Why a trade war could wipe out US economy

Imposing tariffs on $50 billion worth of Chinese products — that equals the annual exports of Brazil, or Saudi Arabia — will cost the American economy $88 billion in the first year, according to the World Bank .

It could mean looking for new trade partners and increasing government expenditures to navigate the fallout.

Cities of trade

To tackle the effects of a trade war, President Donald Trump says he wants to negotiate with China and reinstate the US high-tech industries that lost their edge under former President Barack Obama. However, few expectations have been set for future talks.

“The premise here is that we’re going to come out of a [trade war] better than we were before,” said Lael Brainard, a former US Treasury official who is now president of the Council of Foreign Relations. “So far that’s been just not the case.”

Brainard said companies could take a hit as a result of Trump’s actions, and that a rollback would have to occur before America’s trade deficit shrinks significantly.

“There’s a finite natural speed limit to recovery from any kind of disruption in terms of economic activity. That’s much greater than the speed of the markets. That needs time,” she said.

Other economists aren’t so certain the effect will be that strong. It’s true that shutting down global trade would hurt the American economy, and likely drive consumers to buy more American-made goods. It’s also true that China has a habit of not enforcing its regulations, said Ellen Zentner, an economist with Nomura Securities.

“China has a nasty reputation of not enforcing all of its laws and regulations. And if that’s true then they’re gonna try to discourage that,” she said.

Shifting trade deals

According to President Trump, eliminating tariffs and leveling the playing field with China would improve US competitiveness.

According to Dean Baker, a labor economist with the Center for Economic and Policy Research, the US may instead suffer with higher prices for a wide range of Chinese goods including electronics, sport utility vehicles and televisions.

According to Baker, other economies such as Europe, Japan and Australia may see increased tariffs on their exports to the US.

“I would think that would hurt our exports, and when our exports are at risk and we’re not gaining competitive advantage,” he said.

Baker said that increasing government expenditures to offset the trade barrier could increase the deficit and further impact consumers. This could possibly spark the kind of consumer price inflation seen in places like Britain and the United Kingdom during the European Union’s Brexit negotiations.

Baker said China might retaliate by putting tariffs on US goods.

“I think the US market would find less efficient competitors than they have before in China, and I think we would see a reduction in trade flows, so exports would probably decline,” he said.

The US could potentially damage its relations with other countries by becoming more dependent on China, Baker said.

“If China turned into a difficult competitor as a trading partner, then I think that you’d see the US pull back from the Chinese market,” he said.

Tension between the two countries has been building over the past year. China’s response to Trump’s policies have been to use policies to stop US goods from entering the country or to block US imports, as seen in the escalating tariff threat.

While the US and China have large trade surplus with each other — last year America ran a trade deficit of $347 billion with China while China ran a deficit of $347 billion with the US — the US has actually exported more goods to China and other neighboring countries than China exports to the US.

According to Zentner, China’s size makes its economy far more important than the US in terms of trade and the potential economic fallout from an escalation.

“Over time China has displaced the United States as the largest trading partner, even though the US remains by far the largest economy,” she said.

In terms of the overall impact of any escalation, Brainard says it could depend on whether America’s competitive advantage is deemed to be greater.

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