US-Chinese trade conflict: In the final instance there will be a solution at the negotiating table

With the latest round of punitive customs US President Trump has massively increased tensions on the trade-policy front. A trade war now seems tangibly close. At the moment, it is the conflict with the EU which is more in the limelight. However, Trump’s focus has always been on China – the US’s most important trade partner and responsible for about one half of the high US trade deficit. China in turn exports four times as many goods to the US than the other way round. It would be wrong to conclude that China is the more vulnerable partner in a trade war. US customs on the countless consumer goods imports from China would above all hit the US consumers. Beijing, on the other hand, could in many ways make business life in China difficult for US companies.

Trump is not quite unjustified: Since China’s accession to the World Trade Organization (WTO) at the end of 2001 the deficit in bilateral goods trade with the US has quadrupled. It is by far the highest of all US trade partners. And the accusation that China’s accession to the WTO has spelled the loss of thousands of US industry jobs is not completely nonsense. In a study, the German Bundesbank has shown the significant drop in US industrial employment since the turn of the millennium, which was all the more appreciable in those sectors of the economy in which the competition from cheap Chinese imports increased most strongly.

What is doubtful, however, is whether the imbalances through US punitive customs on Chinese imports can be corrected or whether the US will in the final instance only harm itself. One cannot emphasise enough that protectionism essentially leads to a “lose-lose” situation, especially if the country “attacked” itself responds with protectionist measures. In the event that China and the USA set up comparable trade barriers, then, or so several studies conclude, the USA would have to fear greater dents to affluence than China. That said, both countries would lose.

And why is this? China exports above all consumer goods to the USA – furniture, toys, household goods as well as mobile phones and computers. US customs would primarily make such goods more expensive and that would hit US consumers who have profited for years from cheap Chinese products. That particularly applies to Trump’s generally less affluent electorate. Many US corporations such as Apple have outsourced end production of their devices to China. Repatriating this will take years and involve enormous costs, which would again make products more expensive for the end consumers. On the other hand, China primarily imports food, cars and aircraft from the USA. These products would be more easily substituted by imports from other countries. Other than customs duties, Beijing could opt to turn the government screw, by consciously raising product standards or annulling large-scale contracts. It is also conceivable that the government will initiate boycotts by the population, e.g., against US cars or travel to the USA.

We nevertheless have doubts whether China will engage in such a show of muscle flexing. Given that in past years Beijing has arduously but essentially stabilised growth, the economic risk of a trade war would simply be too great – not least with a view to the dangerously high debt levels. Trump himself also does not seem averse to solving things at the negotiating table. At least the customs duties applied to date only affect the Chinese marginally. Chinese steel exports to the USA, for example, have long since shrunk to a minimum owing to anti-dumping measures. On the other hand, the US Administration has long since been criticising China for the often forced technology transfer to which (not only) US corporations are exposed if they wish to be active in China. Here, Beijing has some scope for reaching out to Trump.

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