The Trump Administration’s Dead End on Trade
The Trump administration has initiated a trade dispute with China with the stated goal of reducing America's bilateral deficit. But given the strengthening dollar and expansionary US fiscal policies, the US trade balance will almost certainly worsen for the foreseeable future.
LONDON – There is every reason to believe that the United States’ trade dispute with China will get worse before it gets better, and that the US trade deficit will widen further rather than shrinking. In fact, the economic conditions – were they to materialize – that would allow President Donald Trump’s administration to claim victory in the dispute would ultimately undermine its economic policy credibility.
Now that they are on the receiving end of US tariffs, Chinese policymakers have three options. First, they could capitulate, by scaling back many of the “discriminatory practices” identified in the US Trade Representative’s March 2018 report on technology transfers and intellectual property. So far, there is no indication that China is considering this option.
Second, China could escalate the dispute. It could set its own tariffs higher than those of the US, apply them to a larger range (and greater dollar value) of US exports, or offset the impact of US tariffs on Chinese exporters by allowing the renminbi to depreciate against the dollar. Alternatively, policymakers could look beyond trade in goods to consider capital flows and related businesses associated with US firms, effectively allowing the authorities to impede US financial and nonfinancial firms’ Chinese operations. As with the first option, this one seems unlikely, at least at this stage of the dispute.