Trade wars are “good and easy to win,” President Donald Trump tweeted last year. But just like nearly everything he’s said about the intensifying trade dispute between the U.S. and China, the president was wrong.
Trade wars, in fact, are not good — especially for consumers — and they are easy to lose. And the losses for both nations — and given the size of the American and Chinese economies, the world — will mount if China goes through with retaliatory tariffs announced on May 13.
Up to $60 billion in U.S. goods will face an additional 5% to 25% duty, the Chinese government announced, responding in part to the 10% to 25% tariffs the Trump administration imposed recently on up to $200 billion in Chinese imports.
Trump has repeatedly said the tariffs would be paid for by China. But of course, as every economist will quickly correct, that’s not true. U.S. importers pay the freight and either absorb the cost in part or in full. That can reduce profits — and prospects for hiring. Or the costs are passed on to consumers in the form of higher prices and lower purchasing power.
This fact was finally, grudgingly admitted on May 12 by National Economic Council Director Larry Kudlow, responding to Fox News host Chris Wallace. “It’s not China that pays tariffs,” Wallace said. “It’s the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers.”
“Fair enough,” responded Kudlow. “In fact, both sides will pay.”
First, it isn’t “fair enough,” especially the way that certain sectors — particularly Midwestern farmers — are bearing the brunt of the escalating tariffs. True, the administration has pledged an additional $15 billion to help agricultural producers. But more spending means more borrowing — ostensibly and ironically from China itself — and farmers want and need trade, not aid.
The pain will extend beyond “both sides.” The impact on globally integrated supply chains means the damage of escalating tariffs will be felt worldwide, holding down consumer demand and further harming U.S. exporters, including many Minnesota multinational firms. Global investors will pay too, and already equity markets were reeling on May 13.
Trump’s response to Kudlow’s admission seemed to be a switch to a “Buy American” appeal to avoid the tariffs. That ignores the fact that U.S. manufacturers that don’t import from China might raise prices even if they don’t face higher costs because of tariffs.
Trump is right about the central issue: China is guilty of unfair trade practices. The country’s propensity to demand technology transfers or just steal intellectual property outright is a profound problem that must be addressed.
But the problem, like trade itself, is global. China’s cheating isn’t limited to its relationship with the U.S. — it’s a challenge for every country that plays by the rules. The response also should be global, ideally through international institutions like the World Trade Organization, which was developed in part to resolve such disputes.
Multilateral free-trade agreements among responsible nations are another counterbalance against China, but unfortunately Trump (and Hillary Clinton, for that matter) disavowed the negotiated Trans-Pacific Partnership and the nascent Transatlantic Trade and Investment Partnership, a proposed pact with the European Union.
That previous presidents tried these approaches to curb China does not mean the strategies are wrong. Rather, they need to be effectively executed.
For now, the best hope is that cooler heads prevail and that Washington and Beijing climb down from a trade war in which both sides would indeed pay a high price.