Could tariffs lead to next Great Recession?

Hey there, time traveller!
This article was published 26/09/2018 (2597 days ago), so information in it may no longer be current.

Ten years ago this month, the financial services firm Lehman Brothers filed for bankruptcy protection, triggering the 2008 crash and the subsequent Great Recession, from which the world’s economies have still not fully recovered. Will we look back on this month as the turning point when U.S. President Donald Trump’s trade war with China unleashed the second Great Recession?

In the past couple of weeks, the slow dribble of tariffs and counter-tariffs has rapidly grown into a full-fledged confrontation between the world’s two greatest economic powers.

In July, the U.S. imposed tariffs on US$34 billion worth of Chinese exports to the United States, extending them to another US$16 billion of Chinese goods in August. China responded cautiously, announcing roughly comparable tariffs on US$50 billion of U.S. exports to China in August.

Trump deemed that unfair, and last week he slapped a 10 per cent tariff on another US$200 billion of Chinese exports to the U.S. He warned that if China retaliated again, he would impose a similar tariff on all the rest of China’s exports, another US$267 billion.

Trump also threatened to raise the rate of the tariff to 25 per cent if there is no U.S.-Chinese deal that meets U.S. requirements by the end of the year. Did he imagine that this threat would force an autocratic regime such as China’s to back down and lose face? Who knows?

The Chinese replied hard and fast, announcing a new tariff on all the rest of America’s exports to China, worth some US$60 billion. So if Trump fulfills his threat and hits the remaining US$267 billion of Chinese exports as well, by this weekend all of America’s imports from China and all of China’s imports from the United States will be paying tariffs.

China, trying to lower the temperature, is keeping its tariffs on U.S. goods down to five per cent for the moment, but it can’t hold that line forever if the U.S. goes on ratcheting up the ones it has imposed on China. Trump has got the trade war he was clearly itching for — and it’s a much bigger deal than his spat with the European Union or his bullying of Canada.

We’re still not talking about cataclysms here: China’s trade to the U.S. accounts for less than a quarter of its total exports, and its exporters will still get paid for what they sell. (It’s the importer who pays the tariffs.) The same goes for U.S. exports to China, which are only one-sixth of total American exports.

In the long run, higher prices for Chinese goods in the U.S. might damage its market share there, with negative effects on employment in China, but that’s a slow process. The same applies to potential U.S. job losses due to declining exports to China: they won’t happen fast enough to have any impact on November’s midterm elections in the United States.

It’s the long term that counts — and this trade war will probably not be settled for a long time. Multibillionaire Chinese businessman Jack Ma predicts that it could last 20 years, which sounds a bit pessimistic, but as long as it lasts, it will poison relations between the world’s two greatest powers.

Trump seems to think that China’s economy is now so wobbly that the tariffs will push it over the edge, forcing it to come to the U.S. begging for mercy. It’s true that the Chinese economy is growing very slowly, if at all: nobody believes the official figure of six or seven per cent annual growth. It’s also true that the Chinese financial system is as overloaded with bad debts as American banks were in 2008.

But China is only a sham capitalist economy. If lost exports to the U.S. trigger a financial collapse in China — an unlikely but imaginable outcome — Beijing would slam the doors closed on international capital flows, bail out the Chinese banks and flood the domestic economy with cheap credit. In this scenario, it’s international trade that would collapse, which wouldn’t be in anybody’s interest.

Meanwhile, Xi’s regime would be stoking Chinese nationalism and blaming the United States for all the domestic misery. Indeed, Xi and the Communist Party hierarchy are coming to the conclusion that Trump’s trade war is designed to “thwart China’s rise.” There can be no compromise with the United States if that is the case.

That’s not just Chinese paranoia. There really are those around Trump (and elsewhere in Washington) who are encouraging his obsession with the American trade deficit with China for exactly that reason. Yet his obsession is completely misplaced: 85 per cent of the seven million American manufacturing jobs lost since 2000 were eliminated by automation, not by trade.

This nonsense is going to go on for a long time and everybody will end up at least slightly poorer, but it probably won’t bring on the second Great Recession. It may, however, start the second Cold War.

Gwynne Dyer’s new book is Growing Pains: The Future of Democracy (and Work).