Trade wars

After tariffs amounting to $34 billion by the US on Chinese goods last week, a trade war between the US and China has begun. Oil prices and stock markets have continued to collapse after China responded with tariffs that come to the same amount. The US has fired the next shot by listing another $200 billion worth of Chinese goods. The Chinese ministry of commerce has kept a dignified position stating that it has kept its promise ‘not to fire the first shot’ but has chosen to respond in kind. The damage can already be seen in gloomy predictions about global economic growth. The US had previously banded the mantra of free trade when it was to its advantage. Now that the superpower lies on the opposite end of the balance of trade, it has chosen to adopt protectionist policies. These are the same policies that the US had forced developing countries – using both carrot and stick – to adopt and which severely impended the development of these economies and bred an unequal relationship to the global market. The real question is whether the trade war between China and the US means that two long-standing neoclassical economic dogmas, free trade and competitive advantage, can be said to be dead now.

The Chinese support for free trade and globalization comes as it has been able to secure competitive advantage by reducing labour costs and providing state support. It seems the best way to do well in the economy is state-supported capitalist development. The trouble is that competitive advantage and high production levels only work with uninterrupted access to export markets. Without open markets, export-oriented economies have no option but to slow down. This explains the unease in the Chinese stock markets, which reached a two-year low this week. China’s price advantage could be chopped away by the current US regime, which is acting aggressively, but without the economic strength to do so. Chinese companies have responded by claiming that they might have to shift their market to domestic consumers in China, which would allow them more margin to deal with the negative impact of the tariffs.

Trump has pledged to raise tariffs to the value of China’s $506 billion of exports to the country. This would be a serious crisis for the Chinese economy – and could spur another global economic crisis. Arguably, it was the fact that the 2008 global economic crisis did not hit China that prevented the larger economic order from collapsing. Some economists think that the impact of US tariffs could be far more limited, with China having already made domestic consumption a big part of its GDP. But the Chinese economy is thought to need around ten percent growth to prevent an economic slowdown. This aim will be hard to achieve with more US tariffs looming. There can be no winners in a trade war between the US and China.