China’s aggressive tendencies ensure trade wars occur

Those who opposed Trump’s tariffs have a stronger position: China will not acquiesce in the U.S. imposing tariffs. Indeed China did not acquiesce. It retaliated against the United States by putting tariffs and, more importantly, administrative restrictions on imports of U.S. goods, particularly those pro-duced in states important to Trump’s political standing, including agricultur-

In one accounting Trump’s tariff war ended in an agreement with China within two years. Who won? It is hard for an objective observer to say, and likely the world is lucky that the economic warfare did not escalate.Starting early in the post-Second World War period as the frozen world thawed economists analyzed tariff warfare, a curse of the inter-war period (see Johnson, 1951, 1953, 1965). This literature strongly suggests that mov-ing from a free-trade equilibrium to a particular country’s optimum tariff provokes retaliation and ends in tariff warfare. Further both sides may well end with reduced welfare relative to free trade. Under some conditions, how-ever, one country may be better off, a boon to protectionists. Later analyses include a variety of complications.24 Games may be non-cooperative or co-operative, for one period or sequential, with or without signaling of various types or side payments or threats of various type. There may be interna-tional institutions to facilitate freer trade. More than two countries may be involved. Domestic special interests may represent various industries with influence. One can construct games in which a country may benefit by mov-ing from free trade to an optimum tariff even with the possibility of retalia-tion. History suggests the burden is on protectionists to provide a convinc-ing argument that a given proposed tariff is different from the base case of both countries losing.No country has trade as its sole international concern and this greatly complicates analysis. China is a difficult case for the U.S. free traders. China is an aggressive political, military and ideological competitor, not subtle and prone to insults, with much human-rights’ baggage. China has engaged in in-tellectual espionage and continues to do so. American politicians seldom lose ground with their voters by calling out the Chinese government and Chinese companies. Moreover, many Chinese leaders view free trade as a mere use-ful pretense. Giving China “one in the eye” sells politically.

In the multidimensional game of international relations free traders have two strong arguments. First, protectionism, especially protectionism aimed at a particular country or group of countries is likely to create political prob-lems, including national hostility, that dominate any economic gains. Second, retaliation undermines any gains, either economic or political.25 Neither ar-gument’s free-trader conclusions are logically necessary but they have much history on their side.