US-China trade tensions: Trump plays a dangerous game

We are not yet witnessing a full-scale trade war between the US and China, but the rise in tensions this week has been worrying. First, China outlined a list of proposed tariffs in response to earlier moves by the US against steel and aluminium imports.

Then, as part of a separate investigation, the Trump administration announced that it would impose new tariffs on a range of Chinese consumer and manufactured products. This met an immediate response from Beijing, which said it would target US products – including sensitive areas of the food sector and the car industry.

It is the kind of escalating tit-for-tat activity which could set off a full-scale trade war between the world’s two biggest economies. There is still time to draw back. The US has said that the latest tariffs will not be introduced before a 60-day consultation period with US industry. This will give some time for talks with Beijing, though the worry is that both sides will now find it hard, politically, to be seen to give ground.

With mid-term elections later this year, president Donald Trump would appear to be driven largely by the desire to seek a political victory, even if the logic for the move is dressed up in talk about the deficit in trade which the US has with China. There may be issues to discuss here, including the alleged Chinese treatment of intellectual property, the reason for the latest tariff move.

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But tariffs and other restrictions hit trade, push up inflation, damage economic efficiency and hit confidence. The threatened damage from the measures announced so far may be limited to particular sectors, but there is now a real risk of further escalation and a damaged relationship between the US and China. In a globalised world where production chains cross continents, as does investment in manufacturing plants and financial assets, the consequences of all this are unpredictable and dangerous.

China and the US also have a host of economic interdependencies – China relies on inward investment from the US, for example, while the US effectively borrows cash from China, which is a big investor in US government bonds. It is also as well to remember that the Trump administration retains the threat to impose steel and aluminium tariffs more widely – pending discussions – including on the EU. In turn this could drag in more players to the building trade conflicts.

During his first year in office, President Trump’s rhetoric on trade appeared to be little more than sabre rattling. Now, he is taking action. It may be that he is hoping to gain a negotiating advantage and will not follow through. But it is a dangerous game to play. The president’s erratic behaviour could yet threaten economic growth and stability. Twitter is no place to be holding trade talks.