US-China trade war: Major pain, little gain

US-China trade war: Major pain, little gain
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The suspense would be gripping if it weren’t so debilitating.

The 11th round of negotiations between the United States and China on a bilateral trade deal ended on Friday in Washington, D.C. with an agreement still uncertain.

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President Donald TrumpDonald John TrumpPapadopoulos on AG's new powers: 'Trump is now on the offense' Pelosi uses Trump to her advantage Mike Pence delivers West Point commencement address MORE tweeted that the two sides had “candid and constructive conversations” and that negotiations “will continue” into the future. Liu He, a Chinese vice premier and the country’s lead negotiator, confirmed that Beijing would keep talking. 

But Trump’s negotiating team, led by U.S. Trade Representative Robert LighthizerRobert (Bob) Emmet LighthizerChinese, US negotiators fine-tuning details of trade agreement: report The Trump economy keeps roaring ahead Trump says no discussion of extending deadline in Chinese trade talks MORE, had earlier told their Chinese counterparts that Beijing had “three or four weeks” to reach a deal or face 25-percent tariffs on the $325 billion worth of Chinese exports that still enter the United States untaxed.

Washington’s ultimatum came less than a week after Trump announced that his administration would respond bellicosely to a reported move by Chinese President Xi Jinping to delete commitments made in a negotiating draft to change specific Chinese laws that pertain to unfair trading practices, such as industrial subsidies, access restrictions and forced technology transfers.

Despite the promise of further talks, the lack of immediate concessions from Beijing saw the White House follow through on a threat made last Sunday to raise existing tariffs on $200 billion worth of Chinese imports from 10 percent to 25 percent.

Beijing has already vowed to retaliate with unspecified “countermeasures,” which are likely to include higher tariffs on American goods. Escalating the U.S.-China trade war will bring much pain for little gain.

The most obvious impact will be that of higher tariffs on the American economy. The effect of current U.S. tariffs on Chinese products shows that higher import costs will be passed onto American consumers, will increase consumer inflation, will reduce business investment and will hit the profits of American manufacturers with suppliers or customers in China.

Heightened uncertainty about the trade deal also saw a nervous week for international markets. Foreign traders unloaded $640 million worth of Chinese shares daily, major stock markets in Asia and Europe weakened, and the MSCI AC World Index lost $2.1 trillion in value. Expect further losses as markets price in the greater risk of no U.S.-China trade deal being reached.

A no-deal situation seems increasingly possible. The Trump administration believes the higher tariffs will hurt China more than the United States, forcing Beijing to make concessions before the four-week deadline.

But nationalism is a pillar of Communist Party rule in China and President Xi has strong political (and perhaps personal) reasons to not back down in the face of American pressure. Plus, both leaders feel buoyed by upticks in their domestic economies.

Yet, the potential costs of Friday’s tariff hike pale in comparison to those of 25-percent tariffs on all bilateral trade. Economists warn such an all-out trade war would shave 2.6 percent off US GDP and cost 3 million jobs, plunging the economy into recession right before the 2020 presidential election.

While this scenario could also reduce Chinese growth by 1.5 percent, analysts predict that it would cause a 0.5-percent decrease in worldwide production that risks triggering a “global recession.” 

An all-out trade war would also have longer-term repercussions for global supply chains. Trump believes that punishing Chinese imports will cause business to “pour back” into the United States, but all the indications are that multinationals are moving production and jobs from China to “next-cheapest” manufacturing bases such as Mexico and Vietnam.

But such moves bring extra costs for producers, consumers and innovators that could drag on global growth for years. 

Ultimately, the White House's current strategy needs improvement. 

The Trump administration is right to seek robust enforcement mechanisms for any trade agreement with China, but the instability inherent in this week’s to-and-fro exposes the inferiority of bilateral negotiations to multilateral institutions. 

The present economic confrontation will probably slow the Chinese economy slightly and perhaps somewhat impede the rise of China’s geopolitical power, but Beijing is far less likely to improve its adherence to international economic standards under American duress than under pressure from the (U.S.-led) international institutions on which its success has been built. 

Moreover, Washington’s bilateral brinkmanship with Beijing is damaging its capacity for global leadership by weakening Beijing’s motivation to play by U.S.-backed rules, eroding the authority of rules-based authorities such as the World Trade Organization (WTO) and alienating allies who depend upon free trade.

To remain the world’s predominant technological, military and financial power as its share of the global economy declines, the United States will need to increasingly leverage not only its alliances but also the benefits of trade, investment and talent from all around world.

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For the sake of stability, the Trump administration should reach a deal that delivers agreed-upon promises from China to reduce the bilateral trade deficit, increase market access and strengthen prohibitions on intellectual-property theft and forced technology transfer.

But it should then act on its widely-shared concerns about China’s economic practices by leading a diplomatic coalition that pursues extensive WTO reform and expands the Trans-Pacific Partnership. 

Cheerleading for unilateral sanctions against Beijing might help American politicians (and pundits) from both sides of the aisle score political points for seeming “tough” on China. But economic pain and global insecurity are the only sure things if the trade war continues. 

It’s time for this nail-biter to end. 

Neil Thomas is a research associate at MacroPolo, the in-house think tank of the Paulson Institute in Chicago. He is @neilthomas123 on Twitter.