The United States will lose its trade war with China by Anatole Kaletsky

But, ironically, this apparent strength is Trump's fatal weakness. By applying the principle of martial arts to reverse the strength of an opponent against him, China should easily win the contest tariff, or at least fight Trump in a draw.

Economists since David Ricardo have argued that restricting imports reduces consumer welfare and hampers productivity growth. But this is not the main reason why Trump will be forced to retreat into the trade war. In hindering the Sino-US conflict, another economic principle – rarely used to explain the futility of Trump's tariff threats – is much more important than Ricardo's concept of comparative advantage: Keynesian demand management.

Comparative advantage certainly influences long-term economic well-being, but demand conditions will determine whether China or the United States will feel more pressure to demand commercial peace in the coming months. And the focus on demand management clearly reveals that the United States will suffer from Trump's tariffs, while China can avoid any negative effects.

From the Keynesian point of view, the outcome of a trade war depends mainly on whether the combatants suffer a recession or excess demand. In times of recession, tariffs can boost economic activity and employment, but at the cost of long-term efficiency. However, when an economy is operating at or near capacity, tariffs will simply increase prices and increase upward pressure on US interest rates. This clearly applies to the US economy today.

US companies could not, in total, find low-wage workers to replace Chinese imports, and even the few US companies motivated by tariffs to outsource Chinese imports are expected to raise their wages and build new factories . interest rate. With the limited capacity available, the new investment and hiring required to replace Chinese products would be to the detriment of other more profitable trade decisions before the tariff war with China. Thus, unless American companies know that tariffs will continue for many years, they will not invest or hire new workers to compete with China.

Assuming knowledgeable Chinese companies know, they will not reduce their export prices to absorb the cost of US tariffs. This will allow US importers to pay tariffs and pass on the costs to US consumers (which will fuel more inflation) or US shareholders by reducing their profits. Thus, tariffs will not be "punitive" for China, as Trump seems to believe. Instead, the main effect will be to hurt consumers and US businesses, as will an increase in sales tax.

But let's say that tariffs can exclude some Chinese products from the US market. Where will the competitively priced imports come from below China?

In most cases, the answer will be other emerging economies. Some low-end products, such as shoes and toys, will come from Vietnam or India. The final assembly of some electronic and industrial machines can move to South Korea or Mexico. Some Japanese and European suppliers can replace high-end Chinese suppliers. Thus, to the very limited extent of tariffs that are "punitive" for China, the effects on other emerging markets and the global economy will not undermine the "contagion" but will give a slight boost to demand. .

Of course, Chinese exporters could suffer modest losses, other producers taking advantage of US tariffs to reduce them. But this should have no effect on Chinese growth, employment or corporate profits if demand management is used to offset the loss of exports. The Chinese government has already started boosting domestic consumption and investment by easing monetary policy and cutting taxes.

But China's stimulus measures have so far been cautious, as they should take into account the negligible impact of US tariffs on Chinese exports. If, however, signs of weak exports begin to emerge, China can and must compensate with additional measures to boost domestic demand. In principle, China can avoid any damage to US tariffs simply by reacting with a Keynesian stimulus on a large scale. But would the Chinese government be willing to do it?

It is here that the bipartisan support of the United States for a "containment policy" against China works paradoxically against Trump. Chinese leaders have so far been reluctant to use demand stimulus as a weapon in the trade war because of President Xi Jinping's strong commitments to curbing Chinese debt growth and reforming the banking sector.

But such financial policy arguments against Keynesian politics are certainly irrelevant now that the United States has presented the battle for Trump's tariffs as the first skirmish of a geopolitical cold war. It is simply inconceivable that Xi gives higher priority to credit management than tariff war and thus demonstrates the futility of a US containment strategy against China.

This raises the question of how Trump will react when its tariffs begin to hurt US businesses and voters, while China and the rest of the world will ignore them. The likely answer is that Trump will follow the precedent of his conflicts with North Korea, the European Union and Mexico. He will "make an agreement" that does not achieve his goals, but allows him to boast of a "victory" and to justify the verbal aggression that inspires his supporters.

Trump's astonishingly effective rhetorical technique of "shouting loudly and wearing a white flag" helps explain the constant inconsistency of his foreign policy. The US-Chinese trade war is likely to provide the following example.