U.S. President Donald Trump’s assertion that trade wars are “good, and easy to win” is fake news if economists are to be believed.
The victor in an economic war of attrition will instead be which nation loses least. The first salvos are set to be launched this week as America and China prepare to slap duties on each other, risking a spiral of tit-for-tat tariffs that imperils global growth.
“Everybody will lose in absolute terms in a trade war,” said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington. The question is who “will win in relative terms.”
Bloomberg Economics reckons the looming U.S. tariffs on $50 billion of Chinese imports and a like-for-like retaliation from Beijing could cost China about 0.2 percent of gross domestic product and the U.S. a little less, a manageable amount in both instances.
It’s where the dispute goes next that poses a bigger threat. The direct cost to the world’s two biggest economies is probably the most straightforward forecast. From a breakdown in the global supply chain to a ratcheting up of military tension over the South China Sea, the collateral damage represents an incalculable unknown.
“I’ve got a fairly high anxiety at this point about how this is all going to play out,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg Television in June.
In a full-blown global trade war, Bloomberg Economics reckons a 10 percent increase in U.S. tariffs and a similar response from the rest of the world would knock 0.5 percent off global GDP by 2020, not taking account of any financial market fallout . That’s about $470 billion, roughly the same as Thailand’s annual output. The U.S. would suffer more than China because it would face the wrath of all its trading partners.
Judging by the financial markets, investors seem to think the U.S. has the upper hand. The Shanghai Shenzhen CSI 300 Index is down about 14 percent this year, hit by an economic slowdown and rising trade tensions. The Standard & Poor’s 500 Index, in contrast, is up almost 2 percent, buoyed by a strong economy. While U.S. companies are benefiting from a tax-cut boost to earnings, Chinese firms are suffering as deleveraging dents the supply of credit.
One thing in the U.S.’s favor is that its economy relies more on demand from home than abroad, meaning trade barriers will exert less of a pinch. Exports amounted to almost 12 percent of U.S. GDP in 2016, compared with close to 20 percent for China, World Bank data show.
America also has more to shoot at — a point made repeatedly by Trump. It imported $505 billion of goods from China last year but sent only about $130 billion in the other direction.
The president is also hoping costlier imports will drive companies to increasingly base their operations in the U.S. rather than low-cost China, supporting domestic demand and providing more jobs for American workers.
In a June 19 paper for the C.D. Howe Institute, economists Meredith Crowley and Dan Ciuriak argued that Trump is “weaponizing uncertainty”: Companies that want to be sure of selling in the U.S. are being compelled to set up shop in America.