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November 15, 2019

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Who holds the power in potential U.S.-China trade war?

With trade negotiations between the U.S. and China now in high gear, President Trump has suggested he might delay the latest round of tariffs on Chinese goods, currently scheduled to take effect March 1. Paul Solman reports on the disadvantages China faces in these trade negotiations, what options the country may have to retaliate and why trade wars can be "very, very stupid" maneuvers.

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  • Judy Woodruff:

    With U.S.-China trade negotiations now in high gear, President Trump recently suggested that he might delay the latest round of tariffs on China, scheduled to take effect March 1.

    So, is the United States in a trade war with China, or not?

    Our economics correspondent, Paul Solman, explains, as part of our weekly series Making Sense, which airs every Thursday.

  • Donald Trump:

    I love tariffs, but I also love them to negotiate.

  • Paul Solman:

    In any negotiation, as the president's book "The Art of the Deal" stressed, the key question, who's got the power?

    America, trying to suggest it does, has trotted out a major economic weapon, tariffs imposed on Chinese products, taxes on goods coming into the country from China, that is.

    Tariffs make Chinese exports more expensive by raising their prices here, which protects American manufacturers from cheaper competition, punishes the Chinese and their economy.

    China responded to the Trump tariffs in kind. It retaliated with tariffs on American exports, targeting U.S. products from Trump strongholds, soybeans, for example.

  • Man:

    I have been in the news lately because I'm caught in the middle of a trade war involving the two powerful countries of China and the United States.

  • Paul Solman:

    The result, in both countries, higher costs for consumers and businesses which use imports, which is why most economists hate tariff wars. The total costs, they insist, far outweigh the total benefits, short term and long, or, as Chinese Internet billionaire Jack Ma put it:

  • Jack Ma:

    Trade war is the most stupid thing in this world.

  • Paul Solman:

    So, we impose tariffs, China does the same. But is it an even tit-for-tat?

    Yasheng Huang is a professor at the MIT Sloan School of management.

  • Yasheng Huang:

    China is a disadvantage for two reasons. One is that the total share of trade with Chinese GDP is much higher than it is for the United States.

    Secondly, Chinese economy is slowing down. And the Chinese exporting industry employs a massive number of people. So it's actually quite big on China, the Chinese economy.

  • Paul Solman:

    So China is not going to win the tariff game. What other moves does it have? How about a bond dump? China holds more than a trillion dollars worth of U.S. debt. If it sells off U.S. bonds, the market would be flooded, and the U.S. would have to offer higher interest rates to lure investors to buy the new bonds we need to keep issuing to cover our federal debt, growing at a rate of about a million dollars every 30 seconds or so.

    And higher interest rates would cost us a pretty penny. But what would the effect be on China? A bond dump has a huge downside, says Huang:

  • Yasheng Huang:

    First of all, there will be other people who come in dying to get a piece of that. So that's not going to hurt the U.S.

    Secondly, the Chinese are going to get hurt, because whatever that they have remaining in their holding of the U.S. treasury is going to decrease in value.

  • Paul Solman:

    OK, another move: Squeeze U.S. firms now operating in China; 400-plus Wal-Marts do business there, more than 5,000 KFCs, more than 3,300 Starbucks. In fact, the U.S. trade deficit with China nearly vanishes once you include sales by American firms there.

    But how would pressuring U.S. firms or discouraging Chinese citizens from buying American affect the Chinese economy?

  • Yasheng Huang:

    If you go after foreign companies, you are going to increase unemployment in the country. The Chinese manufacturing industry is already experiencing problems. The private sector of the Chinese economy is experiencing problems.

    Doing an economic war to solve economic problems, this is a very, very stupid thing to do, because you're hurting yourself.

  • Paul Solman:

    And other retaliatory options pose the same risk. Pull back on the number of Chinese coming here for education? Devalue their currency? Hurts the Chinese more, right?

    OK, so, finally, it's been suggested that China might make sweetheart trade deals with other countries, including our allies, cozy up to the rest of the world economically, that is, leaving us out.

    But, again, not so fast, says Professor Huang. Look what happened after the recent U.S. crackdown on Chinese telecom company Huawei as a national security threat.

  • Yasheng Huang:

    Australia now is restricting Huawei. The latest news is Czech Republic is restricting Huawei. I don't think they want to take on the Trump administration and ally with China against the United States.

  • Paul Solman:

    And so, at last, we come to the bottom line: China seems at first to have quite an arsenal of economic options. But, in the end, they all seem more likely to backfire. We know it. They know it. No wonder they are willing to negotiate.

    I'm economics correspondent Paul Solman.

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