By Clay Chandler and Eamon Barrett
June 16, 2018

Most days, writing about trade is pretty boring. But on Friday, economic correspondents the world over got to don helmets and flak jackets and deploy all their favorite military metaphors in reporting President Trump’s announcement that the United States will slap a 25 percent tariff on $50 billion worth of imports from China.

China immediately hit back with penalties of the same rate on imports of high-value U.S. goods including farm products, cars and crude oil. The two lists of dueling duties will go into effect July 6, which doesn’t leave much time for negotiating a resolution.

The New York Times said Trump’s tariffs “escalated a trade war” between the world’s two largest economies. The Financial Times and Wall Street Journal agreed China’s retaliation brought the U.S. and China to the brink of a “full-scale,” “all-out” trade war.

Global investors aren’t panicking—yet. On Friday, the Dow tanked 280 points in the morning, then bounced back to close the day down just 85 points. But there are almost surely more fireworks to come.

Trump has promised he’ll retaliate to any Chinese retaliation, and threatened that the next round of tariffs will penalize $100 billion in Chinese goods. How the showdown might play out from there is anyone’s guess. China doesn’t import enough from the U.S. to match a second tariff round of that magnitude. But there are all kinds things Beijing could do to restrict U.S. investment in China and make life miserable for U.S. multinationals already operating in China. Things could get ugly fast.

Both sides seem supremely confident the other is bluffing. Trump and his aides are betting that, because China exports so much more to the US than the US exports to China, by definition Beijing stands more to lose from a protracted trade war. The White House may also be betting that business cycles in the two countries put the U.S. in a stronger bargaining position. The U.S. economy, in its second longest expansion on record, is running at close to full capacity with unemployment at its lowest level since the 1960s. Meanwhile China’s economy in recent months has shown signs of slower growth.

Xi Jinping clearly is calculating that China’s carrot-and-stick approach will prevail. Beijing’s tariffs targeting sorghum, soy beans and other agricultural exports have been designed to inflict maximum pain on the states that helped put Trump in the White House. Chinese negotiators have made clear that if the U.S. imposes tariffs on Chinese goods, China’s previous offer to dramatically ramp up purchases of U.S. farm goods is off the table. Xi also knows that Trump needs China’s help to enforce any meaningful agreement to dismantle nuclear weapons in North Korea.

The danger here is that both leaders are over-estimating the strength of their position. Keep those helmets buckled.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

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