Mutually Assured Disruption: What a Trade War with China Would Mean for the Supply Chain

With President-Elect Donald Trump set to take the oath of office in less than a month, the supply chain industry is gearing up for potential disruption on a scale which had previously seemed unthinkable. Already, companies within the United States have had to adjust certain expectations as a result of Trump’s electoral victory in November. The Trans-Pacific Partnership is dead, and NAFTA is likely to be heavily renegotiated. But while the concerns over renegotiations between allies such as Mexico and Canada are prevalent, none of them carry the same weight as a potential trade war between the United States and its biggest trade partner, China. The result of such an event would be disastrous to both nations, especially in regards to the supply chain. With that in mind, the potential for it happening is very real, and those results deserve to be looked at closely.

Trade with China has been one of Donald Trump’s key talking points since he first began his campaign. Despite ample evidence to the contrary, he has made consistent claims that China has been manipulating their currency to gain leverage over the United States in trade deals. He vowed that if elected, he would impose stiff tariffs against them (as high as 45%) as punishment. Any hope that this was merely fiery campaign rhetoric was dashed soon after his victory, as the President-Elect took to Twitter to blast China with the same accusations. This came after he was criticized by their government for breaking with America’s long-standing ‘One China’ policy by taking a phone call with the President of Taiwan. The war of words between China and Trump has continued apace since then, with both sides threatening that should the other keep along the path they are now on, a trade war awaits.

Both sides also claim that they are better equipped to outlast the other in such a scenario, and indeed, each can make their own strong case.
Within the United States, supporters of Trump and harsh critics of China point out that as their biggest customer, the United States holds more leverage. America imports more goods from China than any other country in the world, with the two-way trade relationship recently valued at $627 billion. Should the United States move towards a protectionist economy and impose crippling tariffs against them, $420 billion of that money in China exports could be lost, as could close to 15 million jobs within their country.

Those in favor of Trump’s firm stance point out that such a result is not the goal. Trump has branded himself a master negotiator, and his supporters claim that the extremity of his threats regarding tariffs, coupled with the facts of Chinese labor and exports, put him in a great position to bring them to the table at a disadvantage, so as to cut much more reasonable deals favorable to American interests.

The problem is that China has no shortage of leverage against the United States when it comes to what’s at stake, and if they do not feel like ceding to the brash new American President, there is plenty they can do to level the playing field.

For example, China could retaliate against a raising of tariffs by allowing the renminbi to actually depreciate, as Trump has been claiming that they’ve been doing all along. The disparity between his claims and the reality would become immediately apparent, especially if they were to decrease it by over 4% as some have claimed they may. Such an action would make it impossible for U.S. businesses to compete within China.

This would drastically disrupt the current American supply chain. As things now stand, retailers enjoy a competitive advantage by being able to sell low-priced, Chinese-produced goods within their stores. Should they no longer be able to do that, they would have to find new markets for imports, or switch to goods manufactured within the United States (as Trump has championed all along, but which may not be feasible). Meanwhile, certain corporations that sell directly to the Chinese market, such as Starbucks and Boeing, would have to pull out completely.

Diversifying supply chains applies pressure to company profit margins, and thus companies try to avoid it, especially when they are already in a good position as they are now. Diversification would be more acceptable if those same business interests within the US thought that there would be a light at the end of the tunnel, but the case for China coming out on top in a potential trade war is just as strong as the opposite result.

The People’s Republic of China, being a one party state, is better situated to handle the fallout from a trade war than a capitalist democracy like the U.S. Privately owned companies would take the biggest hit. B ut since so many of China’s companies are publicly owned, the government would have an easier time cushioning them against damage. Compare that to the United States, where privately owned companies would brush up against all kinds of political resistance while trying to coordinate relief efforts. It is easy to see how, even though it has more jobs and money at stake, China is in a more advantageous position to play out the long game.

Potentially, should tensions continue to rise, the World Trade Organization (WTO), of which both nations are members, would step in and make rulings that would avert a trade war, or at least mitigate some of the drastic retaliations that each country would seek to impose upon the other during one. However, no one can count on this to be successful, since neither the Chinese, nor Donald Trump, have been shown to put much faith in abiding by the rulings of international bodies.

That each nation has as much to lose from a trade war as the other should bring both to a stalemate, in a fashion similar to the nuclear arms race of the Cold War. However, even during that period, when actual global extinction was a possibility, there were enough close calls and near-misses that such a result is not one that should be casually expected. That same situation also resulted in the complete downfall of one of the two sides in the collapse of the Soviet Union. Obviously, neither side wishes to find itself in that role, but neither should they wish it upon the other, since, despite the rhetoric, the trade deals in place currently are more mutually beneficial to each other’s econonmy than not. A trade war may produce a winner between the United States and China, but that winner would find its supply chain (and likely, its entire economy) so bloodied that such a victory would be purely pyrrhic.