All the talk that has erupted in the past couple of weeks about a possible trade war between the United States and China has been interesting in the way that a soap opera is interesting: lots of drama with little link to reality.
Sure, it is easy to use China as a scapegoat. A place that is conveniently far away and too big to understand. It is easy to say “look, it is China’s fault and we will put the hurt on them and things will be lovely all around”. If only that were true.
For once, it has been China that has responded with a measure of restraint. An editorial in the reactionary Global Times newspaper outlined the likely response from what is now the second largest economy in the world: “A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the US.”
Multinationals would certainly lose in a trade war but so would people in the US and possibly elsewhere by paying a lot more for items that are now treated as disposable commodities. The range of items that would become instantly more expensive range from fast fashions that are made or completed in China to electronics that are assembled in China, cars with parts made in China, cigarette lighters, active pharamceutical ingredients for medicines (of which China is the largest manufacturer in the world), toys, the cheap colouring books that are sold in dollar stores around North America and much more.
Imagine paying three times as much for a TV or a DVD player, for those of us who still have one.
Trade wars might work with a smaller country that makes a few things but China is too big of a manufacturing centre. It makes too much stuff. And most of the stuff that is made in China is made for and by the American multinationals that then import the stuff. A lot of the things that are made in China, which has cheap wages, cannot be made in the U.S. without jacking up the price multiple times. Imagine paying US$10 for a cheap disposable lighter.
And the benefits would be minimal. Can you imagine companies spending hundreds of millions of dollars to build new factories in the U.S.? Sure, some eventually would but others would simply jack up the prices of products.
And the result would be inflation, which means people would have to spend more but their salaries would not necessarily go up.
And there is another thing, China is investing a lot in the U.S., about US$65 billion and counting to date. The U.S. has invested more than US$225 billion, according to on estimate by Rhodium Group, and much of that is in the same factories that produce the goods that would be essentially taxed in the event that a new U.S. government puts up unilateral tariffs.
This is just one element in this whole discussion, but one that makes the possibility of a trade war a distant one at best.