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Tariffed: who are the losers in Trump’s trade war?

Trump’s tariffs on Chinese imports are stoking market volatility, but there are also longer-term implications for economic growth in the US and beyond.

8 minute read


On September 17, Donald Trump took to Twitter to threaten higher tariffs on the US’s trade partners: “If countries will not make deals with us, they will be Tariffed!” True to his bombastic word, the US president announced further levies on Chinese imports shortly afterwards, marking an escalation in his trade war with the Asian superpower.

Since he took office, Trump has renegotiated trade deals and threatened to pull the US out of the World Trade Organisation. But the tariffs on China are the clearest evidence yet of his protectionist tendencies. Trump slapped a 10 per cent tax on an additional $200 billion of Chinese imports, threatening to increase the rate to 25 per cent next year if no deal is reached to ease the trade tensions.

Explaining the move, the president cited China’s insistence on ‘knowledge sharing’ with foreign firms in exchange for market access. But economists argue Trump’s methods will prove counterproductive. Unlike his previous levies on steel and aluminium, the latest tariffs target a wider range of products and could lead to higher prices for the American consumer. Neither will tariffs banish Trump’s true bugbear: the US trade deficit.

Art of the deal

Jeffrey A. Frankel, a professor of economics at Harvard University, served at the Council of Economic Advisers (CEA) during both the Reagan and Clinton administrations. He says Trump’s stated objective to eliminate America’s “unfair” trade deficit through a raft of new bilateral deals flies in the face of economic logic.

“Trump’s tariffs will not improve US bilateral trade balances, because the sum of those balances has to add up to the overall trade deficit – and this is ultimately determined by the difference between national saving and investment. National saving is falling due to Trump’s tax cuts and fiscal stimulus, and that widens the current account deficit. The logical result is a worse trade deficit – precisely what Trump doesn’t want.”

Trump’s focus on the headline trade deficit figure also fails to account for some economic nuances.

Trump’s focus on the headline trade deficit figure also fails to account for some economic nuances.

While it is true that the bilateral trade deficit stood at $375 billion last year, US companies are far more active in China than vice versa. US multinational subsidiaries made $222 billion in sales to China’s increasingly-affluent consumers in 2015, according to the most recent official figures (data for Chinese sales in the US is not available, but they are likely to be far smaller).1

The trade imbalance between the two countries looks even less clear-cut when the global nature of modern supply chains is considered. Trump has called for Apple to repatriate the iPhone build from Chinese factories as part of his bid to revive US manufacturing. But while iPhone imports add billions to the trade deficit each year, recent estimates show China only makes about $8 per unit.2 The bulk of profits accrue either to Apple itself or to other countries that specialise in the more value-added components of the product. If the iPhone were entirely made in the US, its price would probably rise by at least $100.3

After the latest round of tariffs was imposed, US secretary of commerce Wilbur Ross claimed China is “out of bullets” to fight a trade war.4 But Beijing has the power to impose restrictions on American companies operating in China, or target retaliatory levies on US industries that are important to the president’s voter base. This may already be happening: Trump has argued China’s latest round of tit-for-tat tariffs is designed to influence the mid-term elections in November.5

Markets and growth

Trump has now pushed the US to the brink of an all-out trade war with China, according to Frankel. He sees three possible outcomes. First, Trump wins some small but face-saving concessions from Beijing, enabling him to claim victory and de-escalate the dispute, as with the relatively minor tweaks made to the North American Free Trade Agreement (NAFTA) during talks with Mexico in September.

Second, Trump enacts swingeing tariffs that wreak short-lived economic havoc, but which are negotiated back down by a more emollient successor. The third scenario would be the most damaging over the longer-term: the prospect that the dispute sunders the global trading system into oppositional blocs reminiscent of the dark days of the protectionist 1930s.

The implications of the third scenario for global growth and financial markets could be severe. Equity markets in the euro zone and Japan – regions in which trade accounts for around one third of GDP growth – would be hard hit. But the biggest losers would likely be emerging markets. On September 17, the Shanghai Composite Index closed at its lowest level since November 2014, while net returns on the MSCI Emerging Markets Index fell by almost 12 per cent over the year to September 18.6

Rising US interest rates and a strong dollar have played a role in this underperformance, as have idiosyncratic difficulties in Turkey and Argentina. But trade tensions are exacerbating emerging market volatility, according to Alistair Way, head of emerging market equities at Aviva Investors. Over the longer term, protectionism risks reversing the gains made by emerging economies over recent decades, although the damage will not be restricted to these markets.

Trump may be reckoning the US is rich and powerful enough to capitalise on the economic chaos his trade policy threatens to unleash. It is a risky gamble.


“Rising trade has a key driver of growth across emerging economies and a key factor in the convergence between emerging and developed markets over the last few decades, so greater protectionism is a big risk. But given how interconnected the global trading system is, this isn’t just an issue for emerging markets. Some of the more extreme threats, such as relocating iPhone production from China to the US, would bring all sorts of consequences for supply chains and the cost of goods for consumers and companies across the world,” says Way.

Trump may be reckoning the US is rich and powerful enough to capitalise on the economic chaos his trade policy threatens to unleash. It is a risky gamble.

Debt and the dollar

In a recent research note, Deutsche Bank analysts warned Trump’s attempt to achieve lower trade deficits at the same time as increasing fiscal stimulus poses “the most severe challenge to the international monetary order since the collapse of Bretton Woods in the 1970s”.7

The problem is that the US requires foreign buyers for its debt even as Trump’s trade disputes threaten to erode the very Asian current account surpluses that fed appetite for Treasuries over the last two decades. The logical outcome: either higher government bond yields or – more likely – a weaker dollar, according to Deutsche analysts. The associated rise in borrowing costs might even wipe out the US economy’s ability to generate an income surplus on a growing stock of net foreign debt, the so-called ‘exorbitant privilege’ that had traditionally underpinned the dollar’s status as the world’s reserve currency. Such a reversal would be highly symbolic.

“The dollar’s status as the world’s reserve currency looks secure for now given the lack of alternatives, and China and other major economies are likely to maintain large holdings of Treasuries,” says Michael Grady, senior economist and macro strategist at Aviva Investors. “But a moderate rise in Treasury yields – perhaps by 40 or 50 basis points – or a weakening of the dollar are possible, due to rising debt and flaring geopolitical tensions on Trump’s watch.”

Trade and trust

Experts on trade suggest Trump’s bonfire of the treaties will prove more directly counterproductive to his interests. Anne Krueger, senior research professor of international economics at Johns Hopkins University, has served as chief economist of the World Bank and acting managing director of the IMF. She says increased tariffs will cause short-term pain in the heavy industries Trump has made it his mission to protect, risking a political backlash at home ahead of the midterm elections.

“A lot of metal-using industries are going to be hit by the tariffs on steel and aluminium. There are reports of US plants laying off workers or shutting down because they can’t get the steel they need or because they can’t compete with the Europeans or the Japanese who are paying lower prices. So, it’s already beginning to hurt at the margins, even if it is not fully showing up in the data yet.”

Krueger also worries about lasting effects on the reputation of the US among other countries. “The fact that there are treaties and agreements we have signed, and then reneged on, will make us less trustworthy in the future. I don’t understand why anyone would go into a trade agreement trusting the US after it renegotiated the free trade deal with South Korea, and then imposed further tariffs on top of that. It seems to me the damage being done in terms of trust is incredibly important.”

Research shows that in the wake of China’s accession to the WTO in 2001, it was not simply lower tariffs that promoted trade and economic growth, but a reduction in uncertainty about the future direction of tariff rates.8 Trump’s protectionist policies are causing uncertainty to rise once more, as countries worry about the longer-term implications of trade wars. Whoever is next in line to be ‘tariffed’, the US won’t be immune from the damage.

Read more about the long-term consequences of the Trump presidency in the next issue of AIQ.


  1. ‘Trump forgets that US companies in China are doing a roaring trade,’ Financial Times, June 2018
  2. ‘We estimate China only makes $8.46 from an iPhone,’ The Conversation, July 2018
  3. ‘How much would the iPhone cost if it were made in America?,’ Vox, September 2018
  4. ‘Commerce Secretary Wilbur Ross: China is 'out of bullets' to retaliate against Trump's new tariffs,’ CNBC, September 2018
  5. In a Twitter post on September 18, Trump wrote: “China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me.”
  6. MSCI.com
  7. ‘America First; dollar last,’ Deutsche Bank Markets Research, April 2018
  8. See ‘Upsetting the Apple cart,’ The Economist, September 2018


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