WINNING A TRADE WAR IS NOT AS EASY AS IT MAY SEEM

Following his America First campaign during last year’s election, President Donald Trump has declared a trade war against some countries. The war can be categorised in three parts: the first being duties imposed on imported steel and aluminium and an additional US$50 billion worth of tariffs on Chinese goods; the second is to threaten Chinese firms with another $200 billion in tariffs and another 20% duty on automotive imports from Europe; the third is mainly aimed for its main trade rival, China. The Trump administration has threatened new investment restrictions on Chinese firms in an attempt to curb intellectual property theft, along with the possibility that the USA might leave the World Trade Organization. This aggressive approach has left China with little option but to fight back. China’s Commerce Ministry has prepared retaliatory responses that include both qualitative and quantitative measures if the US moves ahead with the tariffs by raising import duties on $34 billion worth of American goods, including soybeans, electric cars, and whiskey. Regardless of this, many analysts have argued the restrictions imposed on Chinese investment in US technology could backfire. The restrictions target any firm with more than 25% Chinese ownership that appropriates the intellectual property of US startups. But there are not many businesses in this category. Most firms embed US technology in their global supply chain, rather than import the product from the US. Hence, there is a good chance the restrictions could lead to unintended consequences, as American companies could shift more production overseas. Trade patterns will eventually adjust so that firms can avoid the trade barriers. However, high trade barriers do not necessarily reduce a trade deficit and the Mr Trump might be forced to think again to avoid a slowdown in the world’s biggest economy. It may take some time for Mr Trump to realise a trade war is not easy to win, as there may be a lag before the financial markets respond to his protectionist agenda with the American economy as healthy as ever. This might make the president believe his tough approach to trade is paying off.