Who wins in a trade war? Donald Trump believes that trade wars are ‘easy to win’, but what does winning look like?
- Trade wars have seldom had good outcomes and at worst, have prompted global recession
- In trying to shore up US manufacturing, Trump is threatening the consumer economy
- There is a significant risk that American businesses will lose contracts to sell overseas
China’s initial response to US trade tariffs appeared relatively restrained. However, in recent days it has launched retaliatory tariffs on a range of US goods and the trade war looks set to escalate, with all the associated repercussions for global stock markets.
The markets are right to be nervous. Trade wars have seldom had good outcomes, no matter what Donald Trump thinks. In extreme cases they have prompted significant inflation and led to global depression. Economists cite protectionist trade policies as one of the key factors accelerating the Great Depression.
Trump’s view is that China has been unfairly flooding the US with cheap goods and nicking its intellectual property. He wants to repatriate US manufacturing, shoring up the forgotten rust belt that forms his core vote. However, this is likely to come at a high price.
It takes time for new production to come on stream. In fact, US aluminium manufacturers have said they don’t have the capacity to replace production from China. In the short-term – and possibly the long-term as well - aluminium costs are going to rise. That means the price of cars, appliances and anything else that uses aluminium is going to rise.
This is a sledgehammer to crack a nut. In trying to shore up US manufacturing, Trump is threatening the consumer economy on which the US economy has been so successfully built for so long. Inevitably there will be some demand destruction as consumers hold off on new purchases or upgrades.
Then there is the flip side -all those American businesses that will lose contracts to sell overseas. Building a business in the crowded and capricious Chinese market is not easy. To have ploughed resources into building exports to China only to lose those contracts because the White House would rather revive old industries than support new ones is likely to be particularly galling. Their customers are likely to find more dependable suppliers, based in countries with more rational and reliable governments.
There is also the issue that while countries amass Dollars through the sale of goods to the US, they have an incentive to buy US government bonds. If they’re not amassing those Dollars, then they won’t. If demand drops for US debt, that creates a problem for a government with a huge deficit. Winning? I’m not so sure.