The danger of the escalating trade war

Originally published in Utah Business.

When I think of the People’s Republic of China, my mind goes to lots of places. I think of communism and the country’s red flag with gold stars. I think of the Olympics, both as a venue and remarkable athletes. I think of rice and tea and even Peking duck (yes, I’ve tried it before). I think of intellectual property disputes, the two-child limit, and the brilliant Shanghai skyline, framed by the waterfront of the Bund. But mostly, I think of the world’s most populous country―approximately 1.4 billion people… about one in every five humans on planet Earth.

With a population like that, there was once a time when China comprised much of the world’s poor people. Today, thanks to the introduction of market reforms, China has moved into the ranks of the global middle class. It’s an international success story, as an estimated 800 million people have been lifted out of poverty over the past four decades. 

I saw some of this success firsthand during a business delegation visit to China in 2010. We attended the world’s fair―known as Expo 2010 Shanghai China. The tallest and most impressive pavilion in the expo was by far the Chinese pavilion, known as the Oriental Crown. It cost $220 million (US dollars) to build, stood 63 meters high, and was the largest display in the history of the World Expo.

While I found the international pavilions interesting, the massive parking lot outside the Expo was of greatest interest to me. There I saw thousands of buses―though it seemed like tens of thousands―that had transported thousands of people from inland China to see their country featured prominently at this important international gathering. China’s middle class showed up in droves.

I share these observations to make a point. China is big, proud, and ambitious. That’s why I’m so concerned about the escalating trade war between the US and China. What started as a 25 percent tariff on $34 billion worth of goods in July 2018 has now grown to 15-25 percent tariffs on $361 billion of goods. This December, $156 billion more products will be subject to a tariff. 

Moody’s Analytics’ chief economist, Mark Zandi has called US-China trade relations “trade war chicken.” Each country dares the other and in the end, either one prevails, or both get hurt. It’s never a win-win.

Mr. Zandi estimates the trade war has already done meaningful damage to the US and global economies. He estimates that in the past year, the trade war has shaved off 0.3 percentage points from growth in US real GDP, and almost 300,000 US jobs. He also points out that the initial tariffs targeted intermediate goods, but the next tranche of Chinese imports to be hit with tariffs will be consumer goods―things like consumer electronics, toys, and other consumables. That’s why the Trump Administration postponed the full implementation of these tariffs until December 15, 2019. They didn’t want to negatively impact the 2019 holiday shopping season.

Mainstream economists continue to debate the costs and benefits of the US-China trade war. Some argue that trade wars almost always turn negative and that uncertainty and inefficiencies are not worth the benefits. Many point out that the trade war has not achieved the policy objective of fair trade with China. Instead, importers are stockpiling products and re-routing international supply chains. The intended boost to US manufacturing simply isn’t happening.

Others point to the special case that is China. In their minds, China’s unfair trading practices, abuse of intellectual property rights, and global environmental degradation require the stiff arm of the United States. Under this line of reasoning, the short-run costs are worth the long-term benefits. 

Maybe so, but be aware that economic pain is on its way. Most economists believe the US manufacturing sector is already in recession. According to Moody’s, industrial production has dropped for two consecutive quarters and overtime hours are falling. In addition, the ISM manufacturing index, a survey of purchasing managers at more than 300 manufacturing firms, fell from 51.2 in July to 49.1 in August. That’s the lowest reading in over three years.

Closer to home, the Utah economy is not immune. Utah exports over $1.3 billion worth of products to China each year and imports over $2.7 billion in products from China each year. Utah’s two large urban counties have 32 percent or more of their gross domestic product in industries impacted by Chinese retaliatory tariffs.

A state like Utah has little say in these matters. We can only look at the danger signs, manage the risks, and make certain our voice is heard by the Utah congressional delegation.