The President of the United States, Donald Trump, announced during his campaign indicating that there will be a dramatic change in the whole set of economic and foreign policies. China is obviously his main target. He claimed that China has been manipulating their currency so the imports from China are too cheap and cause the huge amount of the U.S. trade deficit. He has promised to impose a 45% tariff on Chinese products. This protectionist trade policy can cause not only haywire global trade but also shake the U.S.-China relationship to collapse.
One optimistic view is from Professor Keyu Jin, at the London School of Economics. She noted that Trump is unlikely to change much in terms of the U.S. economic policy since he should realize that imposing a very high tariff will hurt the U.S. economy instead of benefiting. She pointed out that Trump might make some changes in the foreign policy, but those changes may be more likely to please China than to make it worse. According to Professor Jin, no radical change should be expected. China’s leader need to focus on a cooperative bilateral relationship. (http://prosyn.org/D98xwAs)
But what if Trump keeps his promises and does all of the trade protectionist policies that he announced? That would lead to a global recession. William Buiter, Chief Economist at Citi, wrote to his clients that this might spark a global trade war, “which could easily trigger a global recession” (Business Insider, 2016). Before signing any policies, the U.S. president should also keep in mind that China is not in the inferior position. They are the single largest non-U.S. holder of Treasury debt.
I agree that the harsh protectionism will lead to a global recession. First of all, the argument that Chinese products are cheaper because China manipulated their currency might not be valid anymore. China did manipulate their currency lately, but mainly for defending yuan from falling sharply, not for making their exports cheaper. Secondly, if a 45% tariff rate is imposed on products from China, China will surely retaliate by imposing tariffs to American products. The practice of imposing tariffs to every product is also against the World Trade Organization’s rules. The U.S. is among the strongest voice that asked the developing countries to cut down their trade barriers in the past. China just entered the WTO in 2001 and was among those developing countries. If the U.S. ignored the the WTO’s rules, no one will care about following the rules anymore. All the WTO members will start raising their tariffs and non-tariff barriers again. Global trade will be drastically dropped. This phenomenon will kill millions of jobs around the world, including in the U.S since the export sectors of every country will contract. The middle-class people, who have jobs in the factories and have just started to climb up to the upper-middle class, will fall miserably and suffer the most. When they lose their jobs, they will cut down the spending. It will cause a domino effect to every other part of the economy.
The direct effect of trade protectionism is falling on Americans (or residents of the U.S.). Products of China have been part of the poor and the middle-income for more than two decades. American consumers enjoy buying cheaper products from China, and that is not their faults. Consumers should have the right to buy the cheapest goods under their budget constrain. If the tariff is imposed, the importers will pass that burden of higher price to consumers. A lot of importers might stop importing from China, but they won’t start to produce by themselves. They just have to change the suppliers from China to other countries like India, Bangladesh, Vietnam, etc.
The cost of living for Americans will be a lot higher while there is absolutely zero sign that Trump will support to increase minimum wage. Protectionist policies won’t create many jobs, since the U.S. will be in the trade war with other countries and lose the existing export markets. Domestic demand will be doomed. Trump’s Protectionism will hurt Americans the most, especially the poor and the middle-class.