The trade war that erupted Friday between the U.S. and China carries a major risk of escalation that could weaken investment, depress spending, unsettle financial markets and slow the global economy. The opening shots were fired just after midnight, when the Trump administration imposed a 25 percent tariff on $34 billion of imports from China, and Beijing promptly retaliated with duties on an equal amount of American products. It accused the U.S. of igniting "the biggest trade war in economic history."
Because of this first round of hostilities, American businesses and, ultimately, consumers could end up paying more for such Chinese-made products as construction equipment and other machinery. And American suppliers of soybeans, pork and whiskey could lose their competitive edge in China. These initial tariffs are unlikely to inflict serious harm to the world's two biggest economies. Gregory Daco, head of U.S. economics at Oxford Economics, has calculated that they would pare growth in both countries by no more than 0.2 percent through 2020. But the conflict could soon escalate. President Donald Trump, who has boasted that winning a trade war is easy , has said he is prepared to impose tariffs on up to $550 billion in Chinese imports -a figure that exceeds the $506 billion in goods that China shipped to the U.S. last year.
Escalating tariffs are likely to slow business investment as companies wait to see whether the administration can reach a truce with Beijing. Some employers will probably put hiring on hold until the picture becomes clearer. The damage could risk undoing some of the economic benefits of last year's tax cuts.
"Trade disruption is the greatest threat to global growth," said Dec Mullarkey, managing director of investment strategies at Sun Life Investment Management. "The direct effects will be amplified as business confidence drops and investment decisions are delayed. Markets are still hoping that the key players return to the negotiation table."
The root of the conflict is the Trump administration's assertion that China has long used predatory tactics in a drive to supplant America's technological supremacy. Those tactics include cyber-theft as well as forcing companies to hand over technology in exchange for access to China's market. Trump's tariffs are meant to press Beijing to change its ways. The rift with China is the most consequential trade conflict the administration has provoked. But it's hardly the only one.
Trump is also sparring with the European Union over his threat to tax auto imports and with Canada and Mexico over his push to rewrite the North American trade pact. And he has subjected most of America's trading partners to tariffs on steel and aluminum. Many caught in the initial line of fire -U.S. farmers absorbing tariffs on their exports to China, for instance -are fearful. The price of soybeans has plunged 13 percent over the past month on fears that Chinese tariffs will cut off American farmers from China, which buys about 60 percent of their soybean exports. Christine LoCascio, an executive at the Distilled Spirits Council, said she fears China's tariffs on U.S. whiskey will "put the brakes on an American success story" of rising exports of U.S. spirits. Even before the first shots, the prospect of a trade war was worrying investors. The Dow Jones industrial average has shed hundreds of points since June 11.
China's currency, the yuan, has dropped 3.5 percent against the dollar over the past month, giving Chinese companies a price edge over their U.S. competition. The drop might reflect a deliberate devaluation by Beijing to signal its "displeasure over the state of trade negotiations," according to a report from the Institute of International Finance, a banking trade group.
"Tariffs will bring retaliation and possibly more tariffs," said Jay Timmons, president of the National Association of Manufacturers. "No one wins in a trade war."