When the top two economies face off, the globe shakes

The quickly escalating tariff battle between the U.S. and China risks throwing a self-imposed, destructive monkey wrench into a U.S. and global economy that for the first time in many years is firing on all cylinders. China’s open drive for supremacy and “self-sufficiency” in key technologies is well-known worldwide.

It warrants a strong, sophisticated and ongoing counter-strategy by the U.S. and our allies. However, the tariff war between these two heavyweights could easily spiral out of control, drag others into the fray, and cut into still-fragile global growth.    

{mosads}China first retaliated against the Trump administration’s imposition of tariffs on its steel and aluminum under Section 232 with a modest $3 billion in tit-for-tat tariffs on 128 U.S. products, including sweet cherries, raw almonds and frozen piglets.

This week, the administration upped the ante, proposing under a separate Section 301 action, tariffs on $50 billion of Chinese imports, particularly electronics, as a sanction against China’s misappropriation of U.S. high tech products, its forced technology transfers and other unfair trading practices.

Within 24 hours, China had threatened to retaliate further by imposing 25-percent tariffs totaling some $50 billion on 106 categories of U.S. products, from toys and cars to airplanes and agricultural products.

China has been politically strategic, targeting bourbon from the home state of Senate Majority Leader Mitch McConnell (R-Ky.), Harley-Davidson motorcycles made in House Speaker Paul Ryan’s (R-Wis.) home district and soybeans, a $14 billion export to China from the heart of Trump country.

In just a two-day span, the Trump administration and the Xi regime threatened tariffs of $100 billion against each-other’s exports, driving stock markets down in the U.S. and worldwide. After China’s most recent and much bigger retaliatory threat of new tariffs on U.S. products, share prices of U.S. export companies fell sharply.

While only half of all U.S. households participate directly in the U.S. stock market, the pension funds of many more are directly at risk from such market downdrafts. The fact is that each country would lose in a trade war, with their consumers and producers bearing the higher costs of imports.

It would be hard to underestimate the stakes for global growth, given the size and inter-dependence of these two economies, if the focus remains on tariffs and trade deficits rather than on how to secure open markets and raise productivity.

In January, the International Monetary Fund warned that the imposition of new trade barriers and other “inward-looking” policies could derail surprisingly strong global growth. Erecting U.S.-China trade barriers could do just that.      

The U.S. and China are each other’s largest trading partners and have a symbiotic, integrated, if fractious trade and investment relationship. When the world’s first and second largest economies face off, the rest of the globe inevitably shakes.

The U.S. and China together account for at least 40 percent of global GDP and around 40 percent of global growth, and the two economies are more deeply-intertwined than ever. The U.S. and China have over $650 billion in total trade together every year. The U.S. Commerce department estimates that nearly 1 million U.S. jobs are supported by our exports to China.

China’s billions of consumers benefit from U.S. agricultural efficiency by accessing soybeans and other consumables at low-cost. U.S. consumers benefit tremendously from our access to inputs and products from China, many of which incorporate U.S. products and know-how, and buy enormous amounts of furniture, toys and electronics made or assembled in China.

According to the U.S. Special Trade Representative’s Office, the value of U.S. investment into China is now close to $100 billion; that of China into the U.S. is nearing $30 billion. Chinese firms now employ an estimated 140,000 U.S. workers; U.S. investments into China support some 1.6 million jobs there.

Nonetheless, China will need to lower its substantial barriers to investment and trade and stop forcing companies to transfer technology if it wants to create enough jobs to keep its population employed and satisfied with Xi’s leadership.      

Regardless of any pique with the Trump administration’s public rebukes and tariff threats, it is in China’s own interest economically to pivot more directly to open markets and to lower investments costs and barriers, including protecting intellectual property and ending coerced technology transfers.

China’s policies in recent years generally have not moved in that direction. It is also in China’s interest that the U.S. economy grow and thrive.

The U.S. and the many others who are hurt by China’s economic policies should work together in a serious, long-term effort to persuade China that it can deliver broad-based prosperity at home by participating in global markets without seeking to crush its competition in zero-sum fashion.

China should be encouraged to integrate more fully, faithfully and beneficially into the rules-based international system — from the World Trade Organization (WTO) to the Organization of Economic Cooperation and Development (OECD).    

Meanwhile, the U.S. should look more closely at its global competitiveness and domestic productivity. The U.S. economy would benefit if it spent less time on debilitating and risky tariff battles and more time on the many ways we could invest more wisely in our human, physical and institutional capital.

The U.S. should strive to model how democratic, market-based economies can deliver better lives for all their citizens, in part by working with allies and partners to create a more prosperous and stable global community.

The impacts of a tariff war between the U.S. and China ultimately would make it harder for the U.S. to remain on the cutting edge of innovation, research, skills, healthy communities and efficient investment.

It will also be more challenging to address headwinds created by high public debt, inadequate infrastructure, rising social divisions and inequality, and the need to improve critical underpinnings, such as education and health care.

There is still time to avoid a disastrous trade war between these two titans. The Trump administration, which initiated the massive Section 301 tariff threat, has given 30 days both for comments by U.S. industry and affected interests.

At the same time, quiet negotiations with China have already been initiated by Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross and Trade Representative Robert Lighthizer.

If the $50 billion in tariffs against Chinese products threatened by President Trump are part of a negotiating strategy to get China to curb its unfair practices against U.S. technology companies, as Secretary Ross maintains, that might be worth the extreme nervousness now infecting markets.

The actual impact of $50 billion in tariffs alone would be modest for a massive economy like the U.S. But it would have a significant psychological impact on U.S. consumers, industry, U.S. stock markets and, ultimately, enormous consequences for the real economy if neither side backs down.

Others countries would surely feel less bound to WTO disciplines and be all too quick to join in the use of new tariff measures. Politics alone would almost certainly demand it. If the president pulls the trigger at the end of the day and China retaliates, as it certainly will, this would begin a downward economic spiral with incalculable economic and political consequences.

Although President Trump thinks the U.S. would come out the winner in a trade war with China, the fact is the U.S. economy is well-integrated with global supply chains and diversified global markets for goods and services. A global downturn could well hit us harder than it hits China.

It is time for U.S. and Chinese officials to act upon self-interest, not continue down the rabbit hole of a zero-sum tariff war. What they decide in coming days will determine whether global growth strengthens or veers into a ditch.  

Stuart Eizenstat is the former U.S. ambassador to the European Union, undersecretary of commerce and international trade, undersecretary of state for economic, business and agricultural affairs and deputy secretary of Treasury in the Clinton administration (1993-2001). He was also the chief White House domestic policy adviser to former President Jimmy Carter (1977-81).

Anne Pence is the former international policy adviser to the State Department (1992-2005).