DEBATE: Should we be worried about the escalation of a US-China trade war?

U.S. President Trump Visits China
Tariffs are a tax on people who buy things from foreigners (Source: Getty)

Should we be worried about the escalation of a US-China trade war?

Matt Kilcoyne, head of communications at the Adam Smith Institute, says YES.

So the Donald has decided to play Top Trumps with tariffs. He should remember: trade wars are fought not against an enemy state, but waged against a country’s own citizens.

Tariffs are a tax on people who buy things from foreigners. When governments tax their own, prices will be higher than if they didn’t.

Higher prices from overseas also increase the power of domestic companies over your own citizens. Trump’s tariffs of 20 per cent on steel will let producers at home raise their prices as the level of competition falls.

Drop the tariffs and producers are usually better off too. They’re consumers as well as producers, and tariffs make the inputs of their products more expensive.

I have a trade deficit with Tesco. I’ll almost certainly never have a trade surplus with them, but it doesn’t bother me. To put it simply, bilateral trade deficits don't matter. But until Trump understands this, we will be stuck with a wasteful trade war.

Read more: Hold the tariffs, Trump! Trade deficits are not a sign of weakness

Neil Wilson, senior market analyst at ETX Capital, says NO.

This isn’t the beginning of a trade war. It is posturing, with all the hallmarks of a classic Donald Trump negotiation, in which he floats an extreme position only to back down from the worst-case scenario in return for some big concessions.

White House economic adviser Larry Kudlow has stressed that US tariffs on Chinese goods are only proposals, and Beijing is still only offering up a tentative menu of tariffs in response. Both sides have made it clear that they would prefer to negotiate. A trade war remains a tail risk and they might back themselves into a corner where all-out war is the only option, but we’re a long way from that.

People and the markets have very short memories. Trump may not be in quite the same mould, but George W Bush enacted steel tariffs that did not escalate to a trade war, while free-trader Bill Clinton slapped tariffs on steel imports from key ally Japan for dumping.

True, it is different this time: this is not about penalties – this is negotiation, Trump style.

Read more: Despite what Trump says, trade deficits don’t actually have to be a problem

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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