The art of trade war

AS the world's largest economies stumble toward an all-out trade war, President Donald Trump is tweeting in all-caps, but carrying a small stick.

After White House chief economic adviser Gary Cohn announced on Tuesday he's resigning, the Trump administration is considering tariffs on a range of Chinese imports from shoes and clothing to consumer electronics, people familiar with the matter told Andrew Mayeda and Jennifer Jacobs of Bloomberg News. China "will take necessary measures" if its interests are harmed, Vice-Foreign Minister Zhang Yesui said on Sunday.

Which side has the divisions best-arrayed to bring victory in this conflict? One lesson from real warfare is that battles tend to be won and lost on the home front - and in that respect, the US is labouring under a significant handicap. Its major imports from China are overwhelmingly consumer goods, where the predictable effect of tariffs will be to increase costs to American citizens, as Gadfly's Tim Culpan points out. The largest categories are computers, phones, knitwear, other clothing, and toys.

It won't be easy for US retailers to replace these goods. In every one of the consumer sectors where Chinese exports to the US were worth more than US$5 billion in 2016, China accounted for more than one-third of US imports by value. Global supply chains can't source from rival regions fast enough to avoid a tax on shoppers' wallets, should further tariffs be imposed.

The ideal solution, from Mr Trump's perspective, would be for domestic production to come to the rescue - but that horse has long bolted. In clothing manufacturing, the US production-line workforce has shrunk by more than 90 per cent since 1990, and the electronics industry has lost almost 40 per cent of its jobs. With China itself seeing industries quitting for cheaper locations in South and South-east Asia and Africa, the chances of those jobs coming back to the US are slim. By contrast, China imports mainly intermediate products and parts from the US, led by soyabeans, aircraft, cars, integrated circuits and plastic. The cost of any retaliatory tariffs on those products will pass through a number of producers before any citizens feel it in their hip pockets - and dictatorships don't have to worry so much about popular backlash, anyway.

In the firing line

If Xi Jinping chooses to fight back, watch what happens to the semiconductor industry. A quarter of US chip exports go to China, but that constitutes just 3.8 percent of the People's Republic's total imports of integrated circuits. A relatively small shift in Chinese business patterns could deliver a devastating blow to one of America's most successful export trades. Soyabeans, too, could come in the firing line. China swallows up more than 60 per cent of America's exports of the legume. Putting levies on those imports will turn up the heat at a time when global soybean prices are at a two-year high, raising pressure on the processors and farmers who use soy for animal feed - but prices for pork, the most critical end-use sector in China, have been declining for 12 straight months, so they could afford to rise a little.

The smarter move for China might be to stand pat. Despite Mr Xi's boasts at Davos and elsewhere, the country's record on free trade is dismal, a potential handicap if matters degenerate into a wider trade war. The better policy would be to let Trump raise costs for American consumers with ill-advised tariffs; refuse to retaliate; then pose as the innocent victim.

Governments in Washington's sphere of influence, motivated by strategic investments in the likes of Deutsche Bank AG and Brazilian utility CPFL Energia SA and taken aback by Mr Trump's aggressive stance, may be persuaded to regard Beijing as the friendlier ally.

That would be the greater victory for a Chinese president without term limits and with a view to posterity: To subdue the enemy without fighting, as the Chinese philosopher Sun Tzu wrote, is the supreme art of war. BLOOMBERG

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