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Why China Won’t Yield to Trump

Summary:
China may give Donald Trump some face-saving way out from the trade war he has started, but it won't offer any substantive concessions. In other words, Trump's tariffs will do nothing to improve America’s external balance, output, employment, or real wages. BEIJING – Last month, US President Donald Trump enacted steel and aluminum tariffs aimed squarely at China. On April 2, China retaliated with tariffs on 128 American products. Trump then announced 25% tariffs on another 1,300 Chinese products, representing some billion of exports. In response, China threatened 25% tariffs on 106 US exports (including soybeans, cars, and airplanes), to go into effect whenever the US tariffs do. Exclusive insights. Every week. For

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China may give Donald Trump some face-saving way out from the trade war he has started, but it won't offer any substantive concessions. In other words, Trump's tariffs will do nothing to improve America’s external balance, output, employment, or real wages.

BEIJING – Last month, US President Donald Trump enacted steel and aluminum tariffs aimed squarely at China. On April 2, China retaliated with tariffs on 128 American products. Trump then announced 25% tariffs on another 1,300 Chinese products, representing some $50 billion of exports. In response, China threatened 25% tariffs on 106 US exports (including soybeans, cars, and airplanes), to go into effect whenever the US tariffs do.

Yes, if these measures go into effect, it will amount to a trade war – one that the United States is not likely to win.

While economists generally argue that everybody loses a trade war, some defend Trump’s actions as a shrewd negotiating tactic to impel China to adjust its trade policies, such as the requirement that foreign companies share their intellectual property (IP) to gain access to the Chinese market. Yet Trump does not understand the basics of such a negotiation: he thinks that a country with a trade deficit necessarily has the stronger negotiating position. In reality, the surplus country is often in the stronger position, because it has accumulated financial claims against its “opponent.”

That is certainly true of China, which holds well over $1 trillion of US Treasury securities. Of course, if the Chinese government dumped its US holdings, the resulting price decline would hurt both countries. But that doesn’t invalidate the point. China does not necessarily even have to sell to wield influence. With US debt expanding and interest rates on the rise, even rumors that the Chinese might stop buying Treasury securities could be enough to drive down US bond prices and accelerate the increase in US interest rates. This would further undermine confidence in financial markets, which are already unhappy with Trump’s trade war, responding to every tariff announcement with a selloff.

But there are even deeper reasons to believe that China won’t give in to Trump. Both the US and Chinese tariffs will significantly hurt Americans. For example, Trump’s tariffs on steel and aluminum will force the US auto industry to raise prices for consumers as its major inputs become more expensive. China’s retaliation hurts other important US economic sectors, from agriculture to manufacturing.

While industries and consumers in China would also be hurt by a trade war, that country’s leaders can overrule interest groups and stifle protests. In any case, public opinion will largely back retaliation against the US. The Chinese remember well the Opium Wars of the nineteenth century, when the Middle Kingdom tried and failed to resist the British campaign to force it to open its economy to opium and other imports. The so-called Unequal Treaties that emerged from that campaign were part of China’s “century of humiliation,” the transcendence of which is as important to modern popular Chinese consciousness as the word “liberty” is to Americans.

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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