The global implications of Trump’s trade war

True to his word, the United States President Donald Trump fired the opening shots of a likely trade war. His primary target is none other than China, the world’s leading trading nation, which is well on its way to becoming the world’s biggest economy in coming years.

In late March, the American president targeted imports from China, which have dramatically expanded in recent years. Up to $60bn in Chinese exports now hang in the balance, as the US ramps up tariffs against major trading partners. 

Trump is also considering additional restrictions on Chinese investments in America. A Chinese bid to buy an American semiconductor equipment company was blocked by regulators earlier this year.

The US intelligence community has encouraged a ban on imports of the Chinese phone brand Huawei, a likely prelude to more comprehensive pushback against any Chinese investments in critical sectors of the economy.

China responded in kind, targeting as many as 128 American products, mostly in the realm of food and agriculture. The Asian powerhouse imposed an additional 25 percent tariff on recycled aluminium and pork from America, while wine, nuts, fruits and seamless steel tubes were hammered by an additional 15 percent tariff rates.

The escalating tit-for-tat between the two superpowers has sent shockwaves across international markets, raising concerns over a potential lose-lose outcome for the global economy. There was almost universal condemnation of the US government’s latest protectionist policy. Unless Trump strikes a compromise with Beijing in the near future, he risks hurting the very people who voted him into power the most. 

Warning shots

At the heart of Trump’s latest offensive are Chinese steel and aluminium exports as well as alleged intellectual property theft. The US government contends that Beijing has engaged in unfair trade practices, which have driven countless Americans into unemployment across rustbelt states. 

The firebrand US president imposed the latest round of trade sanctions by invoking Section 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974. While perfectly legal at home, the US’s unilateral exercise of trade sanctions has severely undercut its decades-long role as the harbinger of global free trade.

Trump's hardball strategy could provoke a rising and proud China, unleashing a beggar-thy-neighbour dynamic between the world's two leading economies.

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In the run-up to the decision, even key US allies in Europe, Asia and Latin America threatened collective response against Trump’s latest offensive.

World Trade Organization (WTO) Director General Roberto Azevedo warned about a “catastrophe” and the likely “severe” effect of the simmering trade war initiated by America. He expressed his organisation’s commitment to “to avoid the war” between US and China from degenerating into a global depression.

Eager to prevent a full-fledged diplomatic meltdown, the American government, citing national security considerations, exempted most of its key partners from the latest round of sanctions, particularly on aluminium and steel imports. 

Argentina, Australia, Canada, Brazil, the European Union, South Korea, and Mexico were given temporary or full exemption. But Japan, Turkey, Russia and China are expected get hit the hardest by the dramatic rise in tariffs. 

Fire and fury 

In effect, Trump managed to alienate two key allies, Japan and Turkey, while escalating tensions with key rivals, Russia and China. Yet, with more than half of steel imports exempted, the economic wisdom of Trump’s latest sanctions is under question. An incensed China warned America to “rein in its horse before the edge of the cliff,” otherwise it “will fight to the end”. 

China has gone so far as threatening to reduce its purchase of US treasury bonds, a key source of liquidity for the American market; cancelling major trade deals like purchase of American Boeing aircrafts; cracking down on American car and electronics investors; and maintaining long-term blockage of tech companies from Silicon Valley from China’s humongous internet market.

Yet, the US government seems intent on upping the ante. In its National Security Strategy (NSS), the Trump administration promised to leverage the Committee on Foreign Investment in the United States and its majority-support in the Congress to “ensure it addresses current and future national security risks”.

In particular, it is committed to defending the so-called National Security and Innovation Base (NSIB), the network of capabilities, people, and knowledge, which undergird American technological supremacy. 

Thus, the US government is even reviewing “visa procedures to reduce economic theft by non-traditional intelligence collectors”, targeting foreign students from “designated countries” in order to ascertain “intellectual property is not transferred to our competitors”.

This means, unless China overhauls its intellectual property infrastructure, more trade sanctions and restrictions are on the horizon. Trump’s “art of the deal” strategy is likely aimed at forcing Beijing into concessions, including removal of restrictions on American entry into the car, electronics and financial markets in China.

Yet, his hardball strategy could provoke a rising and proud China, unleashing a beggar-thy-neighbour dynamic between the world’s two leading economies. In a bid to stave off further tensions, Chinese Premier Li Keqiang has promised to ease access for American investments; strengthen intellectual property restrictions; and scale down its demand for technology transfer from foreign companies.

It remains to be seen whether this would satisfy his American counterparts, but both powers know that they’re trapped in a state of mutually assured financial destruction. As Nobel Prize-winning economist Christopher Pissarides correctly warns, a tit-for-tat trade war could “actually hurt” Trump’s basic constituency of manufacturing and agricultural workers, who depend on foreign investment from and trade with countries such as China and Japan.

Ultimately, any kind of great power protectionism could undermine a thick network of trade agreements, which undergird peaceful commerce among nations around the world. What is at stake is no less than an unprecedented period of peace and prosperity in human history.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.