The notion of a potential trade war breaking out sometime in the near future is creating much speculation. A number of well known economists, including Nobel Prize winners Joseph Stiglitz and Paul Krugman are convinced President Trump’s aggressive protectionist tariffs, coupled with China’s retaliatory actions herald the beginning of a US-China trade war that will have drastic effects on the global economy. Other economists, and experts in the field are less convinced a trade war is upon us. They point to the Chinese retaliation measures as proof of this thesis. Beijing’s response has been cautious, and calculated. 128 US products with an import value of $3 billion have been targeted. The sum is a fraction of President Trump’s tariffs on $60 billion in Chinese imports. What the future will bring remains to be seen, but if the market reactions over the last two days are an indication, the anxiety out there may not diminish for some time.
It is open for debate whether or not China’s responses will be strictly economic in nature. Economists seem to believe this will be a tit-for-tat exchange of tariffs between the US and China. Beijing can decide to craft a geopolitical response as well. China’s actions in the North Korea situation have vacillated between helpful and hindering. The Trump administration had long sought Beijing’s assistance in defusing the high tensions in the region. To Washington’s chagrin, China has not exercised its substantial influence with Pyongyang in a beneficial manner. With economic tensions between the US and China rising, Beijing could use it as a justification to do even less with regards to the North Korean situation.
The South China Sea presents another arena where the PRC can project its displeasure with US actions. China has been extending its military reach there, and has expressed increasing annoyance with US attempts to project power in the disputed sea. Today a US Navy destroyer cruised within 12 nautical miles of Mischief Reef, once a fishing atoll, now the site of a Chinese military installation. Now, with the tariffs becoming a heated matter, Beijing can respond more aggressively to US warship patrols, possibly leading to a diplomatic compromise or a concession of sorts down the line.
Saving face is important to China. If the tariff tug-of-war continues, and even escalates, the South China Sea, and North Korean issue provide two areas where Beijing can challenge Washington with a measured approach without plunging the world into a major trade war.