Who will win the US-China trade war?

The ongoing trade war between the US and China shows no signs of abating. Instead, it has escalated to new heights in recent days with the US President announcing 10% tariffs yet again against $200 billion worth of Chinese goods with a threat of more tariffs on another $267 billion of US imports. Immediately afterward, China announced retaliatory tariffs on $60 billion US goods, sending signals that it is just the beginning of a long-drawn war between the two countries.


Question arises what are the stakes involved for both countries, who will win out of this escalating trade dispute between the two countries and till when will this war continue? The real stakes are much higher than mere trade practices and with neither side willing to concede, it is apparent that the people of both countries would lose from a full-blown trade war.

Leading businessmen like Jack Ma of Alibaba have expressed fears that the trade frictions between the two countries could last for up to two decades and would be “a mess” for all parties involved.

Even though the reasons being given by the US are an “out-of-control trade deficit” with China, as well as China’s “theft” of US technology, analysts feel it is actually a battle for global economic supremacy and with the leadership position of the US being threatened by China it was left with no option but to go for an all-out war. China has reciprocated with equal venom, at least till now, making it clear that “China is not going to fundamentally change its industrial policy just because another country says: ‘Do this’.

The US President, on the other hand, believes it is a win-win battle for US where either China will back down and create a level playing field for the US companies, or the US firms will start sourcing its imports from elsewhere.

Ma, of Alibaba, on the other hand feels that the US may win the battle but lose the war. Ma is of view that trade tensions would adversely impact Chinese and other foreign companies immediately but eventually the Chinese businesses would move production to other countries in the medium-term to get around the tariffs.

Consequences are not going to be good for the US too. While Chinese businesses will suffer from the loss of exports to the US, prices will escalate in the US since consumers depend largely on Chinese imports – not just for finished goods, but as parts and constituents of things made by American companies. If the US President is hoping that the US companies would start sourcing their requirements from other countries, it is easier said than done. Looking at the retail giant Walmart is enough to reveal the picture. Walmart sources as much as 70 per cent of the goods that it sells, from China. This is a good example to show that both China and the US would hurt if trade stopped or gets slowed substantially and it will come to which of the two countries have more lasting power and resilience to stand amidst public resentment and enhanced stress on economy.

The US President has said he is willing to put tariffs on all $505 billion of Chinese goods imported into the US. China, which till this point, had matched US tariffs dollar-for-dollar – retaliating with $34 billion worth of tariff hike as against the similar hike put up by the US – has slapped only $60 billion worth of tariffs this time as against US’s $200 billion, knowing well that it imports only $130 billion worth of US goods as against $505 billion worth of Chinese items that it exports to the US; this trade deficit is being quoted by the US as the real cause for trade war.

This doesn’t mean that China is not in position to retaliate an eye-for-an-eye. It can do much more to hurt the US as it has more damaging set of weapons in its arsenal and might use it, if left with no option. China holds more than $1 trillion worth of US treasury bonds. If it stops buying new bonds, or sells off its holdings, as a trade weapon, it would trigger a hike in yield, thereby putting pressure on America’s debt load. Analysts feel China would use this as the last option considering selling off its massive holdings of US treasury bonds might impact its own stability.  Other options available with China are to devalue the yuan by certain percentage points to make the tariffs moot or making it harder for the US companies to operate in China.

While US is hoping that China will seek to resolve the trade war quickly by conceding to the US demand, it feels if China holds fast and does not concede to opening its markets, the resultant scenario will be that the US businesses will respond to tariffs by seeking markets and imports from other countries, thereby delinking the two major economies and reducing the possibility of China using trade to coerce US in any future policy disagreement.

The US President’s confrontational approach has worked so far in doing trade agreements with South Africa, Canada and Mexico but this approach is also leading to forming of an opinion that the Trump-led US Government has begun to abandon global trade rules. China on the other hand is now being as a supporter of these rules. To counter loss coming from the US, China is hoping it could open new markets for its products, particularly in Africa, and it would thus be able to wither away the loss caused by US tariffs. It has already used the imposed sanctions on Iran to its advantage resulting in the Iranian markets getting flooded with Chinese goods. China is leveraging its relations with other countries in a similar manner and eyes Africa as a great market for future.

US still remains the bigger and stronger economy, China being a command driven economy has ways to support its businesses through a prolonged trade war whereas such options may not be available to the US President and his Government, which owing to being a free market democracy, might not have the same kind of ability to manipulate its economy. Impact once felt by agri-community in the US, particularly the soy farmers, would be difficult to ignore for the President.

Both countries have high stakes to lose and as said earlier the one with more staying power when face-to-face with adverse circumstances is likely to win. Truly speaking, it is too big and too complicated a battle with several long-lasting ramifications to conclude win or loss for one or the other. With both sides bleeding, the saner decision for both the countries would be to work out a deal keeping mutual benefits in mind. This will also be in interest for the rest of the world.

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