Donald Trump and Xi Jinping (R) (Photo: AP)
Donald Trump and Xi Jinping (R) (Photo: AP)

Opinion | Mutually assured debilitation

Beijing has seemed reluctant to engage in a tariff war, but retaliated on Monday by putting up barriers to US goods valued at $60 billion

America invoked “national security" to fire its first trade salvo last year, imposing import tariffs on steel and aluminium. As its recent talks with China faltered, it slapped Chinese imports worth $200 billion with a 25% levy and may soon include another $325 billion worth—mainly consumer products. Beijing has seemed reluctant to engage in a tariff war, but retaliated on Monday by putting up barriers to US goods valued at $60 billion. It had earlier burdened American farm exporters in a few electorally-sensitive “swing states" in America, like Iowa, to signal it could play hardball with the US. The exact economic impact of these hostilities is hazy, but it’s clear that both sides will suffer as input and retail costs rise and supply chains are disrupted. Policymakers in Beijing and Washington are said to be preparing for dips in economic growth and possible inflationary effects by keeping fiscal and monetary stimulus plans ready.

Chances of this trade war being called off seem to be receding. According to reports, the ongoing round of talks stumbled on Beijing’s refusal to comply with a US demand for revised policies on competition, intellectual property and other matters in China. State capitalism, under which Beijing subsidizes much of its output, is not a practice it is likely to give up. These “Chinese characteristics" are partly what aided the country’s rise as an export powerhouse. US President Donald Trump, who prides himself in “the art of the deal", appears to think he can bully China into acting more like a regular free market. The Chinese leadership, in contrast, seems ready to bet on Trump’s exit from the White House after the 2020 elections. Uncertainty in the interim, though, is sure to slow investment decisions down.

Among the fallouts of this US-China trade war could be rethinks done by companies on their cross-border supply networks. In some cases, Chinese firms might need to move production out of China to stay price competitive in the US market. Rising wage bills there have already led some companies to spread their factories around southeast Asia. A renewed search for foreign locations might well draw some of them to India. This is an opportunity that the country must not miss. So far, the US has objected to re-routed Chinese exports, which try sneaking into America via ports in countries that don’t face tariff barriers. Relocated assembly lines should not bother anybody in Washington.