Donald Trump has fired the opening shots of his trade war. His target is China, which says it is “absolutely not afraid” of the consequences. Should it be? And what is a trade war anyway?
Trade war? That sounds terrifying.
Relax, this is not a military war. American cities are not about to be bombed. Nobody expects it to come to that.
But there is a real conflict on trade between the US and China. In the space of two weeks, President Donald Trump has blocked Chinese takeovers of US companies and sought new restrictions on future Chinese investment.
A trade war happens when countries attack each other’s exports. One country will raise tariffs, and the other will respond, resulting in a tit-for-tat escalation.
What is a tariff?
A tax on a product made abroad. Protectionists believe that taxing goods coming into a country means people are less likely to buy them as they become more expensive. People will then buy locally made products instead, stimulating the national economy.
The US has set a 25% tariff on a vast array of goods that come from China. They include aviation equipment, brewery machinery, bakery ovens and rocket launchers. China responded with tariffs on agricultural and industrial products, meaning everything from soybeans to aeroplanes are now subject to a 25% tax.
Why is this happening?
Nailing down Trump’s true beliefs can be hard, but perhaps his most consistent position over the years has been his resentment of America’s trading relationship with China, Mexico and, historically, Japan.
The US runs a trade deficit with China. This means that it imports more from China than it exports to China. The current gap is enormous — as of last year it stood at about $375 billion.
On the campaign trail, Trump repeatedly stressed his desire to cut the US’s trade deficits. His message was especially popular in manufacturing areas which have been badly affected by China’s industrial might.
Trump has placed heavy tariffs on steel and aluminium from all countries. He believes the US relies too much on other countries for its metals, and that, if a war broke out, it could not make enough weapons or vehicles using its own industry.
Could these tariffs backfire?
Yes. Take steel as an example: more people are employed in sectors that buy steel to make products, such as the automobile industry, than in steel-making itself. Consumers may also have to pay higher prices. Trade tensions could increase inflation and add to the growing sense that America is isolating itself from the world.
So is free trade better?
Not necessarily. Free trade has long been one of the guiding principles of the Republican Party, and it is one of the most marked ways in which Trump represents a break with the status quo.
Free trade makes things cheaper. It also makes many people richer. But it means that companies and consumers are less likely to buy local products. The question of free trade often comes down to a very personal choice: are you happy to pay a little bit extra for something because it is locally made?
What are the global implications of Trump’s trade war?
The director general of the World Trade Organisation (WTO) has warned of a “catastrophe” and the likely “severe” effect of Trump’s trade policies. He expressed the WTO’s commitment to “avoid the war” between the US and China from resulting in a global depression.
In an attempt to prevent a diplomatic disaster, the US government exempted many of its key partners, including the European Union, Canada and Mexico, from the latest round of sanctions. But Trump has potentially alienated key allies in Turkey and Japan by not exempting them.
China is incensed, and has warned the US to “rein in its horse before the edge of the cliff”, otherwise it “will fight to the end”.
- Are trade wars necessarily a bad thing?
- Split the class in two: one half argues for buying a product that is cheap, regardless of where it was made; the other argues that buying locally made products is worth paying extra for.
- Trade deficit with China
- Trade between China and the US was worth a staggering $636 billion in 2017. The US runs trade deficits with the majority of its trading partners, but runs the opposite — a trade surplus — with the UK, Brazil, Saudi Arabia and Hong Kong.
- Manufacturing areas
- The states of Pennsylvania, Ohio, Michigan and Wisconsin all voted for Trump in the 2016 election having voted twice for Obama. All four states are in the Rust Belt and have been affected by the loss of manufacturing jobs.
- Guiding principles of the Republican Party
- All of Trump’s rivals in the primary elections were avid supporters of free trade, but George W. Bush’s administration also implemented tariffs on Chinese steel.
- European Union
- The question of free trade versus protectionism has also come up in the UK over Brexit. Remainers argue that leaving the European Union jeopardises free trade. Brexiteers, however, argue that the EU is a protectionist club that prevents free trade with the rest of the world.