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PH watching the clash of economic titans

May 14, 2019

While our eyes and ears were focused on the final day of our midterm election campaign, the long simmering tension between China and the United States over trade erupted into a new level of testiness.

Just last week a deal seemed close. Now the fear is of a full-blown commercial conflict.

Chinese and American trade negotiators were meeting in Washington to put the finishing touches on a new trade deal. But then, one minute after midnight in Washington on May 10, America carried out its threat to ratchet up tariffs on Chinese goods.

Two minutes later, China vowed to hit back. And so the world’s two biggest economies have staggered a couple of steps closer to an all-out trade war.

Such a prospect is still uncertain: talks are continuing and, until recently, had been making progress. But the risks of economic damage in both countries and of a rupture in their already strained relationship are rising.

The increased tariffs apply to a $200-billion tranche of imports from China, including a wide range of industrial inputs, such as car parts and circuit boards.

China has yet to detail its retaliation plans, though it is likely to apply proportionate tariffs: aiming at fewer goods (since it imports less from America than America does from it) but also raising duties to 25 percent.

A trade war, by textbook definition, is an economic conflict resulting from extreme protectionism, in which states raise or create tariffs or other trade barriers against each other, in response to trade barriers put up by the other party. Increased protection causes both nations’ output compositions to move toward autarky or self-sufficiency.

One US political science professor says President Donald Trump in his recent move tendered a Don Corleone offer to China on trade. That means it would be difficult for Beijing to counter, with Trump’s strategy involving harsh tariffs. Those he imposed overnight are punishing, not only to China but to American consumers. The longer they last, the more they will cost.

Serious trade sanctions are the US’ only hope of getting Beijing to roll back its offensive economic practices and open its markets to US exporters and investors.

Half measures and paper promises won’t do. The US wants a big deal, and it wants teeth in it to prevent cheating. To get it, Trump is willing to threaten a trade war. No one knows at this point if the strategy will work.

As in “The Godfather” movie, after Don Corleone makes his offer, the spectator is not given an idea on what will happen next.

Trump’s threats are credible. He began talking about loving tariffs even before he ran for office. China has established its own brand of protectionism — via tariffs and nontariff barriers, as well as in the way it deals with intellectual property rights to support its own industries.

The problems may be clear, but the solutions are not. No previous US administration has figured out how to deal with China’s discriminatory policies. These failed policies don’t leave Washington with many options. The US can either accept Chinese protectionism, as Europeans and previous US administrations have, or it can make them an offer they can’t refuse.

Trump is taking the Don Corleone option.

But why try this now? That is partly China’s fault, partly Trump’s choice. Beijing forced the issue when it reneged.

The timing is also Trump’s preference since he loses leverage as the 2020 election approaches. The Chinese are certain to hit back, and, when they do, they will target industry and agriculture in states Trump needs for reelection. Waiting doesn’t help him.

President Trump is forcing his Chinese counterpart to choose between two difficult alternatives. That is why he has thrown a severed horse head into the bed. Trump wants to force the issue and make it hard to resist the American offer.

The Philippines will watch and see what happens.

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