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As the China/US trade war escalates, what will bring it to an end?

September 2018

The US/China trade war accelerated again this week. China retaliated with a further $60bn of tariffs on US goods, following Donald Trump’s announcement of a further $200bn in tariffs on Chinese goods. The latest exchange means that between them, the US and China have imposed tariffs on more than $360 billion of goods. 

The trade war has now gone beyond the point at which most believed it would stop, but neither party looks inclined to back down. Trump believes he has the upper hand because, well, who doesn’t want to trade with America? On the other hand Chinese policymakers don’t have to be re-elected, so they may believe their hand is stronger. 

There is a danger that this could start to influence US politics. With the mid-terms coming up, China has deliberately gone after US ‘trophy’ goods such as Jack Daniels and Harley Davidson. It has also gone after goods made in key Trump-voting states. As China buys less from the US than the US buys from China, it can’t match Trump’s tariffs dollar-for-dollar, but it could make life difficult for US companies that do business in China, such as Apple and Boeing. It has form on this, having made life difficult for South Korean firms during a political dispute last year. 

The question is where it ends. Ultimately, it is bad for both sides. Both sides recognise that and yet appear to be willing to keep going. There is no doubt that it is a problem that needs to be solved. The US doesn’t want a vast trade deficit with China. At the same time, China doesn’t want to be reliant on flogging low cost goods to the US, with all the environmental and economic problems that entails. However, the problem is that the bullish approach on both sides does not lend itself to a resolution. 

While economists can say that logic dictates that it won’t escalate because it is bad for both sides. It is clear, however, is that both sides are willing to risk economic damage to win this particular spat. The key may end up being the US mid-terms. Donald Trump has an electorate to please and when they start feeling the pain, a resolution may emerge. 

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