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Who wins a China-US trade war?

  • Published at 12:51 am August 14th, 2018
China-US trade war
Equals? Not yet Bigstock

China is weaker than one may think

On July 6 this year, the Sino-US trade war kicked off with both countries imposing tariffs on each other’s exports.

While this move by the Trump administration is seen as a disagreement between trading equals, it is, in fact, a much bigger threat to China than its opponent. 

To be honest, China’s response to this war with its own set of tariffs, worth $34 billion, and later another $16 billion, is akin to them bringing a blunt knife to a gunfight.

As of now, given the size of the two economies, the value of the exports targeted is not substantial for either side.

But Trump has explicitly warned that, depending on how China responds to this move, he will be considering hitting another $500bn worth of Chinese goods with further tariffs.

Goliath has better odds over David 

While the tale of David and Goliath saw the underdog win over the much bigger and stronger adversary, realistically speaking, Goliath will always have better odds.

China, the obvious underdog in this war, is also currently under serious threat. 

It is important to point out that the US is China’s single largest destination for its exports. In fact, the US imports three times more from the Chinese than China from America.

In a full-blown trade war and a tariff for tariff battle, the Chinese simply lack the economic firepower to even survive the fight. 

Moreover, China’s vulnerability is magnified by the fact that it is the world’s largest exporter and nearly all of its trade is dependent upon the Society for Worldwide Interbank Financial Telecommunication (SWIFT) trading system, a system that is denominated by the US dollar.

As evident from the sanctions against Iran, the US can and does manipulate this system at at will. 

The Trump administration too has realized that America can use its dominance of the international trading system to selectively punish countries for whatever reason it deems fit.

Should the trade war extend to sanctions imposed against China, the country will be at a very real risk of economic collapse.

The rationale behind China’s response

Common sense suggests that the reasonable approach to Trump’s demands would have been a policy of accommodation, one that would appease the US and allow trade to continue uninterrupted.

However, President Xi cannot afford to be seen as a weak leader and therefore was forced to retaliate, even though his actual ability to damage the US is extremely limited.

Hence, China immediately accused America of starting the largest trade war in history and responded by imposing 25% tariffs on $34bn worth of US goods, mainly targetting agricultural exports in a bid to create economic instability just before the 2018 midterm elections. 

Retaliating against Washington’s decision to slap tariffs on an extra $16bn of Chinese goods overnight, China also put tariffs on American products, mainly medical equipment, fuel, fish meal, wood waste, paper and paper waste, metal scraps, cars, and bicycles.

However, if this war keeps going on, it is China who will run out of bullets first.

Despite this, it is important to note that the signs of defeat or victory in a trade war take a long time to manifest, and rushing to declare a definitive result so early in the game would be short-sighted. 

A test of the true extent of US power

Unlike full-blown military conflicts, trade wars are much more difficult to assess. Often, the economic effects can take months or even years to materialize and there will definitely be casualties on both sides. 

That said, it would also be a mistake to think that this is a fair fight between equals.

The US, given its dominant position, its lack of exposure to the wider global economy, and overall position as the economic and military hegemon means that it does not have to play by any rules other than those set by itself.

Putting America first is no longer just a campaign slogan, but is now, for better or worse, being manifested into actual policy.

While this may worry other nations that have become used to American interference and guidance without having to reciprocate or those that are riding on the coattails of American security using the US created global trading system unfairly, they are frankly left with nothing to negotiate.  

SM Abrar Aowsaf is a Staff Sub-editor at the Dhaka Tribune.

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