Can China fight America alone?

No bell or siren interrupted the port’s work at a minute past noon on April 9th—nothing to mark the moment when America’s devastating “reciprocal" tariffs came into effect. Containers kept circulating. Globalisation kept moving. A balding lorry driver reversed into position under a “reach stacker", which hoisted his cargo into the air, like a weight-lifter jerking a barbell. The scene was deceptively anti-climactic, for a threshold had been crossed. Most goods leaving the port—and others like it across China—will now incur outlandish tariffs if they enter America, the world’s biggest market and, until now, its staunchest champion of global trade.

The tariffs on China are so extravagantly high because it chose to retaliate, punch for punch, against what it calls America’s “economic bullying". When President Donald Trump unveiled a 34% tariff on China on April 2nd, China matched it. When Mr Trump then raised it to 84%, China answered in kind. Then, hours after America’s tariff came into effect, Mr Trump took a third swing. He hiked the levy from 104% at noon (including an earlier penalty of 20% related to China’s role in fentanyl production) to 125% after dusk.

Even as he hit China, he retreated elsewhere. Reciprocal tariffs on other countries, linked to the size of their trade surpluses with America, will now not come into force for another 90 days. Countries will instead face a 10% tariff as they seek “bespoke" agreements with the president.

Mr Trump’s retreat earned a hearty “thank you" from America’s financial markets. The bond market, in particular, had been making people a little “queasy", Mr Trump conceded. After his reprieve, stocks surged. The S&P 500 index ended the day up by 10%, leaving it 3% below its level at the end of April 1st, before the whole charade began (see chart).

Despite Mr Trump’s retreat, the tariffs that remain are still historic. They average over 25% across all trading partners, when weighted by America’s imports last year. The last-minute rise on China, which remains a huge trading partner, was more than enough to offset the last-minute reprieve offered to India, Japan, South Korea and Taiwan, all combined. As a consequence, America’s weighted overall tariff is still above the level it reached after the infamous Smoot-Hawley act of 1930. At the time that legislation passed, this newspaper described it as “the tragi-comic finale to one of the most amazing chapters in world tariff history".

Today’s chapter, still more amazing and tragicomic, has not yet reached its finale. The 90 days earmarked for country-by-country negotiations is a blink of an eye in the geological timescale of trade talks. When the serious bargaining begins, some countries may not pucker up enough for Mr Trump’s liking. The president still seems intent on imposing tariffs on copper, lumber, pharmaceuticals and semiconductors. And on May 2nd parcels from China that are worth less than $800 will face onerous duties and documentation requirements, which they previously escaped because the revenue was often not worth the hassle of collecting it.

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’s economic policymaking has its own weaknesses, of course; some are mirror images of America’s. Its economy is threatened by deflation, not inflation. The country’s consumer prices declined by 0.1% in February, compared with a year earlier. And its policymakers are, if anything, too rigid in their goals and too slow to change course. Only in September last year did they turn decisively to the goal of boosting consumption to help the economy weather a long-running property slump and the forthcoming trade war.

That war has arrived with a speed and ferocity China did not anticipate. According to Goldman, a 50% hike in American tariffs (roughly the scenario China faced before it retaliated) would have cut the country’s GDP by about 1.5%. A hike of 125% will reduce it by 2.2% this year. The first 50 points, in other words, hurt more than the second or third. Exorbitant tariffs kill trade and you cannot kill the same trade twice.

These calculations cannot, however, take full account of the damage to confidence and financial-risk appetite. China’s stockmarket plummeted on April 7th, after the government chose to retaliate against Mr Trump. The country’s “national team" of state-directed banks and investment funds was obliged to step in to stabilise prices. China’s leaders have also announced that they are ready to do more to stimulate the economy if required, by cutting interest rates and bank-reserve requirements, as well as by selling more government bonds.

They will have to issue a lot of them to offset the tariff shock. Barclays, yet another bank, calculates that China would need up to 7.5trn yuan (over $1trn, or 5% of this year’s GDP) of extra stimulus on top of the easing of 2.4trn yuan it announced in March. Even that would only get growth to about 4%. To hit the government’s target of “around" 5%, the 7.5trn yuan would have to be closer to 12trn (or 9% of GDP).

Offshore bonanza

Another survival strategy for Chinese exporters is to recede upstream, out of the direct reach of American tariffs. They can sell parts and components to trading partners in neighbouring countries, where they can be incorporated into finished products for export to America. On the face of it, the incentive to pursue this strategy will be overwhelmingly strong if China remains stuck with American tariffs of over 100% while countries including Thailand and Vietnam face levies of only 10%.

One problem is that this strategy is no secret to the trade warriors in the White House. Peter Navarro, Mr Trump’s trade adviser, recently accused Vietnam of acting as a “colony" for Chinese manufacturers. “They slap a made-in-Vietnam label" on a Chinese good “and send it here to evade the tariffs", he complained to Fox News. Vietnam could jeopardise its own access to the American market if it does not distance itself from China.

Chinese manufacturers may have doubts of their own. Even if their Asian neighbours can now seal a “bespoke" deal with Mr Trump, it could easily come unstuck in the months and years ahead. The United States-Mexico-Canada (USMCA) trade agreement has not held fast, even though Mr Trump himself signed it. What if a country’s trade surpluses with America fail to narrow in a year or two, due to larger macroeconomic forces outside the country’s direct control? Could the reciprocal tariffs return? The post-war trading rules that America helped enshrine once offered convincing answers to these doubts. They gave exporters the certainty they required to serve the world’s biggest market. That certainty has now gone for good.

No bell sounded in the world’s busiest ports when America’s tariffs came into effect. Cargo kept moving. But make no mistake, the death knell of the post-war trading order has been rung.