- A trade war has been brewing between the US and China.
- The White House has said the US would have an edge over China in a trade war.
- But economists think China has more room to negotiate.
The White House has asserted the US has the whip hand in a tariff fight between the world’s largest economies – with a senior economic adviser saying “it’s clear China has much more to lose” and the president himself declaring that “trade wars are easy to win” – but economists widely disagree.
The Trump administration vowed last week to slap a 25% tariff on $US50 billion worth of Chinese goods, prompting a tit-for-tat response from Beijing. Trump went on to threaten additional rounds of tariffs that could affect $US400 billion worth of products, an amount approaching the $US505 billion of goods that Chinese ships to the US.
And it’s unlikely major American consumer products could be shielded at that level of tariffs, according to a team of Deutsche Bank economists led by Brett Ryan, who wrote in a note that “US businesses and consumers will be the prisoners of the latest dilemma.”
Economists say targeting almost all Chinese imports would likely deliver a blow to the affordability of products near-and-dear to American consumers. Cell phones are the largest category of Chinese exports to the US by dollar value, followed by tablets and laptops. The two sectors combined represent more than $US80 billion worth of imports.
“It is likely that sourcing these products from other countries is not a near-term option for large US companies such as Apple,” Ryan said. “Therefore, these firms will then have to choose between absorbing the higher tariff costs via lower profit margins versus passing them onto consumers.”
Company-level effects would ripple through the economy, economists say, driving up prices and stalling growth.
Imports to the US currently account for about 13% of core personal consumption expenditures, a widely-used measure of inflation, according to analysis by the San Francisco Federal Reserve. Under just a portion of Trump’s proposed tariffs, those on $US250 billion worth of Chinese goods, Deutsche Bank estimates that core PCE would rise about 15 basis points.
And that could weigh on GDP, which Deutsche Bank sees slowing as much as 0.3% under the proposed tariffs. Former economic adviser Gary Cohn, who left the White House as Trump continued ramping up protectionist policies, recently told the Washington Post that a trade fight could wipe out any economic gains from the Republican tax law passed last year.
“If you end up with a tariff battle, you will end up with price inflation, and you could end up with consumer debt,” Cohn said. “Those are all historic ingredients for an economic slowdown.”
Scott Buchta, head of fixed income strategy at Brean Capital, said an extended period of uncertainty for US businesses could stall expected increases in capital spending from tax cuts out by about a year. And that would potentially increase near-term deficits and have an adverse impact on net Treasury supply and interest rate, he said.
Pressure from this year’s midterms could also put the US at a disadvantage with China in the event of a trade war. Backlash would be “substantial” if tariff effects hit consumer goods, according to Pantheon Macroeconomics chief economist Ian Sheperdson.
“China can play the longer game, waiting for pressure from U.S. corporate lobbying and, potentially, consumers, to force the U.S. to back down,” Sheperdson said.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.