Why China Will Win the Trade War Trump thinks he has a strong hand. In fact, Washington is far more vulnerable than Beijing.

Sep 2018
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Headline statistics greatly overstate China’s economic vulnerability — and understate America’s. Focusing on trade in goods, as most observers do, U.S. imports from China last year totaled $506 billion, nearly four times its exports in the other direction ($131 billion). But the United States also sold $38 billion more in services to China than it bought in return, its biggest bilateral surplus. And whereas U.S. goods exports to China are mostly agricultural produce and finished products consisting of mostly American content and sold by U.S. firms, China’s exports to the United States are typically Chinese-assembled goods that contain many foreign parts and components — and are often American-branded to boot. A further 37 percent of U.S. imports from China consist of parts and components on which U.S.-based manufacturers rely.

The threat isn’t just to American-branded products that American consumers love. A trade war also poses a threat to U.S.-based manufacturers that rely on Chinese parts and components to be globally competitive. Trump’s $46 billion list already targets aircraft propellers, machine tools, and other intermediate goods. Pushing up their costs would threaten manufacturing jobs in America’s heartland. And while those tariffs avoid consumer staples such as clothing and footwear, they will inflate the prices of some consumer goods, such as televisions and dishwashers.

In contrast, China’s potential retaliation is much better targeted. First in line is $16 billion of U.S. civilian aircraft exports. Boeing’s share price slumped when the Chinese move was announced. But Chinese airlines are expanding so fast that Boeing may be willing to slash prices to hang on to sales there, in which case none of the cost of the tariffs would fall on China. And if push comes to shove, the Chinese already have a reliable alternative supplier: Europe’s Airbus.

Finally, the Chinese government can absorb the political costs of a trade war much more easily than the Trump administration can. Every time Trump lashes out at China, U.S. stock markets plunge. That is particularly problematic for a president who treats the Dow Jones industrial average as his personal approval rating, especially because the single biggest constituent of the Dow is Boeing. Because the president has tied himself to the Dow, every time stocks fall, the Trump administration feels compelled to reassure markets that it is seeking a negotiated solution to the trade conflict, a move that undercuts its leverage.

Trump has made matters worse by acting unilaterally against China in a way that would appear to breach World Trade Organization rules. Indeed, potential allies find Trump’s America First rhetoric repulsive. All this has given China the political high ground — “China doesn’t want a trade war, but we’re not afraid to fight a trade war” has become Beijing’s official line.

Why China Will Win the Trade War