In the realm of global trade disputes, economic strength reigns supreme. A nation’s ability to absorb, and equally important, to inflict economic punishment is often the determining factor of its fate.
With an economy in excess of $20 trillion, the U.S. is the world’s largest economic powerhouse. China’s economic output, at just over $14 trillion, is the world’s second largest. But it’s evident these two economies are currently heading on differing paths.
Fueled by a roaring U.S. labor market, high consumer confidence and strong consumer and business spending, America’s economy continues to surge. This economic strength has tempered much of the impact of tariffs imposed on U.S. goods imported by China and other nations. Despite extensive bouts of volatility, the bellwether S&P 500 Index is up around 8 percent this year.
Now, compare this to China. Faced with declining business investment and consumer spending, China’s economic growth rate this year is expected to reach a 26-year low. Its stock market, the Shanghai Composite Index, has declined this year by nearly 20 percent.
So far, the U.S. and China have mutually imposed tariffs on roughly $53 billion of each other’s goods. However, President Trump is expected to significantly escalate this total by imposing tariffs on an additional $200 billion of Chinese goods. These tariffs would be fairly broad-based and target consumer goods imported from China. China is expected to retaliate by imposing tariffs on another $60 billion of U.S. goods, primarily targeting the U.S. technology industry.
China’s retaliation of only $60 billion to America’s $200 billion highlights its current dilemma — China is quickly running out of U.S. goods it can tariff. If this latest round of tariffs goes into effect, China’s tariffs on America would increase from $53 billion to $113 billion. However, China only imports a total of $130 billion of U.S. goods. This leaves just $37 billion in U.S. goods China can impose tariffs on if this trade dispute further escalates down the road.
Conversely, America’s tariffs on China would increase from $53 billion to $253 billion. But the U.S. imports $505 billion of Chinese goods. This leaves a massive $252 billion of Chinese goods that President Trump could still impose future tariffs on — which he has threatened to do.
So, what options remain for China? Obviously, the quickest and most desirable solution would entail a mutually-agreed settlement with President Trump. Absent that outcome, China has hinted at restricting entry and licenses to U.S. companies wanting access to its marketplace. However, the U.S. could easily counter with similar measures.
Instead, China may decide to do the illogical. It could let its ongoing trade dispute with the U.S. reach its maximum — a tariff on every single good both the U.S. and China import from one another. This would then become the new normalcy in trade relations between the U.S. and China.
But why would China, with its weakening economy and lack of economic leverage, willingly follow a path of escalation with the U.S.? Yes, America’s economy would be hit, but China’s would be hit much harder.
For China, this may be its one true viable and winning strategy.
Trade disputes are often a battle of attrition — which nation can, or is willing, to endure economic hardship the longest. China is a nation controlled and dictated by its Communist Party of China. For the benefit of the nation, China could simply declare its citizens will endure a massive and punishing amount of economic hardship as it tries to weather the fallout from a full-blown trade war with the U.S.
In the U.S., President Trump is subject to the political pressure and discontent of voters, something China’s leadership does not face. His strategy has been the economic leverage he wields by the sheer size and strength of the American economy. But China’s leadership may decide to dig in and accept its fate, regardless of the cost to its citizens, as it waits for the U.S. economy to weaken, forcing President Trump to the negotiating table.