U.S-China trade war shatters the global financial system
David Dodwell ’24, July 14, CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific, “China is not posing an existential threat to global trade – America is,” SOUTH CHINA MORNING POST, accessed July 18, 2024, https://www.scmp.com/opinion/world-opinion/article/3270347/china-not-posing-existential-threat-global-trade-america
Yet angst remains, and rightly so, as figures like Trump loom and the US continues to stoke geopolitical fires with China. The International Monetary Fund has warned of increasing signs of fragmentation, noting that trade and investment flows are being directed along geopolitical lines.
One of Trump’s more exotic plans has governments worldwide wringing their hands: he aims to eliminate income tax and replace it with a universal baseline import tariff of 10 per cent, rising to 60 per cent or more for China. One almost expects to hear Trump declare, in an echo of 2018: “High tariffs are good, and an easy swap for taxes.”
Washington’s adults in the room have warned that such a plan would be catastrophic. The Peterson Institute for International Economics led the charge in a paper asking: “Can Trump replace income taxes with tariffs?” Its blunt answer: “No, and trying would be regressive and harm economic growth”.
The arithmetic is simple: income tax revenues amount to around US$2 trillion a year, while imports last year amounted to US$3.1 trillion. Applying Trump’s tariffs could raise around US$225 billion a year – a tiny contribution to the hole left by cutting income tax.
Such a plan “would cost jobs, ignite inflation, increase federal deficits and cause a recession”, said the Peterson Institute. It would antagonise allies and trade partners and provoke retaliatory trade wars. It would damage global economic welfare, undermine national security and destabilise the global financial system.