American farm family. Photo: iStock
American farm family. Photo: iStock

As this author indicated in the last article, US President Donald Trump is losing the trade war he started and is desperately trying to get back on the offensive, threatening more tariffs on Chinese goods and pressuring his treasury secretary, Steven Mnuchin, to call China a currency manipulator. However, escalating the conflict will do nothing to win the war because his policies will damage the US economy and drag the rest of the world down with it.

A full-blown US-China trade war would push the world into an economic frenzy, according to the International Monetary Fund (IMF), the European Central Bank (ECB) and other economic organizations and experts.

The IMF predicted that China will be hit harder than the US in a full-blown trade war; the impact on GDP is estimated respectively at 1.6% and 0.9% in 2019. However, Claudio Galimberti, a senior analyst with S&P Global Platts, a US-based energy research group, predicted that the US might be hit harder, estimating that US GDP would fall by 1.5% in the same year. China’s GDP would decline by 1% in 2019. The ECB also argued that China’s economy will likely emerge stronger from an all-out trade war.

Everyone loses in a trade war

Which organization or analyst is right might be irrelevant because everyone loses, not just China and the US. The IMF predicted that the global economy will be off approximately half a percentage point in 2019 because of globalization, disturbing the supply chain created by the US to increase economies of scale and competitiveness through regional input factor specialization. For example, labor-intensive  China combined with the capital-intensive US would reduce the per unit cost of the iPad and iPhone, allowing Apple to make phenomenal profits on the two goods.

In the US, Trump supporters, ironically, are paying the highest price. Emotionally charged and without alternative sources of information, his support base blindly believes the anti-China rhetoric first propagated by the “independent and objective” media and now amplified by the Trump administration. Further, Democrats and Republicans are united against China.

Popular and bipartisan support is probably what emboldens Trump to escalate the trade (and geopolitical) wars against China.

The US losers

According to a report by Sam Natapoff, the first casualties of the trade war are people living in the “Rust Belt” and “Farm Belt,” home to strong Trump supporters. According to Natapoff, over $75 billion of US goods on the list of Chinese tit-for-tat tariffs came from these regions. Soybean farmers in Ohio and other farm states are hit with a “double whammy,” losing their biggest customer and falling prices due to a bumper crop.

The trade war has created a “migraine headache” for the oil and gas industry, as China stopped buying US oil altogether and drastically reduced its consumption of the country’s natural gas. After Canada, China is the US’s second-largest oil buyer, purchasing over 330,00o barrels per day. But most of the oil “exported” to Canada is just re-routed, going through the Canadian side of the pipeline before heading to refineries on the US side.

And because of the increasingly heated trade war, the over $45 billion energy deal China made with Alaska during Trump’s 2017 visit is in doubt. Indeed, it might be shelved forever because Trump’s constant “changing the rules of the game” might prompt China to buy more oil and gas from Russia, the Middle East and Venezuela. What’s more, these countries are willing to replace the US dollar with the Chinese renminbi as the medium of exchange. Iran even offered its ships to transport oil to China.

US businesses and consumers are feeling the “chill” of the trade war. According to the US Bureau of Statistics, Department of Commerce and others, net domestic and foreign investments went into negative territory in the second half of  2018. The major reason being an uncertain investment climate created by US policies on Chinese investment and the trade war.

US consumers seem to have lost their confidence, in that consumption increased only marginally at 0.1% in September, according to the US Department of Commerce. The less than expected rise should not be a surprise because the mostly tariff-induced inflation of over 2% has eaten up nominal wage increases by the same amount, according to US government statistics.

If Trump follows through with his escalation of trade, currency and geopolitical tensions with China, the US’s economy and security might very well be at greater risk. If his threat of naming China a currency manipulator materializes, there will likely be a currency war which could culminate in the breakdown of the global financial system. If the US Navy follows through with more “freedom of navigation operations” in the South China Sea, an accidental shooting war could not be ruled out. China is determined to defend its territorial claims as shown by the recent “near collision” between a Chinese vessel and an American destroyer.

Chinese losers

The biggest losers in China might be the factories producing goods for the US market and the individual small investors playing the stock market. But these losses will likely be short-term because China’s 1.4 billion population, increasing trade relations with other countries and the Belt and Road Initiative should supplant the US market.

As they did during the 2008 financial crisis, many workers would likely return to their villages to weather the storm. And the Chinese government will most certainly increase spending to minimize the short-term pain the trade would cause; in 2008, a huge stimulus package reversed the economic downturn, raising the GDP from 6.5% to 9.2% in 2009.

Those in the West who claim the massive selloffs in the Chinese market are a sign that China is losing the war is delusional. Unlike the US stock market, the Chinese one is more like a “casino” than an “indicator” of economic performance. Stock buyers are overwhelmingly individuals who want a make a “quick buck”  and nervously sell their stocks whenever a “storm” hits. But “storms” do not last, as seen by the rebounding of Chinese stock values in 2017 and again in October of this year.

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Looking at every scenario, China might emerge from the trade war wealthier and stronger than the US. Barring Chinese companies from accessing US technology only strengthens their determination to innovate, as shown by Huawei, the Chinese high-tech giant, which is spending more on chip and semiconductor development.

The trade war has galvanized the Chinese government and people, making them “stand up” to what they call US “bullying,” which explains why China is taking bold steps to push back US tariffs and freedom of navigation operations in the South China Sea.

Taking the debate to its conclusion, the biggest losers in Trump’s war against China might be his strongest supporters. They are losing a lucrative market that took years to cultivate and paying higher prices for goods.

Ken Moak

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.

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