The old adage tells us no one wins a trade war. So, the next logical question is: Who loses?
Well, the short answer is — you do.
Consumers have been the clear beneficiaries of globalization. Cheap stuff has flooded into North America at a historically unprecedented rate. And so, consumers would also be the clear losers in any trade war where the two biggest economies in the world ratchet up tit-for-tat sanctions. The longer answer, though, is more complex.
In what he called the “first of many,” U.S. President Donald Trump announced on Thursday the U.S. will impose tariffs on $50 billion worth of Chinese imports. China says it does not want a trade war, but won’t shrink from one either.
China ready to retaliate
“They’ve prepared well for this,” said Erlend Ek, research manager with Beijing-based China Policy consultancy. “They’ve done investigations into how to retaliate.”
China’s commerce ministry said in a statement Thursday that the country “will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights.” Those measures reportedly include tariffs on American agricultural products like soy and pork, steel pipe and ethanol.
Is Beijing spoiling for a trade war?
When we think of China, we often think of the world’s factory and the explosion of cheap goods flooding into world markets. But that’s not necessarily the case any more. All those cheap TVs and T-shirts aren’t necessarily made in China anymore. Much of that lower-end manufacturing is now done in other countries, such as Vietnam.
Trump targeting robotics, rail equipment
Lynette Ong of the Munk School of Global Affairs at the University of Toronto said China’s main exports are increasingly high-tech products like artificial intelligence and robotics.
“We are not talking about cheap consumer goods you find at Walmart or Canadian Tire,” Ong told CBC News.
China has moved away from manufacturing cheap junk so it can work higher up the value chain, she said. But, that means more investment, a more integrated supply chain and more reliance on higher-value customers. As such, it may make China more vulnerable to the consequences of a trade war. So, is the rhetoric out of both Beijing and Washington noise or reality?
A lot of hot air
“The incentives on both sides are toward making this sound as bad as possible,” says Karl Schamotta, director of global product and market strategy at Cambridge Global Payments, a currency exchange firm in Toronto.
He says Trump wants to make a lot of sound and noise, but doesn’t want to actually hurt his base, which is made up of American consumers and farmers.
“The Chinese have every incentive to make this sound very extreme and make their reaction sound terrible, simply because they want Trump to think he’s having an impact.” Schamotta said.
In a note to clients, however, Schamotta made it clear the situation could escalate quickly. “The threat of a global trade war is real. History is littered with relatively minor trade disputes growing into wars.”
And once an opening salvo is fired, it can be hard to control global events. Schamotta lists an arm’s length of trade disputes that took on a life of their own.
If this were to blow up, the consequences would be enormous. Stock markets plunged this week after Trump made the announcement.
Trump’s ‘bark is often worse than his bite’
The investment bank Macquarie said a global trade war would plunge the U.S. into a recession, cost millions of Americans their jobs and dry up business investment if the global economy seized up.
The WTO has made similar warnings. But ultimately deems them to be unlikely to come to pass, despite pronouncements from the White House.
As with many things Trump, when it comes to trade, Schamotta said “his bark is often worse than his bite.”
That’s why, despite the scary headlines, the likelihood of a trade dispute between the world’s two largest economies escalating into a global trade war is still pretty low.
As Schamotta put it: “This trade war could be a tempest in a teapot.”