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E China Will Do Everything In Its Power To Avoid A Trade War

By Kurt Osterberg · On April 20, 2018

“Because China has a higher export-to-GDP ratio than the US, its leaders are more concerned with defending the global trading system than with preserving any particular bilateral balance. By eschewing escalation in response to the Trump administration’s widening tariffs on its exports, China avoids jeopardizing the system. (Barry Eichengreen, Can a Trade War be Averted?, Project Syndicate, April 10, 2018)

Barry Eichengreen argues that Donald Trump’s aggressive imposition of tariffs on China’s imports will not result in a wider trade war. Indeed, it is in China’s interest to avoid a trade war with the U.S.

The crux of the argument that Trump’s impact on international trade may turn out to be more limited than he would like is based on three rather related premises.

First, despite all of his initial flamboyant threats, Trump has been forced to almost immediately adopt a more nuanced and softer approach. That is, he exempted Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea from his steel and aluminum tariffs.In the process, he minimized the impact on those exporting countries and addressed the concerns of U.S. metal importing groups. As well, it should also be recalled that the immediate reaction of foreign governments and the financial markets was very negative to the announcement of steel and aluminum tariffs. The stock market, which Trump believes is with him, clearly is not supportive of his protectionist instincts, and will continue to serve as a moderating influence on Trump’s trade initiatives

Secondly, Eichengreen reminds us that so far China’s response to the trade irritants has been carefully calibrated, and in each case almost exactly matched the scope of the US provocation. China clearly has more to lose than the U.S. if bilateral trade ground to a halt, since China runs a huge trade surplus with the U.S. Of course, a full trade war between the two largest economies in the world would hurt each economy, and the effects would negatively spill over to other countries.

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Kurt Osterberg

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