Trade Wars Are Not Good, or Easy to Win

Just how bad can the U.S.-Chinese trade war get?

American dollar and Chinese yuan
Petar Kudjundzic / Reuters

Stocks plunged this afternoon in Wall Street’s worst day of the year, as the trade war between the United States and China entered a dangerous new phase that could imperil the historic U.S. recovery.

The Dow Jones Industrial Average and the S&P 500 both fell 3 percent. Oil crashed. The spread between three-month and 10-year Treasury rates—the “yield curve,” which has historically served as a prescient indicator of the economy—inverted to its widest level since 2007, the year the U.S. fell into the Great Recession.

In March 2018, the president declared that “trade wars are good, and easy to win.” Today was evidence that, in fact, they are neither.

The yuan, which is tightly controlled by the People’s Bank of China, dipped sharply and hit an all-time low in offshore trading—a dramatic escalation in the standoff between the White House and Beijing. But the currency depreciation isn’t just an omen. A cheaper yuan would also have an immediate effect on global trade, making Chinese exports more affordable, while reducing its demand for global goods and services—such as iPhones, oil, and tourism. The state-run Xinhua News Agency also announced that the Chinese firms would stop buying American agricultural goods entirely.

The domestic U.S. economy remains strong. Unemployment is low, consumer sentiment is high, and wage growth has been promising for low-income workers. But the yuan’s devaluation is especially bad news for multinational companies with exposure to the Chinese marketplace. Technology firms such as Apple and IBM, which both have billions of dollars in annual sales from the Chinese market, both crashed in Monday trading.

It’s generally prudent to say that the American president doesn’t determine the stock market’s gyrations or the nation’s overall economic growth any more than a boat captain controls the ocean’s waves. In this case, though, the captain seems to be purposefully steering the ship into a swell while everybody around him screams “STOP!” President Donald Trump has stubbornly insisted on Chinese tariffs over the objections of his economic advisers—not to mention the near-universal outcry of the professional economic community. In a University of Chicago poll of several dozen international economists, zero disagreed with the statement that “the incidence of the latest round of US import tariffs is likely to fall primarily on American households.”

Just because the president’s trade war is masochistic doesn’t mean Trump is entirely wrong in his diagnosis that China is a bad actor. The country’s long history of intellectual-property abuse spans counterfeiting, stealing trade secrets, and forcing companies to give up their IP to do business on the mainland. A 2019 CNBC survey found that one in five U.S. corporations says that China has stolen its IP in the past year.

Still, the president is playing a dangerous game of high-stakes poker, with American wages and savings as the chips at the center of the table. And, of course, the stakes can always get higher: Trade wars can become literal wars. In 2015, the Chinese state-owned newspaper Global Times wrote in one saber-rattling editorial that if the U.S. presses China to accept all of its trade demands, “then a US-China war is inevitable in the South China Sea.”

An armed conflict between the two countries would be both catastrophic and anomalous. According to research by the J.P. Morgan analyst Michael Cembalest, the U.S. and China are more economically linked through bilateral trade, foreign direct investment, and central-bank holdings than any two countries that have declared war since the 1930s. A violent showdown between the U.S. and China in the near future remains extremely unlikely. But if Donald Trump has taught the world anything in the past two and a half years, it’s that this presidency does not seem particularly constrained by the forces of historical precedent.