Bullies are often told to pick on someone their own size. Donald Trump has just followed that advice. After America’s president threatened to start a damaging new trade war with China, Canada and Mexico, America’s two smaller neighbours looked for ways to placate him. Accused of doing too little to stem the flow of illicit drugs and migrants, they both won a month’s reprieve by promising to send more agents and troops to their borders with America.
One wag suggested that China should do the same. The world’s other superpower instead flexed its economic muscles. On February 4th, shortly after America’s new 10% tariffs were added to its existing levies, China announced a variety of countermeasures against American firms. It launched an antitrust investigation of Google, a tech giant. It also added Illumina, a biotechnology firm, and PVH, which owns brands including Calvin Klein, to its “unreliable entities list”, which could curtail their investments in China and their dealings with Chinese companies.
The world’s biggest exporter also introduced new trade barriers of its own. China said it will tighten export controls on a variety of rare metals, including molybdenum and tungsten (used in a variety of products, from bulbs to bullets). And on February 10th it will impose duties of 15% on American coal and liquefied natural gas, as well as tariffs of 10% on crude oil, farm machinery, pickup trucks and “large-displacement cars” (ie, cars with big engines).
The measures will not, in truth, cause a large displacement of commerce. Google mostly withdrew from China in 2010. The country no longer imports much oil from America, and it already makes millions more cars than it can sell at home. Controls on rare metals may do more short-term harm. China, for example, produces about 80% of the world’s tungsten. But these elements often turn out to be less rare when there is a powerful incentive to find new sources.
The retaliation is best seen as a symbolic gesture, intended to deter even higher tariffs in future. America’s government is due to complete a review of China’s trade practices on April 1st. That could revive complaints about Chinese theft of intellectual property and the country’s failure to buy as much stuff as promised under a deal struck with Mr Trump before the covid-19 pandemic. Whereas some of Mr Trump’s advisers are probably telling him to go easy on Canada and possibly Mexico, they are, if anything, more hawkish on China than he is. If he indulges them, today’s measures demonstrate the variety of weapons China could turn to in response.
China’s symbolic retaliation is, then, meant to contain the trade war not inflame it. The only problem with this approach is that Mr Trump takes symbolism very seriously. China’s show of defiance could provoke him into further escalation. His executive order imposing the 10% tariffs states that they “may increase or expand in scope” if China does not turn the other cheek. Although China can match America’s economic heft, few can match Mr Trump’s economic recklessness.
The country’s best hope for deterring America lies not in retaliation but in the economic pain Mr Trump’s own tariffs will inflict on American consumers, businesses and investors. Warwick McKibbin and Marcus Noland of the Peterson Institute for International Economics, a think-tank, calculate that the 10% tariffs, even without Chinese retaliation, will damage the American economy, costing it more than $100bn in total from 2025 to 2040.
In his first term, Mr Trump’s team was cautious about imposing levies on consumer goods, fearful of upsetting price-sensitive American households. The new 10% tariffs, by contrast, apply across the board. They will even fall on parcels worth less than $800, which previously escaped duties on the grounds that they were not worth the bother of collecting. This loophole, known as the de minimis exemption, has allowed American consumers to enjoy the bargain prices offered by Chinese e-commerce and fast fashion with the minimum of fuss. The new trade regime will not make them happy. And the complaints of American bargain-hunters may ring louder than the protests of Google or Illumina.
Consumer dissatisfaction will only increase if Mr Trump’s trade war spreads to Europe as well. He has threatened “very substantial” tariffs on the European Union, whose trade surpluses with America he has described as an “atrocity”. The 27-member bloc, with an economy similar in size to China’s, has promised to retaliate if necessary. “We will always protect our own interests—however and whenever that is needed,” said Ursula von der Leyen, the president of the European Commission, on February 4th. Bullies rarely pick on any target their own size. Mr Trump may pick on two. ■
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