Trade skirmish or war? Who gets hurt?

In the first year of the Trump administration, the president’s threats to upend the global trade system seemed like mostly bluster — lots of threats, not much action. Not anymore.

The administration moved forward with a 25 per cent tariff on $50 billion of Chinese imports. In recent weeks, it imposed taxes on imported steel and aluminum, including that from close allies like the EU and Canada. And those actions both follow earlier measures on washing machines and solar panels. All of which prompts some important questions: Is the United States engaged in what should be classified as a trade war? And what are the economic consequences likely to be?

Is this a trade war?

Definitely maybe.

A “trade war” refers to measures and countermeasures on import restriction that escalate over time, causing trade between two countries to break down. But there is no specific definition. Everyone would agree that the Depression-era period of escalating tariffs was a trade war. Everyone would agree that, say, George W Bush’s 2002 steel tariffs and the retaliation by Europe was not. But the exact line between trade skirmish and trade war is subjective.

“Yes, we are now in a trade war,” said Mary Lovely, an economist at Syracuse who studies trade. She emphasises two factors. First, the Trump administration is signalling that it will meet Chinese retaliation with further retaliation, and second, “the two sides are no longer engaged in productive talks to defuse tensions.”

Chad Bown, a senior fellow at the Peterson Institute for International Economics, is more cautious. Is this a trade war? “In my view not yet,” he said. “My view of a trade war is when all countries start responding unilaterally, and without respect to international rules in terms of the levels of tariff retaliation that they engage in.”

So far, China, the European Union and other trading partners have responded within the confines of World Trade Organisation rules.

The logic behind the administration’s action For many years, American companies have complained of being treated shabbily as they try to do business in China. They often must partner with Chinese companies to be allowed to do business in the country, and frequently complain that their most advanced technologies are being stolen, among other concerns.

The Trump administration’s list of goods to be subjected to the tariffs is aimed at these high-tech sectors, including aerospace, telecommunications equipment and robotics.

China has said it will place tariffs on $50billion worth of American imports in retaliation. That’s where things get interesting. The Trump administration is threatening to escalate things further if China retaliates, pulling another $100 billion of goods into the mix. This increases the possibility that the dispute will spiral to encompass ever larger swaths of goods.

Will it work?

China views development of its high-tech industries as core to its economic strategy of the future and won’t want to give up advantages in those sectors lightly. On the other hand, the substantial US trade deficit with China means the American side has more potential Chinese imports on which to slap punitive tariffs than the Chinese do, a potential source of leverage.

The Trump administration’s negotiating strategy has been erratic. At one point last month, there seemed to be progress toward an accord in which China would buy more American agriculture and energy products. That would have helped reduce the US’ trade deficit with China, one of Trump’s major goals. But it wouldn’t have done much of anything about the longer-term issues around technology theft, and those talks fell apart.

The US might have a stronger negotiating position if it were joined by allies like Canada, Japan and the EU. But given the steel and aluminum tariffs and tensions with Canada, the US finds itself on its own in talks with China.

Is this going to crash the US economy?

Probably not.

The United States has gross domestic product of nearly $20 trillion, so a new tax on $50billion (or, eventually, $150 billion or more) of Chinese imports is a rounding error. Even when you count the costs of steel and aluminum and other tariffs that have resulted from the president’s aggressive trade, it’s hard to get to numbers that move the dial much on overall growth.

As countries retaliate, they can certainly cause damage for individual American industries that export, but the reality is most of the economic activity in the US is for domestic consumption. Exports constitute about 12 per cent of GDP.

That’s not to play down the potentially heavy damage in the industries caught in the middle. Soybean futures prices fell Friday, as commodities traders predicted China would buy fewer soybeans in retaliation. Some major industries that use steel and aluminum are complaining of sharply higher prices, which in turn makes them less competitive against global competitors.

“The questions are does this escalate from here, is this part of a much bigger process, and how do business confidence and financial markets respond?” said Lewis Alexander, chief US economist at Nomura. “With these relatively modest first-round things, it’s hard to make the case that it’s material” to the overall economy.

The risk comes if things spiral out of control in ways that crater the stock market or lead businesses to pull back significantly on their investment spending. Keep in mind the way that trade disputes can cause economic damage without triggering a recession.

Will this mean higher prices?

The initial tariffs on Chinese goods are not focused on consumer products. They are to be levied on products mainly purchased by businesses, such as industrial equipment. That could mean upward pressure on inflation eventually, but in subtle ways.

Even if the dispute spreads to consumer goods, the actual amount American consumers will pay depends on many factors, including the availability of domestic substitutes and the competitiveness of the industry. For any given product, it is hard to predict how much of a 25 per cent tariff will be passed through to consumers versus absorbed by producers and retailers.

Still, consumers ultimately pay the bill for trade barriers in one way or another. At the start of the year, the administration put a 20 per cent tariff on imported washing machines; the price of laundry equipment is up 17 per cent since then.