What a US-China trade war could mean for the world 

Economic acrimony has been bubbling between the US and China since Donald Trump became president. Now the tensions have boiled over into escalating tit-for-tat announcements of tariffs on key imports. This is serious not just for the US and China, but for the entire global economy and the UK, in particular, as it hopes for a free trade Brexit. As Christine Lagarde, the International Monetary Fund director, has warned: the world trade order “is now in danger of being torn apart”.

Anyone familiar with Trump’s zero sum approach to international trade won’t be surprised by the turmoil. Although few might have predicted a US president assailing the free trade model, while the Communist leader of China rides to its defence. Trump made much of trade and the US external deficit on the campaign trail. Among his first acts was to pull out of trade negotiations with Europe and with Asia. He has also threatened to pull the US out of NAFTA and criticised the World Trade Organisation.

As seen on the stage of the hit musical Hamilton, arguments between protectionists and free traders have a long history in US politics. The rise of China and other emerging economies poses huge challenges for the US and other developed economies, with uneven patterns of economic winners and losers within them.

Trump’s response reflects concerns over both the lost manufacturing industries of the US rust belt, and the future – a perception that China’s trade practices are “unfair” and threaten the US’s advantage in higher technology sectors. Much of the focus has been Trump’s tariffs on steel and other heavy industrial goods. But the US tariffs also target a range of high tech industries, particularly in those areas where the Chinese plan to become world leaders over the next decade.

As critics have noted, these tariffs will not bring manufacturing jobs back. Any jobs created in protected industries by tariffs would be more than offset by those lost in industries that use these products facing rising costs and export sectors hit by China’s retaliatory tariffs.

Complex international networks

The US cannot solve trade deficits bilaterally, particularly with China, where trade relations are particularly complex as US companies have moved their production to China. In practice, the US deficit with China has fallen and China’s barriers to imports have been reduced. Modern industrial production takes place within complex international networks and protection is not going to bring whole industries back to the US.

These developments should be seen in context. Before the 2007-08 financial crisis, global trade consistently grew faster than GDP. Since then, global trade has been weak.

So far, policymakers have avoided the sort of protectionist response seen in the 1930s Great Depression, but the global trading system itself has been eroded, with piecemeal protectionist measures on the rise since the financial crisis.

The principle that trade is mutually beneficial for countries has always been mixed with national political calculation in negotiations. Lately, the US has sought to use trade negotiations to try to please its electorate.

Not boding well for Brexit

So far, the threatened measures by the US and countermeasures by China remain relatively limited and this may be largely a case of initial bargaining positions. But if things develop, it will have wider effects on the global economy. The UK, with Brexit on the horizon, could be particularly hit by this.

Britain is a relatively open economy and has bet a lot on an open global trade order. Any significant erosion of a rules-based world trade system would therefore threaten British prosperity. Even if these developments fall short of a full-scale trade war, a shift to a more fragmented and protectionist world order would compound the challenges facing the UK, independent of the EU.

Britain has a particular advantage in services – an area of trade where global barriers remain relatively high. This does mean that there is considerable potential to expand this trade. But global negotiations to liberalise services trade through the WTO have effectively been stuck for years.

Negotiations for some form of preferential trading arrangement between the UK and the EU after Brexit have concentrated on trade in goods rather than services. Further, currently Britain is party to preferential trading arrangements the EU has agreed with around 50 other partners.

There has been a lot of talk about a lucrative US-UK trade deal. But, realistically, Britain would be negotiating with a much larger partner from a position where the UK currently runs a surplus. The US is the world’s leading services exporter and is clearly using trade negotiations to entrench its competitive advantage. Any negotiations with the US would therefore likely be tough.

Trade negotiations have become increasingly complex, particularly in services, focusing on harmonising standards and regulations rather than just reducing tariffs. The implications may be controversial. There has already been much discussion of “chlorinated chicken” and hormone-treated beef as likely conditions for a trade deal with the US. Opening up trade in services may also lead to public services like the NHS facing competition from private providers.

A medium-sized country like the UK is likely to find it harder to negotiate favourable trade deals in a fragmenting world trade order at just the time when its government is betting on being able to negotiate deals with countries beyond the EU and expand its trade with these countries.