Barry Eichengreen

Can a Trade War be Averted?

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Probably the question most frequently asked of international economists these days is: “Are we seeing the start of a trade war?” This is not a question that admits of a simple yes-or-no answer. In contrast to a shooting war, there’s no government declaration to mark the official outbreak of hostilities. Tariffs have been raised and lowered throughout history, for reasons both good and bad.

Even when the reasons are bad, moreover, tariff increases do not always provoke foreign retaliation. There was no retaliation, for example, when President Richard Nixon imposed a 10% across-the-board import surcharge in 1971, arguably in violation of both the General Agreement on Tariffs and Trade (the forerunner to the World Trade Organization) and United States law.

But there’s always the danger of events spiralling out of control. China has clearly indicated its intention of responding to US actions, raising the risk of escalation by an erratic US leader. President Donald Trump’s threat on April 5 to impose tariffs on an additional $100 billion of Chinese exports, provoked by China’s response to his own earlier action, points to just this threat of escalation.

That said, there are still reasons to hope that sanity will prevail. First, Trump has been forced to nuance some of his earlier actions. He exempted Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea from his steel and aluminium tariffs, minimizing the impact on those countries and also on domestic metal-using industries.

Foreign governments and domestic businesses objected to the initial across-the-board tariff, and so did the stock market, through its negative reaction. The market will exercise a moderating influence on the president if anything can.

Second, China’s response so far has been carefully calibrated, in each case almost exactly matching the breadth of US action. Doing less would have been seen as lying down in the face of US provocation. Doing more would have been seen as a dangerous escalation.
Some say that China’s leaders have no choice but to exercise restraint. Because it runs a surplus with the US, China stands to lose if bilateral trade grinds to a halt. But that’s like saying that one country stands to lose more than another in an exchange of nuclear weapons.

For those still hoping against hope, the good news is that, behind the scenes, the US and China are still talking

In fact, Chinese policymakers have broader motives. Because China has a higher export-to-GDP ratio than the US, they are more concerned with preserving the global trading system; by eschewing escalation, China avoids jeopardizing it. And by appealing to the WTO, it positions itself as a champion of free and open trade. It demonstrates constructive leadership of the multilateral system. To the extent that other countries rely on China for preserving the trading system, they are correspondingly less likely to object to China’s other strategic initiatives, in the South China Sea and elsewhere.

Now comes the hard part. On April 3, the Trump administration announced its intention to impose tariffs on $50 billion of Chinese exports, in response to industrial espionage, licensing, and other intellectual property concerns. Obviously, these trade actions are much larger and more dangerous than those affecting $3 billion of Chinese aluminium and steel.

The irony is that US intellectual-property concerns are valid. But neither those concerns nor Chinese retaliation will win the US any sympathy, because the administration’s latest action comes on the heels of bogus US steel and aluminium tariffs, trumped-up, as it were, on national security grounds. This sequencing and reckless use of the tariff instrument encourage observers to dismiss even valid concerns as fake news.

Is it still possible to avoid the worst? The soonest the administration’s $50 billion of proposed tariffs can come into effect is at the end of a 60-day comment period. This gives foreign governments, business, and the stock market time to push back.

Feeling the heat, the Trump administration could choose to nuance its intellectual-property policy, just as it nuanced its steel and aluminium measures.

Rather than imposing sweeping tariffs, it could tailor its actions to the intellectual-property dispute. It could use the Committee on Foreign Investment in the United States to reject bids by Chinese companies in specific sectors where the U.S. possesses valuable intellectual property. It could pursue its complaints through the WTO. Those who question whether the administration has any inclination of going this route should note that it did, in fact, file a WTO complaint against Chinese technology licensing practices in March.

For its part, China should maintain its calm and steady hand. But it should also show a willingness to address valid US concerns when the US takes a WTO-based approach to pursue them – for example, by relaxing its joint-venture rules and strengthening its intellectual-property protections. For those still hoping against hope, the good news is that, behind the scenes, the US and China are still talking.

The author is Professor of Economics at the University of California, Berkeley/Project Syndicate

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