Between consumers and their Calvins
China may throw some more punches of its own. It has already placed several firms, including PVH, the owner of Calvin Klein, on its list of “unreliable entities” that warrant government scrutiny and restrictions. It could now follow through and hamstring their business. It has also severed some American dronemakers from their Chinese suppliers, and curtailed exports to America of a variety of critical metals. On April 8th a list of other possible responses was posted online by several well-connected commentators. China could suspend all co-operation with America on fentanyl, for example. It could also ban imports of American poultry and other agricultural products, such as soyabeans and sorghum, which mainly come from Republican states.
China may impose restrictions on American services, too. A paper published this week by the Ministry of Commerce was at pains to point out that Uncle Sam runs a surplus with China in services trade (although it is far smaller than America’s deficit in goods trade). If China were to follow the same crude formula that America used to calculate its original reciprocal tariffs, China would be entitled to impose a levy of 28% on American services. China could also probe the intellectual property held by American firms, which may constitute monopolies earning excess profits, according to one influential blogger.
Such retaliation would make a deal with Mr Trump less likely. He seems keen to isolate China by talking to everyone else first. But from China’s point of view, talks with America’s president offer plenty of risk for little reward. America wants to “decouple” from China and contain its economic rise, whatever happens to the balance of trade. Commercial relations between the two superpowers may be at a “cyclical” low—but they are also in secular decline.
Any gains China won through talks might then be whittled away over time. The country’s leaders also have a lot to lose if discussions go awry. No adviser to Xi Jinping, China’s ruler, would risk exposing him to the kind of public humiliation meted out to Volodymyr Zelensky, Ukraine’s president, in February. A trade war is bearable. An Oval Office circus is not.
If the two superpowers do continue to fight, who will back down first? Mr Trump inherited a stretched stockmarket, but a strong economy. America’s latest job figures beat forecasts; household balance-sheets are robust. The president has done his best to squander that legacy. Before the tariff delay, JPMorgan Chase, a bank, suggested America had a 60% chance of falling into a recession and a 40% chance of taking the world economy down with it.
Those odds have presumably dropped a bit. But the tariffs that remain will still raise prices, eroding household purchasing power and, possibly, delaying any interest-rate cuts from the Federal Reserve. For over a third of products that America buys abroad, China is the dominant supplier, meeting 70% or more of America’s foreign demand, according to Goldman Sachs, another bank. The trade war will more than double the price of these goods.
Even before inflation rises, uncertainty has spiked. And that can be equally damaging to investment and spending. A daily index of trade-policy uncertainty, calculated by Dario Caldara of the Federal Reserve and others, has been over twice as high as its previous record, reached during Mr Trump’s first trade war. The president’s supporters point out that tariffs have been a consistent preoccupation of his since the 1980s. But he seems to pursue uncertainty with equal conviction. He is a mercantilist, yes, but a mercurialist above all.
China may throw some more punches of its own. It has already placed several firms, including PVH, the owner of Calvin Klein, on its list of “unreliable entities” that warrant government scrutiny and restrictions. It could now follow through and hamstring their business. It has also severed some American dronemakers from their Chinese suppliers, and curtailed exports to America of a variety of critical metals. On April 8th a list of other possible responses was posted online by several well-connected commentators. China could suspend all co-operation with America on fentanyl, for example. It could also ban imports of American poultry and other agricultural products, such as soyabeans and sorghum, which mainly come from Republican states.
China may impose restrictions on American services, too. A paper published this week by the Ministry of Commerce was at pains to point out that Uncle Sam runs a surplus with China in services trade (although it is far smaller than America’s deficit in goods trade). If China were to follow the same crude formula that America used to calculate its original reciprocal tariffs, China would be entitled to impose a levy of 28% on American services. China could also probe the intellectual property held by American firms, which may constitute monopolies earning excess profits, according to one influential blogger.
Such retaliation would make a deal with Mr Trump less likely. He seems keen to isolate China by talking to everyone else first. But from China’s point of view, talks with America’s president offer plenty of risk for little reward. America wants to “decouple” from China and contain its economic rise, whatever happens to the balance of trade. Commercial relations between the two superpowers may be at a “cyclical” low—but they are also in secular decline.
Any gains China won through talks might then be whittled away over time. The country’s leaders also have a lot to lose if discussions go awry. No adviser to Xi Jinping, China’s ruler, would risk exposing him to the kind of public humiliation meted out to Volodymyr Zelensky, Ukraine’s president, in February. A trade war is bearable. An Oval Office circus is not.
If the two superpowers do continue to fight, who will back down first? Mr Trump inherited a stretched stockmarket, but a strong economy. America’s latest job figures beat forecasts; household balance-sheets are robust. The president has done his best to squander that legacy. Before the tariff delay, JPMorgan Chase, a bank, suggested America had a 60% chance of falling into a recession and a 40% chance of taking the world economy down with it.
Those odds have presumably dropped a bit. But the tariffs that remain will still raise prices, eroding household purchasing power and, possibly, delaying any interest-rate cuts from the Federal Reserve. For over a third of products that America buys abroad, China is the dominant supplier, meeting 70% or more of America’s foreign demand, according to Goldman Sachs, another bank. The trade war will more than double the price of these goods.
Even before inflation rises, uncertainty has spiked. And that can be equally damaging to investment and spending. A daily index of trade-policy uncertainty, calculated by Dario Caldara of the Federal Reserve and others, has been over twice as high as its previous record, reached during Mr Trump’s first trade war. The president’s supporters point out that tariffs have been a consistent preoccupation of his since the 1980s. But he seems to pursue uncertainty with equal conviction. He is a mercantilist, yes, but a mercurialist above all.
