Agreement and the Trans-Pacific Partnership also appeals to Trump’s base of voters in America’s Rust Belt. But talk of a trade war is alarming to many U.S. business leaders, who largely support existing trade deals, and the securities markets, which fear lower profits and slower economic growth.

5. Could tariffs backfire on the U.S.?

They could. Take steel, for instance. Many more people are employed in industries, such as auto manufacturing, that buy steel to make products than in steel-making itself. President George W. Bush’s higher steel tariffs, imposed in 2002 to protect against a surge in imports, created a $30 million drag on U.S. gross domestic product, according to the U.S. International Trade Commission. Workers’ wages fell economy-wide, investors saw lower returns on capital and an estimated 200,000 jobs were lost. Trade tensions could boost inflation more than desired by Federal Reserve policymakers, who might feel the need to raise rates more aggressively than planned.

6. Could the WTO help resolve the situation?

The World Trade Organization is supposed to be the arbiter of international trade disputes. It was created in 1995 out of a set of agreements struck by countries trying to reduce trade barriers. If a government’s complaint about another nation’s trade barriers is seen as grounded, the WTO recommends acceptable retaliation. But the U.S. and China both propose justifying tariffs under domestic law, rather than following established WTO procedures, limiting the WTO’s ability to mediate. In the case of aluminum and steel, Trump is invoking a seldom-used clause of a 1962 law that gives him the authority to curb imports if they undermine national security. His administration is studying whether to use the same law to justify restricted automobile imports. Other nations could copy the U.S. move.

7. Are tariffs the only weapon in trade wars?

No, there are many others, including clamping down on Chinese investments in the U.S., as Trump has also done. Intentionally weakening one’s currency, which he accuses China of doing, is another. One worry for the U.S. is that China, the U.S.’s biggest foreign creditor, will scale back purchases of Treasuries, an option that China’s ambassador to the U.S. doesn’t rule out. China could also retaliate against the U.S. in non-trade matters. Trump has accused China, for example, of undermining North Korea denuclearization talks in retaliation for hitting China’s exports with tariffs. Countries through the years have used other means to keep foreign goods out and protect homegrown companies, a practice known as mercantilism. Some practices are blatant, such as quotas and subsidies for domestic industries (which Trump also accuses China of doing); others are less obvious, such as unusual product specifications, lengthy inspections of goods at entry ports and intricate licensing requirements.

The Reference Shelf

• QuickTake explainers on why trade deficits aren’t necessarily bad, Trump’s claim that China stole U.S. intellectual property, the 1962 law Trump cited for his steel tariffs and lessons from the last trade war.
• Bloomberg Economics says an all-out global trade war could cost economies about $470 billion by 2020.
• Why Trump’s steel and aluminum tariffs might set a bad precedent.
• China stands to gain from Trump’s steel tariffs, Michael Schuman writes in Bloomberg Opinion.
• How Trump’s tariffs could aim for China but hurt U.S. allies more.

--With assistance from Grant Clark.

To contact the reporters on this story: Andrew Mayeda in Washington at amayeda@bloomberg.net;Bryce Baschuk in Geneva at bbaschuk2@bloomberg.net

To contact the editors responsible for this story: Randall Woods at rwoods13@bloomberg.net, ;Sarah McGregor at smcgregor5@bloomberg.net, Paula Dwyer

©2018 Bloomberg L.P.