A Trade War With China Is a Very Bad Idea

Like land wars in Asia, trade wars with China are, generally speaking, unadvisable. But if, for whatever reason, you were insistent on the idea, you’d want to follow two rules.

First, find strength in numbers. China is an industrial juggernaut with more than 1 billion citizens. The U.S. is a finance-and-tech giant with fewer than 400 million people. To maximize success, the U.S. would have to assemble an Avengers team of trading partners across North America, Europe, and Asia. This would help keep our supply chains resilient if China cut off access to important products and materials, such as smartphone parts and processed lithium. What’s more, this so-called friend-shoring approach would squeeze China and hurt its ability to find alternative export markets, making retaliation less likely.

Second, clarity is king. Reindustrialization—that is, building more factories and plants to make essential machines for AI, computing, energy, and national security—is expensive. To maximize domestic financing and even foreign investment, we’d want investors to understand that the tax and tariff rates we announce one Tuesday will hold up until the Tuesday after that, and the Tuesday after that, and even hundreds of Tuesdays stretching into the future. Nobody is going to break ground on a factory in Iowa based on a policy that they expect to disappear next Wednesday.

I would not say the White House is “violating” these two rules. More precisely, I would say it is lighting the rules on fire and throwing the burning pages into the sky like confetti. Rather than deepen our relationships with overseas allies and Canada, we’ve announced high tariffs on the former and hinted at plans to subsume the latter. Rather than clearly laying out a tariff plan for the world, the administration has made a habit of announcing, then un-announcing, then re-announcing trade policies, like an older brother pretending to give candy to his sibling and yanking it away every five seconds.

[William J. Bernstein: No one wins a trade war]

As far as I can tell, this is the state of America’s trade war with China. In February, the Trump administration imposed a 10 percent tariff on Chinese goods. In March, the new tariff was raised to 20 percent. In April, it rose again to 145 percent. After a few days, the administration clarified that many electronics parts made in China would be exempt from these new tariffs. A few hours later, it flop-flipped on the flip-flop and declared that no, actually, new tariffs on electronics were on the way, except nobody could say what those numbers would be (or how many times they, too, would be revised).

This much seems clear: The Trump administration is executing its trade war with China with the same care and thoughtfulness with which it accidentally cut the Department of Energy’s Nuclear Security Administration, mistakenly offered buyouts to mission-critical workers in the Veterans Affairs office, and proposed sudden cuts to customer-service employees at the Social Security Administration. That is to say: with very little care and even less thoughtfulness.

But unlike firing and unfiring a VA worker, which can happen in a matter of hours, unwinding the trade war with China seems unlikely to be a day’s work. China has responded to escalating tariffs by restricting exports on several metals that are processed almost exclusively in China. It has suspended exports of crucial materials used by America’s top manufacturers of cars, airplanes, military equipment, and computers.

This is bad, bad news. “For certain product categories— smartphones, laptops, toys, lithium-ion batteries—it’s difficult to see how we quickly decouple from China, because China accounts for such a large share of our imports in those categories,” Jason Miller, a professor at Michigan State University and an expert on supply-chain management, told me.

I called Miller because I wanted to understand something very straightforward: For what products do we most depend on China, and for what products does China most depend on us?

[David Frum: How Trump lost his trade war]

According to Miller’s data, America’s deepest dependencies fit into two buckets. The first is typical family products. As a share of all U.S. imports, China accounts for 99 percent of child safety seats with detachable hard shells, 96 percent of pet toys, 95 percent of cooking appliances, 93 percent of children’s coloring books, 88 percent of microwave ovens, and more than 70 percent of toys for children under 12. Altogether, these imports amount to many billions of dollars of annual spending. “These items simply will not be available or they’re going to double in price,” Miller said.

The pain of a trade war over toys would not be trivial. The toy-and-hobby industry supports about 400,000 to 600,000 jobs in the U.S., mostly in warehousing and retail. But more than 80 percent of toys are still made in China, because of the country’s ability to combine a wide range of industrial functions—textile production, plastic molding, electronic manufacturing, and safety testing—all at scale. “I think what the American consumer will discover very quickly is how dependent we are on China for a lot of these items,” Miller said.

The second category of Chinese dominance is in metals and electronics, which are imperative for U.S. manufacturing and energy. China is the world leader in smartphone production. The country accounts for 50 percent or more of global processing for lithium, nickel, cobalt, and manganese, which are necessary for manufacturing batteries and other electronics. If China tightens its export controls, the U.S. could quickly see surging prices for batteries and grid storage, which would raise energy prices and significantly drive up the cost of electric vehicles.

America exports more than $100 billion worth of goods to China as well. This makes China somewhat dependent on America, but it also makes some U.S. industries dependent on China. As a share of global exports, China buys 89 percent of America’s grain sorghum and 52 percent of its soybeans. It buys more than 70 percent of our frozen-pig-organ exports and more than 20 percent of our frozen beef. It buys 51 percent of our optical instruments for inspecting and making computer chips and 32 percent of our semiconductor processors.

[Phillips Payson O’Brien: Trump’s trade war handed China a strategic advantage]

These figures reveal a dangerous asymmetry. Although the U.S. can’t substitute China’s toy and electronics manufacturing—there really isn’t another country that can produce so many toys or phones so efficiently—China would have an easier time shifting its supply chains to make up for a trade war with the U.S. “The Chinese can turn around and buy semiconductor-manufacturing equipment from Japan or Europe,” Miller said. China could import more of its soybeans from countries such as Brazil. Many American farmers would be “wiped out” if billions of dollars of agricultural exports were erased from their books, and would require another round of bailouts. The cost of a trade war isn’t just the export income you sacrifice; it’s the higher spending required to shield Americans from the fallout.

A U.S. trade war with China would be a highly uncertain and chaotic affair. It could scramble global alliances, reshape international supply chains, and damage not only the countries on either end of the war but also the entire planet’s economy. But the U.S. has special reason to fear the outcome. China is a choke point on the global manufacture of some of the world’s most important metals and machines—including the very metals and machines that the U.S. needs in order to rebuild its industrial base.