Escalating tariff war with China, White House risks digging a hole for Americans

By Li Hong Source:Global Times Published: 2019/5/12 21:50:30

Illustration: Xia Qing/GT

The US government escalated its trade war with China significantly on Friday, raising tariffs on $200 billion worth of Chinese goods. Beijing has vowed a tit-for-tat response meaning there is an increasing probability that there will be a long and agonizing trade dispute between the economic giants.

For two and half years, the world has watched the White House headed by President Donald Trump scrap multilateral agreements and slap protectionist tariffs on US' trade partners.

Some say that Trump's "tariff tweets" inflamed US' bilateral trade relations with China.

Trump, flamboyant as he is, has witnessed a swelling opinion tide at home. More Americans are jittery about China's modernization going ahead fast and now he is feeling pressure from his electoral base to pull China off a galloping horse.

What the Trump administration has pursued since the beginning of 2018 is the decoupling of the world's two largest economies. American regulators, under the guise of protecting national security, have threatened and harassed Chinese investors. As a result, Chinese investment in the US slumped by more than 80 percent to merely $5 billion in 2018.

American hardliners do not seem to realize that their president is unintentionally digging a hole for them. These hardliners need to look at what fueled the Great Depression.

When high tariffs are levied on imports, normal trade flow is throttled, leading to much pricier manufacturing materials and consumer goods. Basic economics tells us that higher prices coupled with less manufacturing will cause stagflation and recession.

Some American economists are ringing warning bells that an all-out tariff conflict will trigger a US recession. In the event of the worst-case scenario - 25 percent duties on all imports from China and China retaliates in kind - US real GDP growth could be reduced by as much as 1.8 percentage points one year into the scenario, according to estimates by Moody's Analytics.

To make it worse, the biggest squeeze of all this will be felt most acutely by American consumers and farmers - the middle class and the poor who have the most to lose and can ill afford the impact. Some claim American families will have to absorb a consumption tax bill in the neighborhood of $100 billion if the worst-case scenario happens.

On China's side, the rising tariffs are certain to cause pain among manufacturers who will be forced to reduce production and lay off workers. Bearing the brunt of the hit will be a large number of private enterprises and their migrant workers who have homes in rural villages. These people could go back to their roots and grow soybeans, sorghum, oranges, bananas or herd cattle and hogs that China used to import from the US.

At the same time, China's central government is likely to ratchet up its economic stimulus, including cutting interest rates and business taxes to support manufacturers and businesses. It could also beef up fiscal spending on infrastructure and public utilities to revitalize domestic market demand and create jobs.

In spite of temporary economic difficulties, China's leadership should keep well abreast of the tenet - tethering the country firmly to reforming and opening-up, investing in education and technological innovation, and forging more amicable economic ties with European countries, RCEP and BRI economies.

China's huge and lucrative market will always be open to these friendly countries and their companies. If the US truly wants decoupling, China could consider giving it one.

In the face of the US-imposed trade war, Chinese people should stay calm and united. They may take Trump's tariffs onslaught as a test of the resilience of China's economy, just as they did during the last global financial crisis in 2008-09. This time, China is in better shape.

The author is an editor with the Global Times.


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