A Trade War Between China and the US Will Damage Both Economies

Last week, President Barack Obama announced the United States would impose tariffs of up to 35% on tires from China. In response, Chinese government pledged dumping and subsidy probes of chicken and auto products from the US. However, regardless of which country is right or wrong, those protectionism moves are leaving both countries in very difficult position because by entailing trade restriction they can equally loose.

Indeed, in the wake of global recession and unprecedented job losses, the United States and China are facing domestic pressure to take a tougher position against other economies. In fact, US data shows that because the value of tire imports from China increased three times since 2004, four US plants were forced to close and three more are about to be shut down this year. For China, the closure of the tire industry could mean the loss of around 100,000 jobs which may bring the danger of social unrest in regions with factories.

So, will bigger tariffs on Chinese products save US jobs if China decides to do the same to US products? From one side, China is likely to lose more than US because its exports to US are more than 4 times bigger. However, at this point, tariffs on Chinese products are only protecting dying industries in the United States which are not competitive. Instead, US will lose jobs on its competitive industries like agriculture or auto parts because Chinese can easily buy them elsewhere. Moreover, it will be difficult for US to find a fast replacement of Chinese products without driving consumer prices higher. This event connected with high unemployment rate would lead to a possible double dip recession in the United States. There is also another danger by the corner. China is the largest holder of US Treasuries ($776bn or 23% of total) and foreign exchange reserves ($2,132bn or 25% of total). And it may be very risky for the reserve status of the US dollar if China decides to stop buying US Treasuries or to sell some of its US dollar holdings. Yet, with the weakening of the US dollar China may lose its price competitiveness. In sum, is not wise for both countries to start a trade war.

Anna Fedec, contact@tradingeconomics.com
9/16/2009 10:46:03 AM