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Given the all-out declaration of global trade war we feared, it wasn’t actually the worst possible outcome: the first two days of Donald Trump’s presidency saw only the US’s three biggest trading partners threatened with tariffs by the end of next week. Unless you are Mexico, Canada or China, you have the luxury of waiting until April 1 to really start worrying, because that’s when the various reports Trump commissioned on trade and investment are due.
What do we read into this timing and sequencing? Nothing, obviously. Nobody knows anything. The palace politics explanation is that the business-friendly advisers around Trump have deterred him from going for tariffs across the board straight away, but then taxes of between 10-25 per cent on a third of the US’s imports aren’t exactly what the American economy needs.
Broad-based tariffs remain a clear and present danger and taxes on goods — from China in particular — could have global knock-on effects. Given weak Chinese domestic demand, a trade war might exacerbate the supposed China Shock 2.0, in which cheap exports of high-tech Chinese goods undercut manufacturers everywhere. Chinese exports diverted from the US by tariffs, the argument goes, will slosh around the global economy swamping advanced and emerging market economies alike. And if others start reacting with their own protectionist measures, could trade wars end up being Trump’s most successful export?
The experience of Trump’s first term suggests these concerns are serious but not necessarily cataclysmic. In some cases, the US market is less important than it looks. In others, trade will find a way to adapt. It’s the risk of global recession, not the dislocation of supply chains, that is the real threat.
European policymakers are clearly terrified of Chinese imports and particularly electric vehicles (EVs). But the experience of the first Trump term should be somewhat reassuring when it comes to the diversion of Chinese goods from the US market. Simon Evenett and Fernando Martín of the Global Trade Alert project calculate that US tariffs on imports from China resulted in just a net $2.8bn diversion in goods to the EU between 2018 and 2019 — which is small relative to the $46bn overall increase in Chinese goods exports to the EU between 2017 and 2019.
Evenett and Martín found that rather than diverting sales elsewhere, exporters hit by tariffs were often forced into “trade retrenchment”, smaller economies of scale making them less efficient and hence uncompetitive in other markets. To be clear: retrenchment is not a good thing. It reduces efficiency and consumer choice. But it does also lessen the chance of major political conflict over trade.
In the specific case of EVs, the prospect of big increases in Chinese imports is genuine, with the EU already having imposed anti-subsidy duties to manage the flow. But the US isn’t a major consideration here. There were hardly any imports of Chinese EVs to the US market even before former president Joe Biden imposed 100 per cent tariffs on them. Take-up has always been weak in the US, and by promising to remove Biden’s tax credit for EVs, Trump will essentially remove US-based production and consumption from the global market. (Elon Musk, founder of Tesla, is fine with this: removing the credit consolidates Tesla’s position in the US.)
Certainly, there are substantive concerns about Chinese goods swamping other middle-income countries and governments have erected a series of anti-dumping walls against basic goods such as steel. But there’s great reluctance, among Asian governments in particular, to practice large-scale protectionism. Countries like Malaysia have become highly skilled at positioning themselves in global supply chains and managing relationships with both the US and China.
“Like other emerging markets we have put some antidumping duties on imports from China, but generally only industrial inputs such as steel and polymers,” Tengku Zafrul Aziz, Malaysia’s trade minister, told me. “Even if there’s a major US-China trade dispute, we don’t anticipate going to widescale protection.”
For both advanced and middle-income countries, the prospect of Chinese goods being kept out of the US is an opportunity as well as a threat. The consultancy Oxford Economics calculates that the impact of a purely US-China trade conflict on other regions’ exports will roughly net out — lower exports to China because of falling demand being compensated by higher sales in the US market to replace Chinese goods. Europe — which competes with China on selling machinery to the US — and Asian economies in particular will benefit.
During Trump’s first term, bilateral US-China trade dropped off sharply but overall global commerce survived until the Covid-19 shock. Chinese goods often found their way to the US via what the IMF calls “connector” countries like Vietnam by adding an extra stage in the value chain. Trump wants to clamp down on such circumvention, but global supply chains can often innovate faster than policymakers can move.
The biggest risk to the global economy and trading system from a trade war isn’t export diversion. Supply chains are flexible enough to survive a lot of jockeying for position. It’s a sharp weakening in overall demand, perhaps from Trump crushing consumer spending by trying to eliminate the overall US trade deficit with tariffs, or from falling Chinese export sales adding to the woes of the country’s struggling domestic economy. That would take a truly dramatic escalation in trade tensions to achieve. We’re about to find out just how reckless Trump is and whether he wants to risk it.
