A boxing match between the USA and China. Image: iStock

Triggering fears of an extended trade war between the world’s two largest economies, US President Donald Trump recently announced plans to impose tariffs on $60 billion worth of Chinese goods. Swinging into effect after 60 days, the list of about 1,000 products is still being finalized for tariffs of 25%, and new investment restrictions are also being considered on Chinese companies. As stock markets and indexes began to tumble, most economists edgily expected a rapid escalation after this impulsive attempt to reduce the trade deficit between China and the US.

In a tit-for-tat response, Chinese ambassador to the US Cui Tiankai stated, “We are not afraid of [a trade war] . . . We will certainly fight back and retaliate. If people want to play tough, we will play tough with them and see who will last longer.”

Responding to the US move within hours, China also announced planned tariffs worth $3 billion on many goods, mainly food items, saying that while it did not want a trade war, it was “absolutely not afraid” of one. Having a negative impact on the foreign policy of the two economic giants, these new developments are going to start a fresh war of words at the very least.  Discussing the possibilities, economist Deborah Elms from the Asian Trade Centre in Singapore, said, “The Chinese have been developing their list for more than a year and they are very good, if things get very nasty, they can also make life very difficult for US companies doing business in China. It’s going to be very interesting.”

Symbolizing a major turning point in US-China relations, this seems like a well-thought out move as Trump has often complained about the US’s trade deficit 0f $375 billion with China and once said that it is “the largest deficit in the history of our world.” In his bid to decrease the deficit immediately by $100 billion he has ignored the many options China has and that the fallout of tariffs would ultimately be borne by the US consumer, thus impacting his popular “America First” policy. Potentially hitting key American economic sectors like agriculture and aerospace, the Chinese response could include selectively targeting Trump-supporting states. Not only that, China might even increase agricultural imports from Latin America instead of just imposing tariffs on American farmers in retaliation. To give just just one example of the potential economic damage,  last year China purchased nearly one-third of the total American soybean crop.

Predicting an economic showdown, the Bank of England has warned that protectionism would have a “significant negative impact” on global growth and would increase inflation

Predicting an economic showdown, the Bank of England has warned that protectionism would have a “significant negative impact” on global growth and would increase inflation. For the time being, keeping things in perspective, US Commerce Secretary Wilbur Ross has observed, “We will end up negotiating these things rather than fighting over them, in my view.” Apparently, a 60-day window has been left open for consultations, lobbying and arriving at a mutually beneficial agreement.

Assessing the scenario, Stephen Roach, a former non-executive chairman of Morgan Stanley, said, “China’s response is surprisingly modest in light of the US actions, suggesting there could be a good deal more to come. As America’s third largest and most rapidly growing export market and as the largest foreign owner of treasuries, China has considerably more leverage over the US than Washington politicians care to admit.”

Hopefully, this could be mere posturing on the part of the US to forcefully press its demands and China will bide its time and wait for the actual imposition of tariffs before taking any conclusive action. Ultimately, any trade war would impact the GDP growth of both the super-economies and disrupt the supply chain for American as well as Asian companies. Adopting a more realistic approach, the US has to come to terms with the fact that it is not possible to bring down the deficit by a $100 billion in one go, stabilizing the US-China trade relationship should remain the first priority.

While attending the China Development Forum in Beijing recently, Standard Chartered Bank group chief executive Bill Winters noted that no winner would emerge from such a trade war, aptly summing it up: “We are of the view that free and fair trade is the most important ingredient for any bilateral relationship, and no one wins a trade war.”

As of now, both sides are engaged in talks and any tariffs would be levied only if the two governments fail to reach an agreement by the March 31 deadline. At this point, negotiations are crucial towards containing the threat of a trade war, failing which China has the option of approaching the World Trade Organization to facilitate a dialogue to resolve the dispute. Considering the ongoing situation, it is necessary to improve and strengthen the current trading system.

Sabena Siddiqui

Foreign Affairs Journalist, Lawyer and geopolitical analyst. Writing about modern China, the Belt and Road Initiative, Middle East and South Asia. Bylines in Al-Monitor, The Diplomat, South China Morning Post and Asia Research Institute's Asia Dialogue Twitter @sabena_siddiqi