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Why China Won’t Yield to Trump

China may give Donald Trump some face-saving way out from the trade war he has started, but it won't offer any substantive concessions. In other words, Trump's tariffs will do nothing to improve America’s external balance, output, employment, or real wages.

BEIJING – Last month, US President Donald Trump enacted steel and aluminum tariffs aimed squarely at China. On April 2, China retaliated with tariffs on 128 American products. Trump then announced 25% tariffs on another 1,300 Chinese products, representing some $50 billion of exports. In response, China threatened 25% tariffs on 106 US exports (including soybeans, cars, and airplanes), to go into effect whenever the US tariffs do.

Yes, if these measures go into effect, it will amount to a trade war – one that the United States is not likely to win.

While economists generally argue that everybody loses a trade war, some defend Trump’s actions as a shrewd negotiating tactic to impel China to adjust its trade policies, such as the requirement that foreign companies share their intellectual property (IP) to gain access to the Chinese market. Yet Trump does not understand the basics of such a negotiation: he thinks that a country with a trade deficit necessarily has the stronger negotiating position. In reality, the surplus country is often in the stronger position, because it has accumulated financial claims against its “opponent.”

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