Trade War Consequences

The oft-repeated refrain on the Presidential stump circuit threatening 60% tariffs on Chinese products caused some head-scratching among economists.  By some measures, the Chinese economy is in failing health.  Foreign direct investment has fallen off a cliff, from $350 billion in 2022 to less than $50 billion last year, to something close to zero this year.  The official numbers say that China’s gross domestic product was 5% or so in the last 12 months, which, given the government’s habit of (shall we say) optimistic counting, is probably either zero or negative.  Domestic consumer demand is AWOL, millions of young workers can’t find jobs and several large real estate developers have declared insolvency.

Meanwhile, China has become almost totally dependent on exports, with a trade surplus that will approach $1 trillion this year, even after the Biden Administration kept the Trump tariffs in place.  An escalating trade war would hit China’s weak economy like a body blow.  

The Chinese government is reportedly preparing its counterpunch, should a new round of tariffs emerge.  The first, and most familiar measure would be to ramp up tariffs on American agricultural imports—which, last time around, wreaked havoc on the American farming sector.  Meanwhile, China is already turning to other agricultural exporting countries to fulfill its need for soybeans and corn.  

Another measure would involve export controls, which could cripple companies that depend on global supply chains, and on manufacturers who depend on China’s near-monopoly on rare earth metals like gallium and germanium—important components of semiconductors and solar panels.  And, of course, the inevitable rise in the inflation rate would inflict a certain amount of pain on its own.

Ironically, the trade sanctions might also benefit the Chinese government’s long-term goal to become more self-sufficient economically, and disengage from its historical dependency on exports.  And the threat from China’s largest trading partner gives Chinese leader Xi Jinping an excuse to tighten his control over the country’s political levers.  Wars—including trade wars—can sometimes have unexpected, unwanted consequences.

Sources:

https://www.advisorperspectives.com/articles/2024/11/15/china-trade-war-one-trump-doesnt-fight  

https://www.washingtonpost.com/world/2024/11/15/china-economy-donald-trump-tariffs/