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The looming US-China trade war, explained

What happens if the world’s two largest economies can’t agree on what counts as fair trade?

A US-China trade war is on the horizon if Trump’s team and Xi’s team can’t come to an agreement on trade reforms.
A US-China trade war is on the horizon if Trump’s team and Xi’s team can’t come to an agreement on trade reforms.
AFP/Getty Images

President Donald Trump is sending his top economic advisers to Beijing this week for talks to avert a possible trade war with China.

US Treasury Secretary Steve Mnuchin, US Trade Representative Robert Lighthizer, and other senior economic officials will meet with Chinese officials on Thursday and Friday to discuss the two countries’ trade disagreements.

Among other things, the US wants China to import more American goods and to stop forcing American companies to hand over their prized intellectual property if they want to do business in China.

It already looks like talks are going to be tough. Chinese officials have declared they will refuse to discuss two of the US’s biggest demands, and US officials are signaling that they aren’t particularly optimistic.

“I’m always hoping but not always hopeful,” Lighthizer said at a US Chamber of Commerce event on Tuesday in advance of the China trip. “It’s a big, big challenge. There’s a very different system over there and a system that, in all honesty, has worked very well for the Chinese.”

If the two countries do manage to strike a deal, it could dramatically reduce tensions between the two world’s largest economies. But if they don’t strike a deal, or at least make serious progress toward one, things could go south fast — perhaps even escalating into a full-on trade war.

That sounds super scary. But what is a trade war, actually? What would it mean for the average American?

What follows is a brief guide to what a trade war is and why it could be so costly for both the US and China.

What is a trade war?

To understand what a trade war is, you first need to know what a normal trade dispute looks like.

Countries disagree with each other all the time about what counts as an unfair trade practice, clashing over policies like government subsidies for industries. There are a few different ways they handle their disagreements.

Let’s say the US finds out that Country X uses generous government subsidies to make its production of tennis balls cheaper and give them an unfair price advantage over tennis balls made in the US. The US then has a few options for how to respond.

Washington can take Country X to the World Trade Organization — the world’s supreme court on trade — and complain about its subsidies of tennis balls. The hope would be that the WTO forces Country X to cut its subsidies or gives the US permission to use trade barriers against Country X’s tennis balls.

The second option the US has is to initiate direct negotiations with Country X over its tennis ball subsidies and come to some kind of compromise agreement.

If neither of those works or seems desirable, the US could impose tariffs, or punitive border taxes, on Country X’s tennis balls and say it won’t let up until the tennis ball subsidies are reversed. Country X might then choose to come to the negotiating table to try to find a solution. The problem is that it could also choose to impose its own tariffs on an American export that it thinks the US handles unfairly.

Experts say that what separates a trade dispute from a trade war is the way that third situation unfolds. It’s a trade dispute if the US and Country X’s tariffs on each other are one-off strikes. But if the initial tit-for-tat causes further escalations, in the form of higher or more tariffs, then it becomes a trade war.

Phil Levy, who was a senior official on President George W. Bush’s Council of Economic Advisers, told me that his rule of thumb for characterizing something as a trade war is that the escalation of trade barriers is “uncontrolled.”

That is, when disputes veer from the conventional channels for sorting out disputes — and threaten to become the source of serious economic harm for both economies.

Are the US and China heading toward a trade war?

AFP/Getty Images

The US and China are already engaging in what Monica de Bolle, a senior fellow at the generally pro-free trade Peterson Institute for International Economics, calls a “pre-trade war.”

First, on April 3, Trump unveiled a list of more than 1,300 Chinese exports — which included flat-screen televisions, aircraft parts, and medical devices — that he said he plans to hit with 25 percent tariffs. The tariffs are intended to punish Beijing for restricting US investment in China and stealing American intellectual property. Combined, they would affect about $50 billion worth of Chinese exports.

The very next day, China struck back, unveiling its own list of US exports that it plans to hit with 25 percent tariffs. The proposed package could affect more than 100 American-made products, including cars, airplanes, and soybeans — the top US agricultural export to China. Combined, they would cover about $50 billion worth of US exports, perfectly mirroring the US tariffs.

But it didn’t stop there. The day after China’s announcement, Trump directed his trade team to identify tariffs on an additional $100 billion worth of goods, clearly intending to escalate even further after seeing Beijing’s readiness to match his initial tariffs.

Levy says that’s the moment it switched to a potential trade war. The Trump administration’s original proposal for tariffs on $50 billion worth of Chinese exports was specifically designed to compensate the US economy for the amount of revenue it’s lost due to Chinese intellectual property theft. But Trump’s rationale for the additional $100 billion seems to be pure one-upmanship.

The next day, a spokesperson for China’s Ministry of Commerce said that China will fight “at any cost” and take “comprehensive countermeasures” to Trump’s latest measures.

Who would win a US-China trade war?

Trump has said he thinks trade wars are “easy to win” if the US exports less to a country than that country exports to the US. The logic is that the US has more targets to choose from to hit with tariffs or quotas (caps on the total amount of the country’s exports) than the other country has.

The US’s trade deficit of $375 billion with China — the amount by which its imports from China exceed its exports to China — is already pretty big, which means the US should have a lot more targets than China.

The US released a list of potential Chinese targets that covers more than 1,000 different items, but there’s a focus on high-tech materials, including medical devices, machinery, aircraft parts, batteries, and flat-screen TVs. Tariffs on those products will make them more expensive and hurt the Chinese companies that manufacture them.

But experts say that Trump would be mistaken to think the US doesn’t have a lot to lose.

One reason is that nearly every tariff Trump places on a Chinese export to the US doesn’t just hurt China — it also hurts US producers and consumers. Trade with China saves typical American households up to $850 a year, and that extra money gets spread across the economy and helps keep people employed in a variety of domestic industries. That could change if higher prices lead more Americans to change their buying patterns.

US businesses could also feel the sting because Trump’s tariffs on machinery and high-tech components from China would almost certainly mean US manufacturers of things like aircraft and cars have to spend more than they do now.

The Trump administration hasn’t said what new Chinese products could be hit by the additional $100 billion in tariffs, but analysts say it’s going to probably include a lot more essential consumer goods like cellphones, laptops, and furniture. Again, a double-edged sword — it’ll deal a blow to the Chinese companies that make them and the US consumers that buy them.

China might not have as many exports to choose from, but the ones that it can hit are going to sting. Beijing is looking to hammer US agricultural exports produced in states that Trump and the GOP consider vital political strongholds. If China imposed its proposed tariffs, it would cause demand for those US exports to slump in China, and that in turn could dent profits and cause layoffs in those industries.

China’s threat to put tariffs on soybeans is something the administration will take particularly seriously. China buys about a third of the US’s soybean exports, making it far and away the largest importer in the world for the American crop. The biggest soybean producers in the US include Ohio, Iowa, Missouri, and Indiana — states in the heart of Trump country where neither the president nor his party wants to see economic instability or job losses during the 2018 or 2020 elections.

“The fact that Beijing put soybeans on its list is a signal that China is not going to pull any punches,” Christine McDaniel, who served as senior trade economist in the George W. Bush administration, told me.

Many of China’s other tariff choices are clearly politically motivated as well, like orange juice, much of which comes from the battleground state of Florida. And tariffs on corn crops could hit swing states in the Midwest like Iowa.

On top of that, experts like William Reinsch at the Stimson Center say that China could take some unconventional steps to interfere with US companies that rely on supply chains in China. Chinese government officials could delay shipments of iPhones out of China or use regulatory crackdowns to interfere with the manufacturing of components that iPhones rely on. That could make iPhones more expensive and hurt Apple’s share price.

All of which means a sustained trade war could lead to higher unemployment and slower economic growth in the US. Considering that the pace of the economy has been one of the few bright spots in Trump’s tenure, that’s a big deal.

So what happens next?

The main thing to watch is the upcoming meeting between Trump administration officials and Chinese officials this week. It’s possible they could come to a deal that would result in US and Chinese tariffs being lowered or even taken off the table.

But experts are skeptical that they’ll actually manage to come to terms. There’s a deep divide within the Trump administration on how to approach the Chinese. Officials like Lighthizer and White House trade adviser Peter Navarro are hawks on China, want big concessions, and favor tariffs, while Mnuchin and National Economic Council Director Larry Kudlow are more inclined to strike a deal with more moderate concessions.

“It’s worrisome because you don’t have clarity and consolidated negotiating strategy,” Levy told me.

The divisions within the administration could make it harder to settle on an agreement with China, and that in turn means that tariffs could be on the way. The question then will be whether Trump will actually deliver on everything he’s threatened — and if China will keep up the fight as well.

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