Stopgap deals do not mean Donald Trump’s trade war is over
Summary
Barriers between America and China are still far too high. So is uncertainty
FOR WEEKS what was in effect an embargo between America and China had the world economy teetering on the brink. Now a headlong plunge has been postponed. On May 11th the two countries agreed to slash tariffs on each other for 90 days while they talked further. Investors are rejoicing. Those who see Donald Trump’s tariffs as mere preludes to deals are jubilant; the president’s more level-headed advisers appear to have muscled out the cranks.
Do not mistake the reversal of folly for the triumph of sanity, though. Trade policy between the world’s two largest economies is more restrictive and less predictable than it was before Mr Trump took office. A crash has been averted, but the world will keep paying for the president’s protectionism.
Like other countries, China is still subject to a 10% universal tariff. It must also pay a 20% charge Mr Trump says he has applied to punish China for producing fentanyl. Low-value items posted directly from China to American consumers used to attract no levies; today they incur a 54% duty or $100 flat charge. There are also tariffs on steel, aluminium, cars and parts; more may soon come for pharmaceuticals, critical minerals and semiconductors. Moreover, America is trying to persuade other countries to trade less with China.
It is hardly a return to the status quo. After adjusting for substitution away from foreign goods, America’s overall tariff rate will be 15-20%, about five times its level in January and the highest since the 1930s. One rule of thumb suggests that the combined 30% tariff on China is enough to reduce long-run trade by about two-fifths. America’s economy is big and diversified, and so can withstand high tariffs better than most. Nonetheless, the hit will probably roughly halve its economic growth this year, and inflation will rise. China will take a smaller hit to growth, but its economy was already struggling.
As important as the direct effect of the tariffs is the harm from the lingering uncertainty. Shipping companies talk of making best use of a 90-day window during which trade policy towards China is predictable. Anything short of clarity inhibits investment in foreign supply chains and domestic factories alike, because companies need to know what tariffs they and their competitors will face.
What happens next? The rosiest scenario is that America and China will strike a cosmetic deal, and then call off hostilities altogether. In his first term Mr Trump renegotiated NAFTA, a long-standing trade deal with Mexico and Canada, to much fanfare—but ended up with close to a carbon copy. He also struck the so-called “phase one" deal with China, as part of which the country promised to buy more American exports. Disregard the lowering of trade barriers that Mr Trump himself yanked up and the recent, much-ballyhooed “deal" with Britain is little more than scribbling in the margins.
The hope that trade wars fizzle out as agreements are struck is precisely what made investors sanguine about Mr Trump’s second term. The trouble is that he still has three and a half years left in the White House, a genuine belief in tariffs as a tool of reindustrialisation, and a horror of America’s trade deficit which will continue to provoke him. The trade deficit may well widen, considering that Republicans in Congress plan vastly to increase government borrowing, which tends to suck in imports.
Mr Trump is a man who believes in keeping his options open and reneges on deals he himself has struck. China, too, failed to deliver what it pledged in the phase-one deal. Both sides may reasonably doubt the seriousness of the other. As long as Mr Trump is in the White House, another conflagration cannot be ruled out.
