China trade war is inevitable – Biden or Trump will ramp it up – Europe, too

Anyone who doubts that we are headed for a U.S.-China trade war has not been paying attention to the punitive import tariffs that President Biden announced Monday on strategically important parts of the Chinese economy. In addition to a 100% import tariff on Chinese electrical vehicles, Biden announced that the U.S. will triple import tariffs on Chinese steel and aluminum, and double import tariffs on Chinese semiconductors and solar cells.

Not to be outdone, former President Donald Trump is indicating that if he is elected again as president, he will increase tariffs on Chinese electrical vehicles to 200% and will impose a 10% tariff on all U.S. imports. He is also chastising the Biden administration for having been too soft on China’s unfair trade practices.

Compounding China’s problems on the export front is the fact that Biden is coordinating with the Europeans in his efforts to clamp down on China’s unfair trade practices. For its part, the European Union is talking about soon imposing additional tariffs on Chinese electric vehicles.

In the past, China has retaliated against increased U.S. trade restrictions by targeting sensitive U.S. sectors, especially in agriculture. There is little reason to think that this time will be different, especially when President Xi Jinping is facing a host of domestic problems. Such retaliation could prompt a cycle of further escalation that would be damaging to both countries.

Even before the intensification of U.S. trade restrictions, China’s economy was struggling and losing its former momentum. Its massive housing and credit bubble had burst. At the same time, investment confidence slumped in response to Xi’s zero-Covid policy mistakes and his rolling back of a number of reforms that underpinned the erstwhile Chinese economic miracle.

President Biden’s shot across the bow with his trade restrictions heightens the chances that China, like Japan before it, will now experience a lost economic decade in the wake of the bursting of its property and credit market bubble. No longer will it be able to export its way out of its economic funk by using foreign markets to provide the demand for its domestic overcapacity problem. Any attempt to do so will only invite more U.S. trade restrictions.

The greatest effects on the U.S. economy are likely to be indirect. Until recently, China was the world economy’s main engine of economic growth. It is also an important export market for Australia, Germany, and its Asian trade partners. As such, it could constitute a major headwind to the world economic recovery, which in turn would dim U.S. overall prospects.

A trade war with China would also add to inflationary pressure in the U.S. The Federal Reserve is already finding inflation unexpectedly resistant to its interest-rate increases. A new trade war would only further delay the start of a Fed rate-cutting cycle, depriving the country of a boost to growth.

Despite all these long-term economic consequences, China bashing might make good political sense for Biden and Trump ahead of the election. And since when have our politicians paid much attention to the long-term economic price that we might have to pay for their blind pursuit of the presidency?