The trade war between the United States and China is entering a dangerous phase. The main force restraining it up to now was the fact that neither country could do much economic damage to the other by taking aggressive steps. But now they are both starting to use their military and diplomatic channels. In the process, they are increasing risks to global economic health.
The value of higher customs duties resulting from Trump’s tariffs has passed $100 billion, according to the Tax Foundation’s General Equilibrium model. That’s an enormous number, but it also understates the potential damage. As Shawn Donnan points out, tariffs hurt consumers and businesses, especially in countries whose economies depend heavily on exports. Moreover, they can raise domestic inflation and slow economic growth.
Many countries that run trade surpluses with the US want to hit back at Trump’s protectionism by raising their own tariff rates. But those measures are largely unproductive. They would hurt their own citizens and firms, and they would not deter Trump from pursuing his agenda.
Instead, they should work with the US to mitigate the effect of the tariffs. For example, they should change the rules that determine what country a product is from when setting tariffs. The current rules treat products as made in the country where they are assembled, ignoring their components. That allows China to exploit the system, by setting up factories in other countries that rely heavily on Chinese companies and components.