Making Sense of Our Trade Spat with China

The Trump administration escalated its long-running trade spat with China last week by slapping a penalty on $50 billion worth of imports. This week it upped the ante further by threatening tariffs on another $200 billion worth of products if China retaliates.

China, needless to say, was not pleased with this latest salvo, especially after what appeared to be progress on the matter. As recently as late May, Secretary Treasury Steve Mnuchin said that the trade war was “on hold.”

But lately, Mnuchin has been eerily quiet on the subject, suggesting his free trade sensibility has been losing ground to more populist and protectionist voices inside the administration.

Not surprisingly, China’s stock market took a beating on the news.  The Shanghai Composite had already been grinding down amid evidence that growth has begun to slow modestly, and it fell another 10 percent on the latest tariff skirmish. Proposed tariffs will slow Chinese growth further, perhaps as much as .2 to .3 percent of GDP by some estimates.

Of course, trade wars will hurt domestically as well. China, as it has made clear, will retaliate with reciprocal tariffs. That means U.S. consumers will pay more as the cost of goods imported from China rises. And of course, investors don’t take well to any of this tariff bluster, as Chinese markets have already shown.

While the Trump administration has been careful to identify mostly non-consumer goods to ding with the first round of tariffs, that won’t be the case if it pushes beyond the first $50 billion toward the threatened $200 billion tier. According to the Financial Times, more than $100 billion of the $505 billion in goods the U.S. imported from China last year were consumer products, led by mobile phones and computers. Next in line were telecom equipment, computer accessories, then toys and games. If the additional tariffs are imposed, the prices of these products will go up.

Free trade works best when it’s not treated as a zero-sum game.  We can only hope that the trade negotiators for the world’s two largest economies will recognize that before it’s too late.