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Why restraint, not retaliation, is a fitting response to Trump’s trade war

2 0 1
11.07.2018

Defying common sense as well as business and financial elites, US President Donald Trump seems to relish the prospect of a trade war. On July 6, his trade restrictions – 25 per cent tariffs on about US$34 billion of Chinese imports – took effect. They were promptly met by retaliatory tariffs on an equivalent volume of US exports to the Chinese market.

Trump has said he will impose tariffs on another US$200 billion worth of Chinese exports, as well as tariffs on automobile imports from Europe. And it remains possible that he will withdraw the US from the North American Free Trade Agreement if Mexico and Canada do not agree to amend it to his liking.

Trump’s knee-jerk protectionism does little to help the working class that helped elect him. Disaffected congressional Republicans and unhappy corporations that have supported him on other matters may yet rein him in. But those who, like me, thought Trump’s bark would be worse than his bite on trade are having second thoughts about where all this might lead.

But before we get too carried away with doomsday scenarios on trade, we need to consider other countries’ incentives as well. Trump may well want a trade war, but he cannot have it on his own. A trade war requires other economies to retaliate and escalate. And there are compelling reasons why they should not do so.

These are the key Chinese sectors that will bear the brunt of trade war

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In the usual scenario, trade retaliation occurs because countries have economic reasons to depart from low tariffs. The canonical experience unfolded during the early 1930s, when countries were caught in the Great Depression with high unemployment and inadequate policy remedies. Counter-cyclical fiscal policy was not yet in vogue – John Maynard Keynes’ General Theory was........

© South China Morning Post