Will US-China trade war escalate or end?

When the USA and China – the world's two biggest economies – are in a trade war, much of the world will catch colds. After all, somehow, many nations are part of the global supply chain that leads to finished products for the world at large to purchase.

It would appear that America fired the first shot in the trade war involving new tariffs over US$50 billion of Chinese goods. China merely retaliated in full measure. But Washington argues, otherwise.

Her outspoken triggerman Donald Trump says the USA is just rectifying an old business injustice. America exports $115 billion to China, China exports $462 billion to the USA – resulting in an American deficit of $347 billion. Is that China's fault?

Last we read is that if tariffs were zero for all nations countries who can produce the better and cheaper goods and services will successfully export to another country who needs them. A trade war brings high tariff walls to distort this reality.

Trumps' other reasons for his trade war are Chinese industrial espionage and the latter's insistence on joint ventures with Americans in China with a sweetener that there is a transfer of technology transfer to China.

These two reasons seem like Chinese business upmanship but we doubt if imposing more tariffs on their exports is the proper response to them.

On the other hand, Trump allies trumpet it is easy to "beat China in this trade war" precisely because of the American trade deficit (China has more exports to the USA) and because China is more dependent on global trade (40% of its GDP) than America is at (30% of GDP).

But things are not as simple as depicted. In fact, trade disruption was identified as "part of the reason of The Great Depression and World War II." Do we want this again?

Trump has started with increasing tariffs on some US$50 billion worth of Chinese goods- threatening to bring this level to US$500 billion which practically covers all of the Chinese exports to the USA. China has promised to counter tit-for-tat in terms of tariffs on American goods.

When the trade war reaches US$1 trillion ($500 bilion each side) that can truly affect the daily lives of both Americans and Chinese. The second wave of tariffs hit heavy importation from China in terms of apparel, housewares, tools and heavy equipment. Prices will go up there and likely interest rise. This will be coupled with a postponement of any expansion plans and even reduction of business activities.

Since America and China are the globe's biggest economies, inevitably this recessionary atmosphere will affect most nations. That is bad for both America and China. Not to mention the fact that the 25% new US tariffs on steel and 10% on aluminum products also negatively affected the same products coming from Canada and the European Union which totals US$9 billion, much larger than the US$3 billion from China of the same products.

This is one of the reasons why we think that "reason will eventually prevail" and the trade war will stop at some point when both nations realize their folly. Of course, Trump is known to be the master of the "Art of the Deal" in negotiations and is probably just waking China up to a realization that America will stand up to her in the battle for world economic supremacy.

Besides, a trade war will not necessarily create jobs for either country. American labor is already expensive. One car manufacturer based in the USA, for example, which used to get cheap auto parts from China (before the tariff increase) did not set up a separate auto part firm in the USA as a result.

It simply moved its operations to another country where labor was cheaper and China's auto parts not excessively taxed and then exported the finished products. Was this not America's loss as a backlash?

In China's case, labor is no longer as cheap as before. Besides, there is Artificial Intelligence (robots), the usage of such AIs already costs less per unit of output compared to human labor. So, how will the trade war actually create more jobs between the two warring nations?

Most importantly, a full-scale trade war will result in the increase of the prices of consumer goods which will hit China because Consumption is the backbone of her economy.

On the political side, China has an advantage in the sense that she can dictate upon many firms and stateowned companies to do its bidding in pricing their goods. For instance, it is said that in hurting the USA specifically in this trade war, China is deliberately targetting certain products from certain states, according to an independent research.

For instance, China will reportedly impose high tariffs on American soya beans from Iowa, orange juice from Floria and automobiles from the Rust Belt states whose citizens constitute a big part of Trump's electoral base.

China is hoping that the impending loss of jobs of people in these states will fatally add to the woes of the unpopular Trump going into his reelection bid in 2019. Trump will, therefore, likely blink and may not allow this trade war to threaten his own political survival.

Thus, this trade war could end sooner than we expect.

There are analysts that see China using a "currency war" to upstage the US trade assault. Two weeks ago, the yuanwhich is managed as a currency by the People's Bank of China (Central Bank) dropped 4%, the lowest monthly drop in recent history.

The strategy is for China's exports to become more competitive in the market. They say that with the US$1 trillion in dollar reserves, China can easily defend any which way it moves its currency to suit a political end.

But the more sanguine thinkers believe otherwise. Such a currency "war" move would backfire against China since a weakening yuan currency can cause the Chinese exporters and foreign investors in Chinese stocks and bonds to flee China in an unwanted capital flight.

Besides, much of China's borrowings are in bonds and loans are denominated in dollars many from American institutionsmaking them expensive to service in a weakening currency scenario.

Thus, we feel this foolish trade war will find its final reason to cease also within the common sense of both warring nations eventually.

(Bingo Dejaresco, a former banker, is a financial consultant, media practitioner, and book author. He is a Lifetime member and chair of the Finex Broadcast Media. His views here, however, are personal and do not necessarily reflect those of Finex. dejarescobingo@yahoo.com)