Even in these days of hyper-polarised politics, it should not be too controversial to say that a full-on trade war between the world’s two largest economies has the potential to create a global slump.
Whether he anticipated such a firm response from the Chinese leadership or not, President Trump’s successive tariff increases have brought forth a fearsome response from Beijing – ramping up tariffs to the same extent that the Americans have.
Impetuous as ever, Donald Trump decided to issue China with an almost immediate deadline to withdraw their retaliation, or face another 50 per cent ad valorem import tax on Chinese goods entering the United States – bringing the total general tariff rate to 104 per cent. The Chinese response to this ultimatum was to “fight to the end”.
China is not Ukraine, President Xi is not Volodymyr Zelensky – and President Trump should not have tried to bully another industrial and military superpower in this manner.
As a nation, China remains deeply resentful of the “century of humiliation” it endured before Mao reunited the nation in 1949. Perhaps without realising, or caring about their sensibilities, Mr Trump’s demands carried painful echoes of forced Western economic treaties, colonialism, the Opium Wars, Japanese invasion and the dismemberment of the country. President Xi could not be expected to meekly back away on Washington’s orders.
Where this geopolitical game of chicken will end, no one can know – but the tariffs are escalating to absurd levels, ones that would effectively end trade between America and China, and so profoundly damage both that, at some point, a more constructive approach will emerge.
Already, the vibes emanating from the White House suggest that the president is open to “deals” with some countries that would lead to lower tariffs overall. A call with Prime Minister Ishiba of Japan will lead to “negotiations”, which is at least something to cling to. Hence the relative calm that has returned to financial markets.
Yet that may not last as the markets edge towards bear territory, and the risks remain.
The UK prime minister has told MPs that this is not some passing episode, and the “world order” has changed. Sir Keir is right in saying that. In defence, in security, and now in trade and economics, the old assumptions about the Western alliance have been shaken, if not broken. The reverberations of the Trump revolution are far from over. Indeed, there can hardly be a human being on the planet that will not be impacted by the turmoil.
In Britain, the government has rightly rejected engaging in a trade war with America, for the excellent reasons that it would do the struggling economy no good and be futile. Nonetheless, trade and exports will be hit, supply chains disrupted, and the savings of many will be devalued.
The experts agree that a combination of the 10 per cent tariffs being imposed on the UK and the wider global trade recession will halve the UK’s already feeble growth prospects, and that, in turn, will have difficult consequences for public services and living standards. This is the background to the meeting that Rachel Reeves, the chancellor, says she will have shortly with her American counterpart, Scott Bessent.
In principle, a US-UK trade deal would be mutually beneficial and, at least partially, undo Mr Trump’s reckless tariff initiatives. In practice, Ms Reeves and her colleagues may find concessions on NHS drug prices, the digital services legislation, farming standards, higher drugs costs for the NHS and free speech politically unacceptable. Such a trade deal would create winners and losers – but would it be better than the new tariff regime applied to British exports?
In the meantime, the government looks set to try to shield some sectors, as with the relaxation of the electric vehicle mandate and the prospective nationalisation of the steel industry, but the task of supporting economic activity through a global slump will be too much for the Treasury and the Bank of England. About the best that can be hoped for is an accelerated easing in interest rates and some cheaper consumer goods from China, Vietnam and other mass manufacturing centres landing in British markets, diverted from America (but with the concomitant risk of industrial “dumping”).
But cheaper iPhones will be small recompense for the dismal effects on investment, jobs and living standards for years to come.
