Ten Reasons for the US and China to Avoid a Trade War

The media are already talking about a trade war between the US and China. Donald Trump is constantly announcing new tariffs. But how serious is the situation really? The following ten reasons suggest that an uncontrolled escalation of current trading tensions will be avoided.

1. Mobile telephones and computers make up the lion’s share of American imports from China.

Tariffs on these products would in almost all cases translate into higher prices for US consumers. This is why the possibility of tariffs on these intermediates mobilizes the powerful US technology lobby, which depends upon them.


Technology hardware accounts for some 60% of US imports from China

US imports from China: % of total
Source: Credit Suisse

2. US companies have invested more than five times as much in China as Chinese firms have in the USA.

If US companies suddenly could no longer import foreign-produced intermediate products duty-free, American companies would have considerably more to lose than Chinese firms.

3. Farming states elect Republicans.

It is no coincidence that the first step by the EU and China, in 2003 and today, was to apply tariffs to agricultural products from the USA. This puts pressure on the governing Republicans in America’s agricultural heartland. In the still young trade dispute, their voices are among the most effective in calling for moderation in Washington.

2.7 %

US imports from China are currently affected.

4. “All bark, no bite.”

The USA aims to slash its trade deficit with China, currently some USD 370 billion, by around USD 100 billion. But the imports subject to the new tariffs account for “just” USD 50 billion, which corresponds to about 2.7% of the entire exchange of goods between the USA and China. This illustrates why the risk of an escalation from a “cold” to a “hot” conflict is acknowledged, but undesired.

At the recent G20 summit, US Treasury Secretary Steven Mnuchin re-emphasized the USA’s commitment to free trade and the WTO. At the same time, he stressed that his country was primarily seeking reciprocal, “fair” free trade – not a return to protectionism, which no one is advocating. It is no accident that the US Treasury has so far refrained from labeling China as a “currency manipulator” – a threat brandished during the US election campaign.

5. The USA wants to renegotiate the North American Free Trade Agreement NAFTA, not abandon it.

If the Americans wanted to scrap NAFTA, they could have done so at any time by presidential decree. However, this is obviously not in the interest of the White House. Rather, the US government is threatening to leave the free trade zone in order to negotiate what they see as better conditions.

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6. China is aiming for de-escalation.

Beijing’s initial retaliatory measures affect imports with a value of just USD 3 billion. This is relatively modest, but an effective symbol. The measures indicate that China recognizes its trump cards, but is not yet playing them. In the meantime, Beijing is employing the diplomatic “carrot and stick” approach.

a. The carrot: last November, China and the USA signed agreements for China to purchase American products with a value of USD 250 billion. Opening Chinese markets to US companies was also discussed. A rapprochement could encourage China to implement this agreement in principle more rapidly.

b. The stick: in the case of an unwanted escalation, China has considerably more options than it has exercised to date. China finances 8% of the US government debt, could make life difficult for US companies with new regulations, and has significant geopolitical clout that it could use, say, to ease the strained relations between the USA and North Korea.

7. China’s economic and political interests have changed.

Over the last ten years, the People’s Republic has reduced its trade surplus from 10% of its own economic output to less than 2%. In the past, China depended primarily on exports; today, it encourages consumption and capital imports.


China's business model no longer depends heavily on the USA

China Current account, % of GDP
Source: Credit Suisse

8. “Moderate” economic advisors.

Larry Kudlow, former Chief Economist of Bear Stearns and TV economic commentator, is a strong advocate of free trade in the US administration. Guo Shuqing, his Chinese counterpart, has had a Western education and is considered a pragmatic representative of a moderate position.

9. Trade barriers affect goods, not services.

Goods make up 80% of global trade, but only 12% of global economic output. Services, by far the most important pillar of global economic output, are not affected by trade disputes.

10. In 2003, cooperation also conquered confrontation.

When George W. Bush imposed tariffs on steel and aluminum in 2003, his administration was surprised by the pushback from the markets, trade partners, the WTO and American, often Republican, lobbying groups. This contributed to sidestepping a “hot” conflict, which allowed the economy and stock markets to recover.