China just made good on its threat to hit back at President Trump's punitive tariffs on imported Chinese steel and aluminum.
Why no one wins in a trade war
On Monday, China started imposing additional tariffs of up to 25% on 128 American goods to “compensate” for the impact of the US measures, the Chinese Ministry of Commerce said.
The Chinese response, affecting mostly fruits, was a “moderate” retaliation, but could be the start of a trade war that economists say would hurt everyone.
In a trade war, two or more countries raise tariffs and impose barriers on trade with one another, often in an attempt to protect their own economies.
Obviously, Trump doesn’t think that trade wars are detrimental to all. In a tweet early last month, he said that “trade wars are good, and easy to win.”
Here's why economists say otherwise.
Prices go up
When goods imported from China become more expensive because of tariffs, US companies and consumers pay more.
On March 8, Trump ordered stiff tariffs on imported steel and aluminum, by 25% and 10% respectively.
These are the metals used to make cars and many appliances, and a higher import price will be felt at every point in the global supply chain, from factories to car showrooms.
Even US businesses at home are fearing its effects.
The National Retail Federation, a trade group representing retailers, called Trump’s tariffs "a tax on American families."
“Americans ultimately foot the bill in the form of higher prices for everything from canned goods to electronics and automobiles,” it said last month before the tariffs were proposed.
Similarly, China’s consumers will have to pay more for scores of American products, as on Monday Beijing started imposing higher tariffs on US fruits, nuts, wine and pork.
That means wine drinkers in China will soon have to pay more for their favorite Californian reds.
Businesses lose sales
Of course, diehard disciples of Napa Valley aside, few people will find California wine irreplaceable.
Buyers can turn, say, to French wine, cauing US winemakers to lose business.
It's a simple example, but it's not at all hypothetical.
Just days before China announced its retaliatory tariffs on US wine, a group representing California's wine industry said it was hoping for growth in exports to China.
Now, the tariffs are likely to deter some wine buyers.
Conversely, in the US, Trump's tariffs on Chinese steel and aluminum make them less competitive to other alternatives.
And that's the hallmark of a trade war: tit-for-tat measures which hurt exporters in all countries involved.
The global economy takes a hit
Economists who champion international trade see it as an engine for growth and competitiveness.
Christine Lagarde, the head of the International Monetary Fund, warned last month before Trump ordered the steel and aluminum tariffs that “no one wins” in a trade war.
The IMF would know something about it. It was founded to promote international trade to avoid repeating the disastrous, protectionist trade policies that extended the Great Depression, the worst economic downturn in US history.
The textbook argument for global trade is that market forces boost efficiency and the wealth of the world economy, whereas artificially inflated prices do not.
The economist Paul Krugman exemplified this point of view in a New York Times column last month:
“To take a not at all random example, it makes a lot of sense to produce aluminum, a process that uses vast amounts of electricity, in countries like Canada, which have abundant hydropower. So the U.S. gains from importing Canadian aluminum, whether or not we run a trade deficit with Canada.”
To be fair, even before US and China imposed tariffs on each other's imports, trade with China wasn't at all unfettered.
That was why the trade spat supposedly began in the first place: the US cried foul at China's economic practices, calling many of them “anathema to a free market global trading system.”
China doesn’t admit to unfair trade practices, but Premier Li Keqiang has sided with the economists on this one: a trade war does nobody any good.