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A trade war that China would win

A trade war that China would win

By Keyu Jin

Project Syndicate – Donald Trump proclaims that trade wars are “good” and “easy to win.” But if he leads the United States into a conflict with China, no more than a Pyrrhic victory could be expected.

The reality is that a trade war would hurt both economies. What looks like a good deal for the U.S. in the short run may be a much better deal for China in the long run.

For starters, China has many weapons in its trade arsenal – and it knows how to use them. To cite just a few examples: China could stop purchasing US aircraft, impose an embargo on US soybean products, or dump US Treasury securities and other financial assets. Chinese companies could also reduce their demand for US business services, and the government could persuade firms not to buy American goods.

But that’s just the start should a trade war break out. China is also – indirectly – one of America’s biggest employers. Consider what would happen if China switched all of its commercial aircraft contracts from US-based Boeing to France’s Airbus. That move alone would cost the US some 179,000 jobs.

Moreover, China controls key components in global supply chains and production networks. If China threw sand into those chains’ gears, the disruptions would be global, affecting far more than Americans’ ability to buy an iPhone.

While the weapons are well known, the tactics are less predictable. A few scenarios are possible.

Because an escalating trade war with symmetric import barriers would be reciprocal, China and the US would probably initiate disputes in specific sectors, as with Trump’s tariffs on foreign steel imports. He could also block bilateral investment flows by citing national security concerns, as he has been doing. And he might even move to halt US government purchases from Chinese companies.

In the short term, a trade tussle would mean painful income and job losses for both sides. But the benefits to China could eventually outweigh its immediate losses.

Chinese authorities have long worked to establish a growth model that is less reliant on exports and more dependent on domestic consumption. The shock of a US-led trade war could force China to open up, repeal measures that protect infant industries for too long, and break the vicious circle that perpetuates distortions in the domestic economy.

If that were to happen, Trump’s bluster might prove prescient. A trade war really could be “good” – just not in the way he expects.


Caption: Keyu Jin, a professor of economics at the London School of Economics, is a World Economic Forum Young Global Leader and a member of the Richemont Group Advisory Board.


 

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