THE current US-China tariff tit-for-tat is a high-stakes game, not a war.
While the phrase ‘trade war’ has long been used to describe the process of imposition of import tariffs on a country that, in turn, levies counter-tariffs, using the ‘war’ metaphor trivialises the devastation of real conflicts, which involve the loss of life, deep human trauma and the destruction of properties.
Just think about the wars raging in Ukraine, Gaza and Sudan, and the countless other previous wars that saw millions dying around the world. The ‘war’ metaphor as used by commentators, analysts, pundits, and economists over-dramatises the economic and political impact of tariffs. International trade is a peace-time activity; it should be analysed as such, without focusing on this metaphor.
Donald Trump initiated this trade game in a way that shook the entire world. But what are the objectives of levying such large-scale import duties across the board?
He simply wants to provide some protection to American manufacturers, initially at the expense of consumers who will bear the cost of tariffs through higher-priced goods. Another Trump objective is to provide a tax cut to US citizens once the process is streamlined, and the flow of tariff revenues materialises meaningfully. In Trump’s view, his tax cut, to be financed by tariff revenues, will compensate the consumers for the high cost of inflation.
Achieving the above aims needs a continuous flow of imported goods to the US, which in turn requires import duties to be set at moderate levels. If the tariff rates are set at exceedingly high levels, imports might stop completely. This can happen if the tariff is set at what economists call a ‘prohibitive level of tariff’, where imports from the targeted country stop completely.
The retaliating country will also set its tariff at an extremely high rate, thereby ending trade between itself and the other country. Is the tariff rate of 145 per cent imposed by the US on China close to the prohibitive level? While there’s no definite answer, the tariff rate seems close to this level because the increase is exceptionally large compared to what it was before Trump unilaterally began this trade game, forcing all countries to take counter steps, negotiate, or retaliate. This is how he designed the game.
It was not difficult to see how different countries would respond. The countries that are small compared to the US in economic and political power, no matter how developed they are (like Singapore), were expected not to retaliate and to start negotiating with the US to get some relief in rates above the baseline of 10pc, which probably is not open to negotiations. The countries that are comparable to the US in economic and political power were expected to retaliate.
The world has seen clearly that China is the only country comparable to the US that retaliated ferociously with counter tariffs. China knows the stakes in this trade game well. It knows that the US will not be able to achieve its stated objectives of imposing tariffs at these exceedingly high rates — close to the prohibitive level — of 145pc. It knows that the US will back down in due course because Trump will eventually focus on achieving his aims.
While no European country on its own can stand up to the US in this game, the EU collectively has considerable power and could have retaliated like China. But its suave politicians, who usually say something and mean something else (unlike Xi Jinping and Trump), came up with an expected response, expressing a symbolic retaliation without antagonising big brother America while trumpeting that the US is becoming increasingly unfair to its allies!
Trump has brilliantly achieved the wholehearted acceptance of his baseline tariff rate of 10pc by all countries.
But what has Trump gained so far from his trade game? He has brilliantly achieved the wholehearted acceptance of his baseline tariff rate of 10pc by all countries! Imagine the reaction of countries had Trump imposed the tariffs meekly — at the same level (10pc) or involved the World Trade Organisation.
The WTO bureaucracy would have allowed the process of tariff negotiation to linger for years, and each country would have resisted the tariff rate! Now Trump can easily and gradually start providing relief to various countries, bringing the total tariff rate downward, closer to his baseline rate, which would be more conducive for collecting meaningful tariff revenues.
Does this analysis seem rational compared to the one coming from top-notch economists who have a different opinion, closer to the influential Economist’s view that “mindless tariffs will cause economic havoc”?
Let us suppose that Trump is mad or his tariff policy completely bonkers, as most analysts want us to believe. In that case, China-US trade would come to a halt. The level of tariffs on other countries would be set towards the higher end of those indicated in the next level (after the 10pc baseline level) for each country in Trump’s tariff order. If that is the case, the US will hardly be able to collect a reasonable amount of revenue because of drastically reduced trade volumes under this scenario.
Still markets and pundits are focused on this scenario, because they see Trump as a madman intent on destroying world trade.
The disdain that markets and top economists have for Trump is leading them to ignore the costs for Trump for not cooperating in this trade game, and consequently, the prediction that American consumers will be severely hurt, in terms of higher inflation, and of lower levels of welfare for all countries. Their overemphasis on Trump’s personality, together with the ‘war’ metaphor, reduces the likelihood, in their eyes, of Trump being able to exercise considerable flexibility to set his tariffs eventually at moderate levels.
Trump is neither mad nor stupid. On the contrary, he is one of the two shrewdest presidents in the world today, the other being Xi Jinping of China, who wisely stopped further retaliatory tariffs from his side, even in the event of future additional tariffs. Let us wait and see how this game unfolds, perhaps perpetuating the same old economic order.
The writer is former deputy governor of the State Bank of Pakistan.
Published in Dawn, April 23rd, 2025
Source: https://www.dawn.com/news/1906040/us-china-trade-game