Trump’s trade war with China will affect all of us – this is how

The idea that one can limit the domestic economic impact of tariffs by carving out exemptions for certain popular or sensitive products is naïve in the extreme

The primary loser of Trump’s trade deal will of course be the American consumer (AP)

Donald Trump sometimes tries to claim he’s not really a crazed protectionist, merely a champion of what he describes as “fair trade”. The implication is that if trade was not “rigged” by cheating foreigners, he would gladly decommission his battery of new import levies.

So if China stopped its intellectual property piracy, its forced technology transfers, its restrictions on US access to its own market, its currency manipulation, we could have trade peace in our time. If Europe would only end its discrimination against American vehicle imports, we would all be able to get along famously. And so on, with the same applying to Mexico, Canada and every other country that has felt the lash of Trump’s anger on trade. But as Mitt Romney once put it, “such promises are as worthless as a degree from Trump University”.

It should be pretty clear by now Trump’s “fair trade” rhetoric is a study in diplomatic and commercial bad faith.

Today’s 10 per cent tariffs from the White House on a further $200bn of Chinese imports – hitting handbags, rice and textiles, along with several thousand other items – take the total value of trade affected by Trump to $250bn. That’s the value of roughly half the US imports from China.

It would be brave to bet against US tariffs eventually landing on the other half too, as Trump has explicitly threatened. Those who predicted the “grown-ups” in the White House would restrain the president and prevent a trade war breaking out do not look particularly prescient today.

The US claims China is not engaging with its trade concerns. Yet some in the White House privately say they are delaying imposing the full – previously threatened – 25 per cent tariff rate on imports to give US companies more time to shift manufacturing back from China to the US. It seems the real strategy is less about making global trade fairer, in Trump’s eyes, than in incentivising industrial “reshoring” onto American soil.

There is actually a reasonable case for penalising China for its flouting of the rules of multilateral trade, such as through overproduction, dumping overseas and the nation’s excessive restrictions on market access. But a policy of reversing the globalisation of supply chains really does ignore the foundational economic lessons of Adam Smith about the benefits of the division of labour, and of David Ricardo on the merits of a nation recognising its comparative advantage.

The primary loser from Trump’s trade deal will of course be the American consumer. The hypothetical benefits of more manufacturing jobs will be more than cancelled out by higher prices in the shopping malls.

The Trump administration has exempted consumer electronics such as smartphones after lobbying from companies including Apple which, famously, assembles its iPhones in China before importing them to the US.

Chinese bicycle helmets and baby high chairs were also exempted, which suggests someone in the White House, if not the president himself, intuits tariffs are likely to push up domestic prices – which may not be helpful ahead of US mid-term congressional elections.

But whoever it is did not intuit enough. For the idea one can limit the domestic economic impact of tariffs by carving out exemptions for certain popular or sensitive products is naïve in the extreme. In this age of sprawling and complex cross-border manufacturing supply chains there are connections that are hard, if not impossible, to perceive.

As the Apple boss Tim Cook notes, there are iPhone components manufactured in the US which are exported to the China so it can be assembled. What if China imposes tariffs on those in response to Trump’s tariffs? That will likely push up US iPhone retail prices even if there are no direct tariffs imposed by Trump. Deliberately clog the arteries of trade and the economic damage will inevitably show up somewhere, perhaps where it’s not expected.

What will the impact be on the rest of the world, on growth? China is already retaliating and will probably match US tariffs dollar for dollar, at least as far as it can given its bilateral trade surplus. Europe has hit back on steel import duties with charges on Harley Davidson motorcycles and Florida orange juice.

The Bank of England has estimated a global trade war – in which everyone raises tariffs on everyone else by around 10 percentage points – would slow worldwide GDP growth by around 2.5 per cent over three years. That’s a serious economic loss in the context of a $90 trillion global economy. It would hold back UK GDP growth two per cent and the US equivalent around five per cent.

But such estimates, though reasonable, are also potentially misleading. As Maury Obstfeld, chief economist of the International Monetary Fund, recently warned: “The multilateral rules-based trade system that evolved after [the Second] World War ... and that nurtured unprecedented growth in the world economy … is in danger of being torn apart”.

This regime rupture isn’t an outcome which one can reliably model based on historic economic relationships. It would put us in a wholly new and dangerous world. Trump says trade wars are “easy to win”. He’s wrong. But multilateral trade systems could be easy for a belligerent president to break. And we may find it terribly hard to put them back together again.