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If Trump delivers on his promises on China, he’ll probably spark a trade war

A copy of the local Chinese magazine Global People with a cover story that translates to “Why did Trump win” is seen with a front cover portrait of US president-elect Donald Trump at a news stand in Shanghai on November 14, 2016.

When it comes to trade with China, Donald Trump has made some audacious promises.

In language laced with unsubtle nods to Chinese stereotypes, the president-elect has pledged to crack down on the country’s “cheating” in its trade practices with the US — something he claims has resulted in “the greatest theft in the history of the world.”

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Trump’s proposed solution? To label China a “currency manipulator” on day one of his presidency, and to slap massive 45 percent tariffs on the goods it sends to the United States. That would basically function as a massive new tax on incoming Chinese products and slow their flow into the country.

As with everything the brash billionaire proclaims, it’s not clear how much of what he says he actually intends to act upon. But if he does in fact pursue the plan he’s outlined, economists believe there’s a significant chance he could set off a trade war with China. Like any war, the outcome would be impossible to predict, with one major exception: It would guarantee pain for everyone involved.

Why Trump wants to label China a currency manipulator — and what that means

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The first step of Trump’s quest to put an end to what he perceives as Chinese misbehavior would be officially declaring the country a currency manipulator, something he would do through the Treasury Department. In essence, Trump would be accusing China’s government of artificially suppressing the value of its currency, the yuan, to give it an edge in the global market.

The reason? For the past few decades, China’s government has generally held the value of yuan down. It’s a maneuver that makes Chinese exports cheaper and thus gives them a boost abroad. Simultaneously, it makes American imports into China more expensive, which dampens demand for them there.

A cheap yuan has both benefits and costs for Americans. The upside is that American consumers get access to tons of cheaper Chinese-made goods in places like Walmart. The downside is that American goods will be more expensive for Chinese consumers, which means there will be less demand for them, and thus slightly slower economic growth in the US. Trump is convinced that Chinese currency manipulation is fundamentally unfair and cannot be tolerated, and so he has proposed tariffs on the Chinese as a kind of tit-for-tat.

His concern, however, is out of date; there’s a near consensus among economists that over the past couple of years China has shifted away from its cheap-yuan policy. Today, market forces — not China’s government — are pushing down the value of the yuan.

“Labeling China a ‘currency manipulator’ and claiming that they are seeking to intervene in currency markets to devalue their currency right now is exactly wrong — they are in fact, doing the exact opposite,” Chad Bown, a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank that is generally pro–free trade, told me. “For the last few months the Chinese government has been intervening in currency markets by propping up the value of the [yuan]; that has helped to slow its slide against currencies like the US dollar.”

In other words, Trump would be laying siege to China for something that it’s no longer doing. Yet Trump may feel some obligation to live up to his aggressive rhetoric on the campaign trail all the same. So let’s say he labels China a currency manipulator. What happens then?

Hint: It won’t be good

The main effect of officially citing China as a currency manipulator is that it would give the Trump administration license to use new tariffs against China’s exports to the US. It’s not something that’s done often; since the passage of the 1988 Omnibus Trade and Competitiveness Act, which empowered the Treasury Department to label a country a manipulator, the United States has only taken the step a handful of times.

Currently, the US and China do have tariffs on each other’s goods, but they aren’t particularly large. According to Bown, the US taxes Chinese imports at 3.5 percent on average, the same rate it uses for any country that it doesn’t have a special trade agreement with (since the passage of NAFTA, Mexico and Canada pay virtually no tariffs at all). For its part, China has a 10 percent tariff on US imports on average, just as it does on goods from any country it doesn’t have a special agreement with.

These are standards these two countries have agreed to through their membership in the World Trade Organization. Beijing’s tariff is higher, but it’s important to remember that China is in a different stage of its economic development, and that it already dramatically lowered its tariffs, which were in the mid-20s in the 1990s, in order to join the WTO in 2001.

Trump could slap new tariffs on Chinese goods in a number of different ways. If he wanted to take a more modest route, he could, for example, raise tariffs to 15 percent on a specific set of Chinese products, like apparel and footwear. If he wants to be as ambitious as he said he would be on his path to the White House, he could place a whopping 45 percent tax on all goods being imported from China.

China would first turn to the WTO to settle the dispute, a process that could take up to 18 months. But it could go further. It could treat the US’s moves as the first shot in a trade war, and retaliate with tariffs of its own. That counterattack could be with similar taxes, or with far more aggressive ones than the US established. China could respond to a 45 percent tariff on its goods with a 60 percent one on America’s, for instance. And of course, the US could escalate even further in response to that, and so on.

China is likely to escalate

Most experts believe that China is likely to respond strongly to any US tariffs with its own tariffs, and a recent editorial in China’s state-run Global Times newspaper seems to confirm it. The article warns that it would be “naive” for Trump to ramp up tariffs aggressively:

If Trump imposes a 45 percent tariff on Chinese imports, China-US trade will be paralyzed. China will take a tit-for-tat approach then. A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.

The editorial is basically saying, if you hit us, we’ll hit you back. China relies more on the US market than the US relies on the Chinese market, but losing China as a market would devastate American businesses exporting products ranging from agricultural products to tech gadgets, and that would result in large job losses domestically.

In a trade war, companies like Apple would face huge disruptions in their supply chains and a spike in their prices, and would lose out on a gargantuan set of consumers for their products. Consider that China’s smartphone market is almost twice as large as the US and Western European smartphone markets combined.

The Peterson Institute simulated a scenario in which the US engaged in a full-on trade war with China and Mexico based on Trump’s tariff threat. It calculated that the US would enter a recession and lose close to 4.8 million private sector jobs if it imposed a 45 percent tariff on non-oil imports from China and a 35 percent tariff on non-oil imports from Mexico, and if both countries responded in kind with identical tariffs.

As the map below from the Peterson Institute report shows, the whole country would experience massive job losses, and the Rust Belt, the Southwest, and California would be hit particularly hard.

The Peterson Institute for International Economics

Tariffs are not a silver bullet for job creation

But even in a scenario that doesn’t spiral into a full-blown trade war, Trump’s promise to use tariffs to bring jobs back to America is quite likely to disappoint. Tariffs are not very sophisticated tools.

Let’s say Trump imposes high tariffs on a specific set of Chinese goods to help revive those specific industries in the US. There might be a surge in factory jobs in the US temporarily, but it won’t be as big as the number of jobs that were originally lost to China. Why? Technological advancement — better, more sophisticated machinery —means that fewer people are needed to do those jobs than before.

And the uptick in jobs brought back to America probably wouldn’t last. Eventually they’ll trickle back to other countries that offer extremely cheap labor, like those in Southeast Asia, a region that is already seen as being on the path to taking over much of China’s production capacities.

“It’s like playing whack-a-mole,” Todd Tucker, a fellow at the Roosevelt Institute, a New York–based liberal economic think tank, told me. “The problem is that production will shift to other countries that you’re not imposing tariffs on.”

There’s precedent for this. In 2009, the US imposed 25 percent to 35 percent tariffs on imported Chinese car and truck tires for three years. Domestic tire production went up at first, but so did imports from other trading partners that strived to replace China. As the Los Angeles Times reports, “Shipments from South Korea, Thailand and Indonesia doubled in value, more than offsetting the decline in Chinese-made tires.” And because the price of tires went up, retail jobs selling those tires were lost. The Peterson Institute estimates that more jobs in retail were lost than were gained through production.

The US’s manufacturing job losses to China are real, but bringing them back with tariffs targeting one country at a time is probably impossible.

There’s more than the economy at stake

One other major issue to take into account is that tensions in trade with China will ripple over into other policy domains, from coordination on climate change policy to navigating differences on global security. Strong US-China trade relations have been part of the glue that holds the two countries together when their interests are at odds in other realms of global affairs. Beijing, for instance, spent years maintaining punishing economic sanctions on Iran at Washington’s behest even though China doesn’t see Tehran as a direct threat and was eager to get back into the Iranian market.

“During times of friction in the security arena, US and Chinese business leaders have been important constituencies advocating for constructive policies that take into account the broader relationship,” Paul Haenle, a former US diplomat and director of the Carnegie-Tsinghua Center at Beijing’s Tsinghua University, told me. “If the support of the business community is threatened, the US-China relationship could lose an important source of support and stability.”

If Trump decides to slam China with tariffs, there are many potentially huge costs and not a ton of payoffs. He would be wise to find better ways to deliver jobs.

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