The U.S. is now threatening to retaliate against the retaliation, and investors may be overestimating Trump’s willingness to lose face if China refuses to give way.
The U.S. and China inched closer to outright trade war on Monday when Beijing announced plans to raise duties on selected American imports. The announcement was pointedly timed, less than two hours after President Donald Trump tweeted, “China should not retaliate — will only get worse!”
At this rate, things might indeed get worse — a lot worse. That’s what makes Trump’s approach to this dispute so unforgivably reckless.
China plans to raise tariffs to as much as 25% on about $60 billion of U.S. goods, including small aircraft, computers, agricultural products and liquefied natural gas. The measures are in response to the Trump administration’s announcement last week that tariffs of 10% recently applied to some $200 billion of Chinese goods would be increased to 25%. The U.S. is now threatening to retaliate against the retaliation. China is doubtlessly preparing to follow suit.
China’s latest move and what it may mean wiped about $1 trillion from global share prices Monday, and this is only a mild foretaste of what might happen if the two sides, driven by Trump’s appetite for disruption, keep digging in. Even now, investors still seem inclined to bet that Trump’s trade war is a fuss about nothing — that he’s bluffing and in the end will step back from an all-out fight. But this calculation is questionable. Trump may be overestimating the willingness of China’s leaders to let the U.S. president humiliate them, and investors may be overestimating Trump’s willingness to lose face if China refuses to give way.
This apparent complacency means that if things do turn out badly, the markets have a long way to fall. And panics of this sort, once started, can be hard to contain.
Doesn’t the U.S. have a point? Possibly: The charge that China has reneged on commitments it made earlier in these talks, which the administration blames for the latest breakdown, is difficult to judge. Such backsliding wouldn’t be unheard of. On the other hand, who in their right mind would take the word of this White House on anything? All that’s certain is that raising tariffs and threatening to raise them further does not advance U.S. interests.
It isn’t just the risk of further escalation. And it isn’t just that higher U.S. tariffs are first and foremost a growth-retarding tax on American consumers and businesses. The crucial thing is that the endless threat of unbounded disruption to international trade produces chronic economic uncertainty — which in turn deters investment, the key to long-term advance in output and living standards. There’s little doubt that this factor has already been weighing on global growth.
Let’s suppose that in the end, with or without meaningful Chinese concessions, Trump chooses to cool the rhetoric, declare victory and move on. Don’t imagine that the past two years of phony war will have done no harm. The Trump trade-policy burden on American enterprise and the global economy has been real, even if the worst is avoided. Right now, confidence that the worst will in fact be avoided ought to be waning.
A version of this editorial first appeared in Bloomberg Opinion.