How bad could a trade war be for the global economy?

Since the Trump Administration proposed the tariff policy against Chinese imports, there are all kinds of comments, good or bad.

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China’s response to US tariffs has been measured but the end game is uncertain.

Chinese response to the Trump’s announcement was at the dovish end of the spectrum of possible retaliatory actions. If we have seen the first shots in a global trade war, then there are many rounds of escalation still to come, probably taking years to play out. 

So, how huge the scale of the economic damage will be?

The IMF has published simulations on its global economic model, showing the impact of a 10 per cent extra US tariff on all imports of goods from the rest of the world. This cuts US GDP by about 1 percentage point in the long term, and it also reduces GDP in the rest of the world by 0.3 per cent. There is no transfer of output from one region to another: everyone loses.

The tariff increases are estimated to reduce global trade volumes by around 6 per cent, and real GDP is reduced by 1.4 per cent, with the US, China and Europe each suffering a drop-in output of 1.7-2.2 per cent. Since these trade and output losses are likely to be spread over several years, the size of this shock would seem manageable, and maybe a bit less than investors currently fears.

Other simulations are broadly similar. Goldman Sachs economists have published results that imply output losses of around 0.9 per cent over two years for the US and Europe in the case of a 10-percentage point increase in global tariffs, along with a 20 per cent drop in equity prices. China’s output loss is only 0.5 per cent. Inflation rises by a few tenths of a per cent, but then drops back to target as monetary policy tightens and unemployment rises.

There are two obvious ways in which the economic impact could be much worse:

1.    The huge growth in global value chains early in this century (i.e. trade in parts and components rather than finished products) could leave the trading system vulnerable to much greater temporary disruption if there are bankruptcies and dislocations in companies within the GVCs. Tariffs could be imposed every time components crisscross a frontier, greatly increasing the effective costs of production in GVCs.

2.    Uncertainty about future tariffs and their effects could lead to postponement of capital investment decisions, resulting in a much larger immediate hit to GDP than shown in the above simulations.

In summary, the available (though not very convincing) evidence suggests that the global output losses from a trade war might reach 1-3 percentage points over several years, with a left tail that could be much worse. But there are huge uncertainties, both economically and politically. If this strategic game gets stuck in a bad equilibrium, then markets might become disposed to assume the worst.

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How did U.S. citizens react to tariffs on Chinese imports?

Are Americans happy with the Trump’s possible tariffs on Chinese imports in an effort to address trade imbalance between the U.S. and China?

Not everyone is happy, in fact many are worried that this could result in a backfire that would hurt America in the long run.

The U.S. government's latest plan to impose huge tariffs on imports from China is like palliative that does not solve the problem in the long run, said a U.S. scholar on economics and trade.

U.S. President Donald Trump on Thursday signed a memorandum that could impose tariffs on up to 60 billion U.S. dollars of imports from China and restrictions on Chinese investment in the United States.

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Khairy Tourk, a professor with the Stuart School of Business of the Illinois Institute of Technology, said the Trump administration's decision to restrict Chinese investment would be restrictions for new jobs created in the United States.

"President Trump is calling for creating more jobs here, but now the action would work against his policy. So this is really negatively developed." Tourk told Xinhua in a recent interview.

Tourk believes the main issue is not tariff but the natural technology transfer, "many people here claim China is stealing American technology so they want to put restrictions on Chinese investment, that is definitely wrong."

On the other hand, Tourk said the U.S. government believes that tariff is a useful tool to bring balance in the United States and China trade relationship, but it is not the main cause, "We in the U.S are not saving enough, so we have to import resources and products achieving from overseas; this is the truth."

Tourk holds that policy makers here are lack of long term vision. "The best way to improve the American economy is to increase productivity, but this takes a lot of time, so it is easy for politicians to take some palliative (actions), but it does not heal the real cause of the problem."

China is undoubtedly one the largest export economies in the world and has earned the name of “world factory” for itself. Other than the quality and price of the products, one important element leading to the phenomenon here is also the government support.

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America's new trade war towards China: levy tariffs

As America’s largest commodity trading partners (excluding service) in 2017, China is now facing a possible powerful hit in its global trade.

President Trump is preparing to impose a package of $60 billion in annual tariffs against Chinese products.

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A group of 25 major U.S. retail companies, including Walmart, Costco and Best Buy, on Monday urged the Donald Trump administration not to impose sweeping tariffs on Chinese imports.

The situation remains fluid, and Trump has previously in his presidency backed off economic threats at the last minute. But he has shown a recent willingness to unilaterally impose tariffs — even amid objections from advisers who fear starting a global trade war and economists who warn such actions could ultimately hurt U.S. businesses.

Trump was particularly determined to follow through on tariffs on China, as criticism of U.S.-China relations was at the center of his presidential campaign, according to the administration officials, who spoke on the condition of anonymity to discuss the president’s plans.

If implemented, the tariff package would be one of the broadest sets of economic actions imposed by a modern U.S. president against China and could draw retaliation, fraying the trade partnership between two of the world’s largest economies.

The United States exported $130.4 billion in goods to China, but it imported nearly four times as much, running a trade deficit of $375.2 billion, according to the U.S. Census Bureau.

Chinese manufacturers might assemble these products or put on the finishing touches, but the country does not export as many products to the United States that are entirely made in China, said Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics.

Lardy also said that penalizing China probably would not help U.S. producers, even if the tariffs succeeded in stemming the inflow of goods from China.

Beyond the escalating tensions with China, Trump’s pivot to protectionism has put much of the world on edge. His 2016 campaign was built around promises to put “America first” on every issue, but some aides managed to scale back his plans for trade restrictions in 2017 as the Republicans muscled tax cuts through Congress.

Trump’s approach to China has been uneven. He has tried to both befriend Chinese leader Xi Jinping while also isolating him, particularly on economic issues. On Sunday, the Treasury Department had to backtrack on an embarrassing misstep when a senior official said he had suspended economic talks with China, when a formal decision had not yet been made.

What’s next of the Sino-US trade relationship? We’ll just wait and see.

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US retailers urge Trump not to levy tariffs on Chinese imports

A group of 25 major U.S. retail companies, including Walmart, Costco and Best Buy, on Monday urged the Donald Trump administration not to impose sweeping tariffs on Chinese imports.

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"We are concerned about the negative impact" that "could have on America's working families," "as you consider remedial actions under Section 301 of the Trade Act," the retailers said in a letter to U.S. President Donald Trump, referring to the administration's ongoing unilateral investigation about China's trade policies and practices.

"Yet were this investigation to result in a broadly applied tariff remedy on imports from China, it would hurt American households with higher prices and exacerbate a U.S. tariff system that is already stacked against working families," the letter said.

The retail group noted that those working families who can afford less have already paid more in the United States because the country levies "the highest tariffs" on basic consumer goods.

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"Applying any additional broad-based tariff as part of a Section 301 action would worsen this inequity and punish American working families with higher prices on household basics like clothing, shoes, electronics, and home goods," they argued.

The letter came after the Trump administration was reportedly considering tariffs on 30-60 billion U.S. dollars of annual Chinese imports for China's alleged "unfair trade practices."

It was the latest example of growing dissent from U.S. business groups against the Trump administration's protectionist trade policy.

Forty-five U.S. trade associations, representing retail, technology, agriculture and other consumer-product industries, on Sunday also urged the Trump administration not to move forward its tariff plan on Chinese imports, as it would hurt U.S. consumers and companies.

Chinese Foreign Ministry spokesman Lu Kang said Thursday that China hoped to address bilateral trade issues with the United States in a constructive manner and by making a bigger "cake" of cooperation.

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"The two sides have properly resolved their trade differences in a constructive manner over the past 40 years. We believe the two countries can still settle their disputes through friendly negotiations, and we are ready to do so," the spokesman said.

The Chinese market is becoming an indispensably part of the global economy. It is a huge market with immense potentials yet to be tapped into.

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