What will the impact of 'the largest trade war in economic history' be?

Ben Chu
Economics Editor
Friday 06 July 2018 12:42 BST
 Trump is likely to blame others for the economic blowback, rather than changing his policy
Trump is likely to blame others for the economic blowback, rather than changing his policy(Getty)

Donald Trump’s 25 per cent tariffs on $34bn worth of Chinese imports have come into effect – and the US president has promised much more to come unless Beijing bends to his will.

China has accused the US president of launching the “largest trade war in economic history” and has retaliated by imposing levies on imports from America of a similar value.

But how will this trade war affect those two economies? What will be the spillover effects on countries like the UK?

And are hostilities likely to escalate further?

What are these new tariffs?

These are the first part of the $50bn of tariffs that Trump promised last month on Chinese imports that contain “industrially significant technologies”.

These include jet engines, robotics, cars and machinery.

Trump accuses China of effectively stealing American industrial intellectual property.

The targets this week include items such as industrial lathes and electric vehicles.

Tariffs on the second $16bn tranche of goods will come into effect in two weeks.

And Mr Trump said yesterday that the US is ready to target the entire $500bn a year value of Chinese imports if Beijing does not give in to his demands to prise open its domestic markets to US goods and respect American intellectual property rights.

Donald Trump unveils $60bn in tariffs on China for intellectual property theft

How is China responding?

The response has been immediate.

China has slapped import levies on US-grown soybeans, medical equipment and crude oil.

Customs authorities in Shanghai are already reportedly delaying the passage of US imports.

How will this trade dispute affect the two economies?

On the macroeconomic level, Oxford Economics, an economic consultancy, estimates that these tariffs will knock around 0.1 to 0.2 per cent off each country’s growth rate this year.

This might not sound too drastic, but given the size of the US economy last year was $19.4 trillion and the Chinese economy was $12 trillion, this adds up to a loss of between $30bn and $60bn.

Moreover, Oxford Economics stresses that “traditional macroeconomic model simulations underestimate the effects from rising business uncertainty, decreased private sector confidence and supply chain disruption which can exacerbate the economic shocks.”

On a microeconomic level, the many Chinese firms that export to the US will suffer.

And US tariffs will cost American sales to a major, growing export market.

If Trump does extend the tariffs to all Chinese goods imports, he will also be damaging many US firms, such as Apple, that have outsourced industrial production to China.

But US consumers will also suffer just as much as US businesses, as the goods they buy, many of which are imported, will become more expensive.

The Peterson Institute for International Economics, a Washington think tank, concludes the US-China tariff war “will be self-destructive for both sides”.

What about the rest of the world?

Trump is not simply hitting China with tariffs. He has also slapped large levies on European, Canadian and Mexican steel and aluminium.

He is also exploring tariffs on US’s imports of cars and auto parts. That promises to have a disastrous impact on the European auto industry, including that of the UK.

The Bank of England has done some simulations and estimated that a full-blown global trade war could end up hitting global GDP by 2.5 per cent over three years, with the UK economy suffering a 2 per cent hit.

The Bank’s simulations show that the US would actually be the biggest loser, with a 5 per cent hit to growth.

Liam Fox attacks 'unjustified' and 'worrying' Trump's tariffs

What will happen next?

This trade war is being instigated by the White House, so that largely depends on Donald Trump.

And there is little reason to believe that he will change his mind any time soon.

Trump has asserted that “trade wars are easy to win” and believes, mistakenly, that the fact the US runs a trade deficit with the rest of the world means the rest of the world has much more to lose than the US – and that he will therefore ultimately be able to dictate terms.

One possibility is that a domestic US backlash might force Trump to back down.

But this may not happen without a fight. When the US motorcycle manufacturer Harley-Davidson announced last month that it was moving more production outside the US to avoid the new EU tariffs imposed in response to Trump’s steel tariffs, the president accused the Milwaukee-based company of “surrendering”, and threatened it with taxation.

This suggests that Trump is likely to first seek to blame others for the negative economic blowback from his trade war, rather than changing his actual policy.

The strength of the US economy, where unemployment is as low as it was in the Clinton boom of the early 2000s, may also help him ride out any localised discontent.

Canadian PM Trudeau says new tariffs announced Trump are unacceptable

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