Escalates to WW3

The tensions in US-China trade relations threaten the entire global economy, not just the relations inside the Group of Two. As a result of the US-China trade cut, global growth can be expected to decline by 0.5% in 2020 [23].

The World Bank analysts have used a Computable General Equilibrium (CGE) Model to make an economic forecast: introduction of a 25% tariff on all goods of Chinese imports to the US will reduce world exports by 3% and the global product by 1.7%. “The analysis shows that a US-China tariff escalation could reduce global exports by up to 3 percent (674 billion dollars) and global income by up to 1.7 percent (1.4 trillion dollars) with losses across regions”. “The biggest declines in incomes are recorded by China and the US, up to 3.5% (USD 426 billion) and 1.6% (USD 313 billion), respectively. The sectors most affected include: agriculture, chemicals and transport equipment in the US; and electronic equipment, machinery and other manufacturing in China” [24].

The OECD reckons that around a third of the content of the US imports from China is actually of foreign origin. The value added of China’s exports to the US is perhaps USD 329 billion – some 2.7 percent of China’s USD 12 trillion economy. So even if new tariffs slashed China’s exports to the US by 25 percent, the direct hit to the China’s GDP would be 0.7 percent. It would be a noticeable impact, but it would still leave the Chinese economy growing at 6.1 percent a year [22].

If exports from China to the US will be halved as a result of high import tariffs, then the direct loss of China’s GDP will be at least 0.43%. Taking indirect effects into account, the trade war will result in a 1.12% reduction in China’s GDP. In case of imposing increased tariffs on all Chinese imports to the US, GDP losses will reach 4% [25].

According to some experts, the response of China in the trade war with the US may be more painful for the American economy than for China [26]. American companies will partly lose their consumers in China because of nationalistic appeals to boycott products of American companies, including Apple, McDonald’s, KFC. Alongside with that, the internal China’s demand for the products restricted by the US (e.g. ZTE and Huawei) is increasing. Sanctions against ZTE have put the company in a very difficult position, because most of the chips for the telecommunication equipment production were imported from the US, and suppliers from China and Korea could not replace that amount [26].

The impact on consumers will depend on an individual’s consumption choices. For example, those Americans who enjoy tech products, usually assembled in China, are likely to feel short-changed sooner than those relying on domestically (American) produced goods, as the imported goods are made more expensive by the increased tariffs applied. A recent study shows that imposing the tariffs on $200 billion worth of the imports would cost each American household, on average USD 127 a year [27].

According to Bloomberg estimates, if all Sino-US mutual imports become subject to import tariffs, the global GDP will fall by USD 600 billion. And even if the trade war stops, previously implemented restrictions will result in 2 years’ time in a slow-down of GDP growth by 0.2% in the US and by 0.5% in China [28].

Experts from China estimate the overall damage from the increase in US import tariffs from 0.3% to 0.7% of the PRC's GDP growth, which is a relatively “modest” estimation [13]. In particular, Terence Tai-Leung Chong & Xiaoyang Li forecast that the trade war will reduce employment in China by 1.1% and GDP by 1.0%, which may be considered not that sensitive for China [29].

C. Fred Bergsten has identified three scenarios for the development of a trade war: “a G0 in which the US is no longer willing to lead but China is not yet able or willing, and whether such (a likely) regime will be stable or unstable; a new G1, sooner or later, led by China; and a cooperative G2 in which the US and China agree to share leadership” [30]. We can foresee four scenarios of the further US-China trade war development.

4.1 Scenario 1. Trade war will escalate into Cold War II.

Cultural traditions and social values in the US and China are different. The countries will not give up their political and economic systems and will not transform them according to the practices imposed of suggested by the opposite side. China will have to reduce export- oriented production. In contrast to the Cold War I, China has a chance to win since it was able to build a competitive economy and form TNCs that made their way to the Global 500. The US will surround China “with powerful American military capabilities, creating NATO-like adversarial alliances, isolating it economically and imposing costs when it did things the US did not like” [4].

China, in its turn, will seek to strive to push the US out from the APR. The US will explain its unilateral sanctions with the willingness to strike better deals, to reach an “honest” deal with China, but serving the interests of the US economy. The country will be achieving its goals by presenting ultimatums to its trade partner, if their national interests or security are considered harmed. As a result, more and more global problems will be addressed by unions of countries not involving the US (climate agreements, nuclear agreement with Iran, TPP – Trans-Pacific Partnership, China – EU summit in July 2018, etc.). The US will be gradually becoming isolated in the international community. The role of the US in global supply chains and international trade will decrease due to the deterioration of the country’s authority. The US may be excluded from a number of regional trade and economic associations of countries. When some US companies are winning, others suffer losses. There is growing discontent among American business community and their overseas partners (with recent examples including Ford and Boeing, equipment manufacturing and chemical industry, etc.).

The US government bond market will suffer, inflation rate in the domestic consumer market will increase. The risk of unilateral economic sanctions imposed by the US will push other countries to search for alternative suppliers and markets.

China has become a leader in the Regional Comprehensive Economic Partnership (RCEP) of 16 countries, the scale of which expanded beyond the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) without the US: 30% of global GDP, 50% of the world population [20]. Exporting to RCEP countries from the PRC accounts for 26% of the total China’s exports. The development of mega-union will strengthen the leading role of China in the region, but on the other hand, may also cause a decrease in international trade standards, since it does not cover issues of labor, human rights, e-commerce, public procurement [14].