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Can a Trade War be Averted?

Because China has a higher export-to-GDP ratio than the US, its leaders are more concerned with defending the global trading system than with preserving any particular bilateral balance. By eschewing escalation in response to the Trump administration's widening tariffs on its exports, China avoids jeopardizing the system.

BERKELEY – Probably the question most frequently asked of international economists these days is: “Are we seeing the start of a trade war?” This is not a question that admits of a simple yes-or-no answer. In contrast to a shooting war, there’s no government declaration to mark the official outbreak of hostilities. Tariffs have been raised and lowered throughout history, for reasons both good and bad.

Even when the reasons are bad, moreover, tariff increases do not always provoke foreign retaliation. There was no retaliation, for example, when President Richard Nixon imposed a 10% across-the-board import surcharge in 1971, arguably in violation of both the General Agreement on Tariffs and Trade (the forerunner to the World Trade Organization) and United States law.

But there’s always the danger of events spiraling out of control. China has clearly indicated its intention of responding to US actions, raising the risk of escalation by an erratic US leader. President Donald Trump’s threat on April 5 to impose tariffs on an additional $100 billion of Chinese exports, provoked by China’s response to his own earlier action, points to just this threat of escalation.

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