The U.S.-China trade war escalated again in late August, with each side imposing duties on an additional $16 billion of imports from the other. That brings the total value of exports exposed to duties to more than $50 billion each way, with billions more in the crosshairs. Despite assurances from President Trump, this may be a long and costly conflict with economic casualties mounting on both sides of the Pacific.
Trump’s trade team argues that the duties are needed to force China to improve its protection of intellectual property and reform its trade policies more generally. So far, however, the brinksmanship has yielded nothing positive. No formal talks are scheduled to resolve differences. If the stalemate continues, the Trump administration has plans to slap duties on another $200 billion in imports.
In pressing the conflict, Trump makes the simple calculation that the United States is guaranteed to win because we buy a lot more goods from China ($505 billion in 2017) than they buy from us ($130 billion). That should mean that they will run out of U.S. products to target long before we do. But this ignores the fact that our commercial ties with China are about more than exporting goods.
Trump is dead wrong to believe that we can easily win a trade war with China or any of our major trading partners.
Beyond tariffs, China could also retaliate by turning the screws on U.S. service exports. The people of China buy close to $60 billion a year in services from suppliers in the United States, more than half of that spent on freight and passenger transportation and on business and personal travel. The Chinese government is already discouraging Chinese citizens from visiting the United States, which will impose a significant hit on the U.S. hospitality industry.
In addition to cross-border trade, China is a huge market for U.S. direct investment and sales through affiliates. According to the most recent figures from the Department of Commerce, in 2015 U.S. multinationals operating in China sold $294 billion in U.S.-branded goods and $59 billion in services. In contrast, Chinese-owned affiliates in the United States sold only $22 billion that year to U.S. customers.
If we add up what Americans sell to the people of China each year through exports of goods and services and sales through affiliates, the total is more than $500 billion. That is almost exactly the same grand total that Americans spend on goods and services imported from China and supplied by its affiliates in the United States.
Clearly, both sides have a lot — almost exactly the same amount — to lose from commercial warfare.
A recent World Bank study confirms that neither side will win a protracted trade war. At the current level of tariff retaliation, the World Bank estimates that each country will suffer a drop in annual exports of about $40 billion. If retaliation escalates to include all two-way trade in goods and services, Chinese exports to the United States would fall by $190 billion and U.S. exports to China by $166 billion.
If the trade war results in a half-percentage point drop in investment as a share of gross domestic product, as the World Bank quite reasonably assumes it could, the damage would be multiplied. Such a worst-case scenario would result in a $426-billion loss to the Chinese economy and a $313-billion loss to the U.S. economy. The biggest losers in the United States will be agriculture, chemicals and transport equipment. It will be cold comfort to Americans who lose their jobs and their businesses that our loss is somewhat smaller than what our government inflicts on China.
Trump is dead wrong to believe that we can easily win a trade war with China or any of our major trading partners. The record on his kind of trade confrontation is not encouraging. Dating back to the Smoot-Hawley Tariff Act of 1930, American politicians have tended to underestimate or ignore the readiness of foreigners to retaliate and their reluctance to surrender.
We seem to be condemned to learning the lesson all over again that trade wars are for losers.
Daniel Griswold is a senior research fellow and co-director of the Trade and Immigration Project at the Mercatus Center at George Mason University.