As the international community is becoming more aware of the threat the U.S.-Sino trade war poses to global growth, what was originally a bilateral tariff conflict is spreading across regions.
During a press conference on September 26, President Donald Trump disclosed why he believes China, despite the U.S. tariff wars, respects him – because of his “very, very large brain.”
Whether it is the net effect of the president’s extraordinary brain or the result of more conventional economic and geopolitical forces, the U.S. tariff wars are set to derail global recovery that has taken a decade to materialize.
Escalation Through Three Scenarios
Where will the current tensions lead? The progression of Trump’s tariff war can be illustrated through three scenarios, showing the development of the dispute from a mere bilateral trade conflict to a potential global trade war. Following a series of tariff threats from the Trump administration in spring, the economic stakes have been increased from $50 billion to $200 billion, and now to a threatened $500 billion of Chinese imports in America (Figure 1).
Figure 1: Three Tariff Scenarios: From Bilateral Trade Conflict to Global Trade War
Source: Data from International Trade Administration, Standard & Poor’s, Difference Group.
Scenario 1: Unilateral Muddling Through. In July, this stage began when the two countries imposed 25 percent tariffs on $34 billion of the other’s imports and levies on another $16 billion. With just $50 billion of goods impacted, the tariff’s economic impact would have been limited to 0.1 percent of Chinese GDP and 0.2 percent of American GDP, respectively. That’s when some of Trump’s key constituencies, such as the U.S. Chamber of Commerce and the National Farmers’ Association, began a campaign against the tariffs; they were soon joined by American retailers and a host of other industry associations.
Scenario 2: ‘America First’ Escalation. Every U.S. president has exploited China-bashing in the post-Cold War presidential campaigns. However, Trump is the first to walk the talk in the White House. With escalation, the stakes quadrupled to $200 billion, and the potential collateral damage quadrupled relative to the first scenario. In China, it could shave off 0.4 percent of GDP; in the U.S., 0.8 percent of GDP.
