America’s Consequences for the Trade War

In early June, the Trump administration imposed new steel and aluminum tariffs on Canada and other U.S. trade partners. On June 15, the United States withdrew from an extensively negotiated agreement with China and imposed a tariff valued at US$50 billion on high-tech products from China. China quickly retaliated by levying tariffs worth the same amount. Starting from mild friction, the situation has deteriorated into a full-blown trade war.

In pursuit of trade protectionism, the United States has launched a series of trade wars around the world which will not only prove adverse to the long-term development of the U.S. economy, but also leave a serious negative impact and cause destruction to the recovering global economy. The U.S. has become a challenge and threat to the existing rule-based multilateral trading system. United States hegemony has aroused opposition and criticism from other major countries. To safeguard the rules and authority of the system, some countries have begun to prepare more measures to counter U.S.’ protectionist actions.

For starters, this policy choice of the United States is a backpedal. Opening and free trade are trends of the times and the goal of international multilateral trade organizations, and the principle of fair competition is generally accepted by all countries. Considering the development of international trade in the wake of World War II, the U.S.’s tariffs on the Section 301 list from China and steel imports from the European Union and other countries oppose the basic principles of free trade. They reflect Trump’s unconventional style and the adventurous behaviors of the administration. This move is bound to receive condemnation and opposition from other major economies and consequently cause the United States to suffer economic losses as well as being forced into isolation.

Secondly, the policy of trade protectionism benefits none but hurts America itself. The United States should have learned from the disastrously protectionist U.S. trade policy of 1930—taxing steel and aluminum alone directly led to a sharp rise in domestic steel prices in the United States, which caused an across-the-board rise in production costs and prices in the country. After the introduction of counter measures from other countries, affected exporting industries of the United States will face even worse conditions. Once Sino-American bilateral taxation is imposed, a single sanction against American agricultural products could decimate the economies of any number of specific U.S. states.

The United States’ choice to restrict imports will damage American exports and additional import tariffs will lead to a rise in domestic prices and affect domestic consumer spending. With the rise in domestic prices in the United States, the Federal Reserve will be forced to raise interest rates to appreciate the dollar. Appreciation will result in a large deficit in the US currency account, which will in turn suck the life out of the recovery process of the U.S. economy. When a new round of crises arrives, Trump’s confidence will likely evaporate quickly.

At the end of the day, the U.S. will inevitably be caught in more troubles. If Trump re-raises on his conventional thinking as the self-proclaimed master negotiator has been prone to do, the available moves will soon devolve from call or raise to fold and cash out.

The writer is vice-chairman of the China Society for World Trade Organization Studies.