Reza Majidzadeh – Analyst in the political economy of development

Trade wars are not long lasting phenomena, but ending to them needs an encouraging platform of bilateral or multilateral agreements, something that is not provided in the short-term prospect.

Short-term and long-term effects on American industries

With respect to the USA’s $ 80 billion tariffs levied on imported washing machines, solar panels, aluminium, and steel products to the United States, some $ 60 of the cost is imposed on every American household per year. With a tax of $ 200 billion on Chinese imports, this cost will add up to $ 127 per US household, meaning a welfare loss for the American people.

In the long run, a Washington-Beijing confrontation can reduce China’s exports to the United States by 70%, and half of China’s exchangeable sectors, including textile industries, metals, computers and electronic equipment, can experience more than 90% of losses. If Beijing fights back at the same pace as Washington, US exports to China will plunge more than 50 percentages and US products in agriculture, minerals, petrochemicals, computers and electronic equipment will experience the largest drop in exports to China. If we include other countries in the US trade war, the decline in reciprocal exports will be adjusted to about 30 to 40% in the long run.

In the short term, the largest iron rod factory in the United States has adjusted 10% of its labour force, claiming that the adjustment took place due to a 25% tariff on steel. The US Pork production industry relies largely on China and Mexico, and investors in this business have faced an uncertain atmosphere. Also, Harley-Davidson, a US motor engine manufacturer, has announced that it will ship part of its product line out of the US. Likewise, the printing industry in the US has faced with increased expenses due to the imposition of tariffs on aluminium imports. The list does not end here, and even companies like Amazon, Toyota Motor North America Incorporation, and Alcoa, are trying to put an end to this commercial war since they are damaged by the new tariff system. In sum, the continuation of the current trade war can seriously undermine American businesses.

The arrangement of players and prospects of the trade warfare

Simply, if we take only China and the United States into account, there are two options for China to challenge the US imposition of tariffs: continuation of the status quo, or counteraction and reaction. The United States has also two options of free trade or trade warfare, which the US has chosen the latter for now.

China is now faced with decreasing demand for its products in the US, and if it chooses to counteract, it can transfix the Chinese Yuan against the US Dollar at a rate lower than the current rate.  With the weakening of Yuan, China will reduce the relative price of its products as to American products, or impose tariffs on US goods under the same counteracting option. The possible equilibrium for this game depends on the expected benefits and actual gains of each of the two countries during the course of the trade war. This means that in each period, they evaluate the difference between the expected benefit and the real profit, and choose their own periodic strategy accordingly. Therefore, a specific equilibrium cannot be determined for this game; on the one hand, it can lead to a series of tariffs in each round; or, by having a moderator, such as WTO, a core for cooperation will be formed; or to avoid further losses, one of the two countries comes forward for trade deals with the other.

Given the current pattern of China-US competition, on the one hand, and the continued upsurge in China’s economic strength, it is less probable that either of the two countries abandons the trade war. The importance of North Korean disarmament for the United States, shale oil and critical state of oil prices for China, are the variables that make the two-sided game more complicated.

However, if in an opposite pattern encompassing the United States, China, Mexico, Canada, and the European Union, we consider the overall US strategy of continuing the trade war and returning to free trade, and the strategies of the other four actors in the form of counteracting (tariff imposition) or taking the case to WTO, then the state of the US-led trade warfare and the counteraction of other actors will be one of the plausible balance of the game where the US will gain more than other countries, and in the case of the stability of international conditions, protraction of trade war will also be beneficial for Washington.

Nonetheless, should the opposing countries adopt a countermeasure or retaliatory strategy and Trump continue his trade war strategy, the return of the US to free trade with these countries in the current international context would not be a plausible equilibrium. Nor taking the case to the WTO will be an effective strategy for these countries to bring the US to free trade with them.

It seems that in the case of not employing political leverage on issues other than trade war or resorting to WTO, i.e., mechanisms such as provocation of North Korea by China, or the entry of other actors in the game, or the occurrence of such events as financial crises in the US, the probability of reversing US strategy (at least under the Trump presidency) is not easily conceivable.