The trade tensions between the US and the rest of the World were ratcheted up another notch this week. At the end of last week, President Donald Trump announced that tariffs would be imposed on $50billion of Chinese imports. The Chinese Government responded by saying that it would impose penalties of the “same scale” on American goods. Trump then directed the US Trade Representative to prepare tariffs on a further $200billion of Chinese imports.
As well as targeting China, we should bear in mind that tariffs on steel and aluminium imported from Canada and the EU are already in place. This week, the EU said that it would respond in kind and impose tariffs on US goods, including bourbon whiskey, orange juice and motorcycles.
America imports much more than it exports. A pure numbers game of “imposing the most tariffs” is therefore one that Trump could win quite easily. But who would be the real winners and losers?
Trump may be able to point to some US steel mills which are being kept open. He would then point to the jobs that are saved as a very clear sign that he is winning. However, there would be many more losers in other sectors of the economy from the less visible consequences of the tariffs. For example, the steel tariffs will make cars more expensive to manufacture in the US. This will lead to fewer cars sold and fewer people employed in car factories and showrooms, less money spent in local restaurants by auto workers, and so on.
These effects are multiplied across the many sectors of the economy affected by the tariffs, in both the US and its trading partners. Adam Smith demonstrated over 200 years ago that the negative consequences are economically more damaging than the benefits to the visible winners. Merrill Lynch today estimated that a trade war could lower US economic growth by 1.2% over three years.
In other words, America can only win a full-blown trade war by losing less badly than the other countries. There is, however, another way that Trump personally could win – if he uses the threat of a trade war to get what he wants in other areas and de-escalates before serious economic damage is done. Stock markets this week have been weaker, but not by as much as one might expect. This perhaps gives a clue that the market currently thinks the probability of a prolonged, damaging trade war is relatively low. However, should it come to pass, the implications for markets are likely to be much more severe than what we have experienced so far.