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A US-China trade war upends long-standing practices

Washington

THE escalating trade war between the United States and China poses crucial, though unanswerable, questions: Is this the beginning of the end of the post-World War II international trading system or will the present arrangements survive, as they have for 70 years?

Almost certainly, historians will judge favourably the post-war expansion of trade (it has never been completely "free" but has been liberalised substantially by removing many tariffs and quotas). It helped lift hundreds of millions of people from abject poverty and cemented the Cold War alliance of democratic societies against communism.

However, two problems now cloud its future.

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First, global economic growth has slowed considerably, while inequality has increased. International trade and investment - also known as "globalisation" - is now blamed (often unfairly) for these setbacks.

Second, China has burst onto the global economy, rising from a backward country four decades ago to the world's second-largest economy. But its ascendancy, aside from challenging the United States (still No 1), has been controversial, because China practises mercantilism: government policies intended to give its companies an advantage in global markets.

US President Donald Trump portrays these policies - subsidies, trade preferences and the illicit acquisition of foreign technologies - as monstrously unfair to US workers and firms. Unless China overhauls its economy to make competition more even-handed, he vows to do the job himself by imposing steep tariffs on Chinese exports to the United States (in effect: taxes on China's US-bound exports).

That's where we are now. Trade negotiations between the two countries have broken down, and Mr Trump has announced 25 per cent tariffs on a long list of Chinese exports, from soyabeans to semiconductors to plastics. When fully phased in, the affected exports would total about US$50 billion. The Chinese said they would retaliate with similar tariffs on the same amount of US exports. Mr Trump responded by asking the US trade representative to prepare an additional list of US$200 billion of Chinese exports to be hit with 10 per cent tariffs. If China retaliated, he threatened to add another US$200 billion of Chinese exports.

Nothing like this has happened since World War II. If this isn't a "trade war", what is it?

Whether it portends an end to the post-war trading system is unclear. Many economists are sceptical. They also doubt the trade war will plunge the US economy into recession. The direct effect of the tariffs - which will raise prices, inspire retaliation and dampen some production - is "tiny", says Nariman Behravesh, chief economist for IHS Markit, a consulting firm.

Do some simple arithmetic, he says. A 25 per cent tariff on US$50 billion of Chinese exports totals US$12.5 billion; another 10 per cent on US$200 billion of exports is US$20 billion. Together, that's US$32.5 billion, not much in a US$20 trillion US economy.

REAL DILEMMA

Economist Mark Zandi of Moody's Analytics agrees but warns that imposing tariffs on most Chinese exports (around US$500 billion in 2017) could cause a recession. So could some of Mr Trump's other trade proposals. These include a 25 per cent tariff on car imports and a repudiation of the North American Free Trade Agreement with Mexico and Canada. The car tariffs alone could cost as many as 550,000 jobs, he says.

There is a real dilemma: China's mercantilist policies are bad, but so are Mr Trump's proposed remedies. The view that the present trade war won't become more destructive assumes that China and the United States will find a middle ground that allows both to declare victory. But this is hardly guaranteed. "Even though it's an authoritarian country, public opinion matters," says economist David Dollar of the Brookings Institution. China's leaders can't be seen capitulating to Mr Trump. Mr Trump probably feels the same way towards China.

The defining characteristics of the post-war trading system have been reductions in trade barriers and the adoption of jointly agreed upon rules - now enforced through the World Trade Organization (WTO) - about what's fair trade and what isn't. The United States played the leading role in this global project, though there has long been frustration with the rules' complexity and their slow-motion operation.

"The United States seems to be giving up on the WTO rules, which we helped create. Other countries may do the same," says economist Douglas Irwin of Dartmouth College and author of Clashing Over Commerce: A History of US Trade Policy.

This would signal an unravelling of the post-war trading system and its replacement by a hodgepodge of bilateral and regional trading agreements with consequences that no one can predict. The history of warfare is a long string of miscalculations by combatants on all sides. The same may also be true of trade wars. WP