Tariff Showdown. Click to keep reading…

Tariff Showdown. Click to keep reading…

As an economic strategy, tariffs can be an effective way to test your trading partner’s willingness to retaliate. Ethan Harris, head of global economics at Bank of America Merrill Lynch, says “The act of putting on tariffs teaches you something about the other side.” While it can result in concessions, it may also result in high tariff barriers that reduce commerce for each participant.

Here is how the trade war with China is shaking out:

June 15- President Trump announces duties for $50 billion worth of Chinese imports, and his intention of reducing the $376 Chinese trade deficit.

China immediately announced that it would respond with equal scale and equal intensity.

June 18- Trump asks his staff for a list of another $200 billion worth of Chinese goods that would be tariff targets.

China responded with “if the U.S. loses its sense and publishes such a list, China will have to take comprehensive quantitative and qualitative measures.”

Analysts fear that if neither nation blinks, there could be “major conflict”, remarked Michael Smart, managing director at Rock Creek Global Advisors LLC. “Things could get a lot worse if the trade war escalates and China fights back in an unconventional way,” says Hoa Hong, chief strategist with Bocom International Holdings Co. in Hong Kong. So far, neither nation is backing down. Merrill Lynch’s Harris said “China thinks they can win and wait it out longer. Trump thinks he can hit them harder. They’re not just beating each other up for the fun of it. They think they have an advantage, and they’re only slowly learning that maybe they don’t.”

The outcome of the trade war is largely dependent on how much economic damage each side is willing to tolerate.

Bloomberg Businessweek, June 25, 2018.

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