Can America actually benefit from a tariff war?
It could, but only if it is over swiftly and results in Chinese policy concessions that can reduce trade distortions
The spectre of a large-scale trade war between the United States and China, the world’s two biggest economies (an event unprecedented in modern times) has people scrambling to anticipate the effects. Most analyses are focusing on regions and industries that will be hurt or helped by the tariffs.
But is it possible that the US could actually benefit from a tariff war? It could, but only if the war is over swiftly, and results in Chinese policy concessions that durably reduce trade distortions.
Economists have long known that trade barriers could be used as a strategic bargaining chip. If Trump uses his tariffs to force Chinese policy concessions rather than simply to posture, he could conceivably force China to reduce its systematic theft of US intellectual property, to create a fairer, more level-playing field for foreign companies, to reduce subsidies for its manufacturers, or to promise not to engage in currency manipulation. Any and all of these changes would end up making global trade freer in the long term.
So could the US conceivably force China to make any of these concessions? Some argue that the US has more leverage in a trade war, since it runs a trade deficit with China. When trade between the two countries falls, Chinese producers would almost certainly suffer more than American ones.
In 2010, writing in support of using tariffs as a strategic tool to force China to appreciate its currency during the Great Recession, Paul Krugman explained: “What would happen if China tried to sell a large share of its U.S. assets? ... Long-term rates might rise slightly … [T]he Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds. … Right now America has China over a barrel, not the other way around”.
Krugman was worried about Chinese imports reducing aggregate demand —now that the recession is over, he no longer supports a trade war. But the fact that China probably has more to lose than the US remains the same.
So maybe Trump is right, and that a trade war with China will be “easy to win.” But I wouldn’t bet on it. Every day that tariffs, or the threat of tariffs, stay in place in either country is a day that US industry bleeds. As for the possibility of China’s government blinking first, the autocratic Xi Jinping is probably able to endure economic pain much longer than the democratically elected leaders of the US.
In other words, the safe bet is that this trade war will not end well for Trump, or for the US.