Carl Sacklen     Freelance Portfolio     Blog

Why China Would "Win" a Trade War with America

The premise of Trump’s protectionist rhetoric is that the US still dominates world trade. They hold all the cards and can do pretty much anything that serves the national interest. His “America First” policy therefore follows naturally, as does the proposition to slap 40% tariffs on some Chinese goods to level the playing field. But what if the premise is wrong? What if the US doesn’t hold all the cards and doesn’t win the trade war?

First off, nobody wins from protectionism. The consumers pay higher prices and the workers lose their jobs. Indeed, those workers now protected by tariffs may see more employment, but across the whole economy, higher costs of imports combined with lower consumption, job losses are a real prospect.

The reasons why China would emerge from a trade war on top boils down to an imbalance in dependence on each others’ markets.

Graph showing US trade deficit with China

America’s dependence on China is greater than China’s on America. Therefore, although China certainly wouldn’t emerge unscathed, it also wouldn’t have taken the greatest hit. This is because China has developed massively in the last two decades following access to Western technology and techniques.

Now that its economy has matured, it can purchase machinery from countries other than the US and is looking to invest in other developing economies (especially in Africa). It is therefore not as reliant on good trade with the US.

Also, although much of American high-tech machinery is manufactured in China, the largest chunk of the profits go to the original American designers. Hence, protectionism against China by the US would hurt American companies more than it would Chinese factories.

The Chinese market is extremely lucrative for American producers. This is evidenced by the fact that in 2015, Apple had sold 131 million iPhones in China, but only 110 million to American consumers. The Chinese market is crucial for American producers. Meanwhile, Chinese producers look more to regions such as Latin America, Africa, and the Asian sub-continent where there’s a growing demand for low-cost electronics such as mobile phones and laptops.

A trade war would be felt almost immediately in the US, especially by firms such as Walmart who rely heavily on cheap imported goods. US tariffs on these cheap goods would cause prices to hit the roof at the expense of consumers and workers. For a company like Walmart - which reported revenues of almost $500million and has 2,300,000 employees - protectionism would be disastrous.

There’s a clear disparity in the two countries’ reliance on each other in trade. What’s also clear is that in a trade war, whilst nobody wins, China would almost certainly lose least.