US-China trade war: who wins, who loses?

But does the theory work in practice? Abacus examined two weeks ago how difficult it will be for China to retaliate if Donald Trump follows through on all his tariff threats. China simply doesn't buy enough from the US to impose proportionate tariffs in response. And although Beijing can target the Chinese operations of US companies - Apple sells more iPhones in China than the US, GM more cars - these products are manufactured locally, so Beijing would be harming its own economy more than the US.

But that doesn't mean China will necessarily come off worse in a trade war. Many of the imports from China on which the US is proposing to charge tariffs are vital links in the supply chains of companies in the US itself.

For example, many US companies import intermediate goods from China as inputs for their own manufacturing processes. For example, US industrial heavyweight Cummins makes components in China that go into the engines it manufactures in the US. It will now have to pay a 25 per cent tariff to ship in its own components.

Similarly, many electronic products that the US imports from China contain components designed and manufactured in the US. By levying tariffs on imports from China, in lots of cases the US will effectively be imposing export tariffs on its own exporting industries.

That's bad enough. But the US economy today has little spare capacity, and inflation pressures are beginning to emerge. As a result, US companies will struggle to ramp up domestic production to substitute for imported products subject to the new tariffs.

That means exporters from China will not have to absorb the costs of the tariffs, but will be able to pass them on to their customers in the US. The result is likely to be higher inflation in the US, higher interest rates, and slower real economic growth.

This article originally appeared on the South China Morning Post (SCMP).

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