sign uplog in
Want to go ad-free? Find out how, here.

Stephen Roach thinks trade wars are for losers and that Chinese retaliation against US trade sanctions will almost certainly cause America far more damage

Stephen Roach thinks trade wars are for losers and that Chinese retaliation against US trade sanctions will almost certainly cause America far more damage

By Stephen Roach*

Protectionist from the start, US President Donald Trump’s administration has now moved from rhetoric to action in its avowed campaign to defend US workers from what Trump calls the “carnage” of “terrible trade deals.” Unfortunately, this approach is backward-looking at best. At worst, it could very well spark retaliatory measures that will only exacerbate the plight of beleaguered middle-class American consumers. This is exactly how trade wars begin.

China is clearly the target. The January 23 imposition of so-called safeguard tariffs on imports of solar panels and washing machines under Section 201 of the US Trade Act of 1974 is directed mainly at China and South Korea. Significantly, the move could be the opening salvo in a series of measures.

Last August, the US Trade Representative launched Section 301 investigations against China in three broad areas: intellectual property rights, innovation, and technology development. This is likely to lead to follow-up sanctions. Moreover, a so-called Section 232 investigation into the national security threat posed by unfair steel imports also takes dead aim at China as the world’s largest steel producer.

These actions hardly come as a surprise for a president who promised in his inaugural address a year ago to “…protect [America’s] borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs.” But that’s precisely the problem. Notwithstanding the Trump administration’s cri de coeur of America First, the US could well find itself on the losing side of a trade war.

For starters, tariffs on solar panels and washing machines are hopelessly out of step with transformative shifts in the global supply chains of both industries. Solar panel production has long been moving from China to places like Malaysia, South Korea, and Vietnam, which now collectively account for about two-thirds of America’s total solar imports. And Samsung, a leading foreign supplier of washing machines, has recently opened a new appliance factory in South Carolina.

Moreover, the Trump administration’s narrow fixation on an outsize bilateral trade imbalance with China continues to miss the far broader macroeconomic forces that have spawned a US multilateral trade deficit with 101 countries. Lacking in domestic saving and wanting to consume and grow, America must import surplus saving from abroad and run massive current-account and trade deficits to attract the foreign capital.

Consequently, going after China, or any other country, without addressing the root cause of low saving is like squeezing one end of a water balloon: the water simply sloshes to the other end. With US budget deficits likely to widen by at least $1 trillion over the next ten years, owing to the recent tax cuts, pressures on domestic saving will only intensify. In this context, protectionist policies pose a serious threat to America’s already-daunting external funding requirements – putting pressure on US interest rates, the dollar’s exchange rate, or both.

In addition, America’s trading partners can be expected to respond in kind, putting export-led US economic growth at serious risk. For example, retaliatory tariffs by China – the third-largest and fastest-growing US export market – could put a real crimp in America’s leading exports to the country: soybeans, aircraft, a broad array of machinery, and motor vehicles parts. And, of course, China could always curtail its purchases of US Treasuries, with serious consequences for financial asset prices.

Finally, one must consider the price adjustments that are likely to arise from the inertia of existing trade flows. Competitive pressures from low-cost foreign production have driven down the average cost of solar installation in the US by 70% since 2010. The new tariffs will boost the price of foreign-made solar panels – the functional equivalent of a tax hike on energy consumers and a setback for efforts to boost reliance on non-carbon fuels. A similar response can be expected from producers of imported washing machines; LG Electronics, a leading foreign supplier, has just announced a price increase of $50 per unit in response to the imposition of US tariffs. American consumers are already on the losing end in the Trump administration’s first skirmishes.

Contrary to Trump’s tough talk, there is no winning strategy in a trade war. That doesn’t mean US policymakers should shy away from addressing unfair trading practices. The dispute-resolution mechanism of the World Trade Organization was designed with precisely that aim in mind, and it has worked quite effectively to America’s advantage over the years. Since the WTO’s inception in 1995, the US has filed 123 of the 537 disputes that have been brought before the body – including 21 lodged against China. While WTO adjudication takes time and effort, more often than not the rulings have favored the US.

As a nation of laws, the US can hardly afford to operate outside the scope of a rules-based global trading system. If anything, that underscores the tragedy of the Trump administration’s withdrawal from the Trans-Pacific Partnership, which would have provided a new and powerful framework to address concerns over Chinese trading practices.

At the same time, the US has every right to insist on fair access for its multinational corporations to operate in foreign markets; over the years, more than 3,000 bilateral investment treaties have been signed around the world to guarantee such equitable treatment. The lack of such a treaty between the US and China is a glaring exception, with the unfortunate effect of limiting of US companies’ opportunities to participate in the rapid expansion of China’s domestic consumer market. With trade tensions now mounting, hopes of a breakthrough on a US-China investment treaty have been all but dashed.

Trade wars are for losers. Perhaps that is the ultimate irony for a president who promised America it would start “winning” again.

Senator Reed Smoot and Representative Willis Hawley made the same empty promise in 1930, leading to protectionist tariffs that exacerbated the Great Depression and destabilised the international order. Sadly, one of the most painful lessons of modern history has been all but forgotten.

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2017, published here with permission.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Trump embarking on beggar-thy-neighbour policies offers no encouragement there is a quick recovery from the next financial crisis. The central bank toolbox is also bare.

Of course trade wars are so old hat . Globalism is the way albeit western govts have yet to deal with the coming issues which will reduce the need for large workforces. We can produce cheaply but who will have a job. Decline of the American middle class has been happening for decades. Trump merely a symptom of people’s frustration with the status quo.

Trump loves China since they put on a full parade for him He’s placed a tariff on Big washing machines which has meant LG of Korea increasing prices here I’m sure China will simply do as Russia does lending to his losing golf courses around the world & buying his lousy apartments

Maybe, but surely there will be a flood of lousy chinese washing machines as well, and we have never refused a bargain.

? Was that a comment
Simple Simon must be Sunday, but
Yawn, it must be Sunday.

Fantastic to see the generally rational commentary of Stephen Roach here well done. He has been a long time critic of the central banks monetary madness

.. yes , he's always worth listening to ... and he didn't mention the rise of robotics , which promises to make manufacturing in cheap labour jurisdictions such as the PRC a thing of the past ....

Meanwhiles ... the likes of Apple operate as a platform company ... garnering the lion's share of profits of their products for themselves , whilst the Foxconns who manufacture on their behalf gather much tinier slices of the profit pie for themselves and the actual grunts within their factories ...

... butcha can't tell Trumpy that ... he knows best .... Ahem , yeah right !

Most of the multi-national tax vampires that have sucked billions of tax-free profits out of their victims and salted the loot away in tax-havens are US companies. Trump has said he wants that loot back in America (Apple has obediently complied) and now Trump says he wants "fair" two-way agreements. Hows-about we start with sharing that loot

The countries like NZ who have been waiting for years for the OECD to set some rules are looking stupid

Australia got off its "date" a couple of years ago - at least it has a head-start

Meanwhile Qantas Airlines calls on AU government to implement competitive corporate tax rates

Quantas who has paid zero tax on $46 billion revenues in the past 3 years

Zero is a very competitive rate - cant get much more competitive than that

... yes , and George Soros has had a crack at two such companies , Google and Facebook ... check out the article on .. he reckons that they're monopolies who're stifling innovation in the tech sector ... as well as salting away mega $ billions from the prying eyes of the tax man ...

Butcha can't tell Trumpy that ... he knows best .... Sigh !

Perhaps a little extreme to call it a tradewar, more a game of Tit for Tat or Poker.
The chinese have had a good run, treated kindly by the west, desperate for new markets.
Donald now has some chips, china put tariffs on american silicon and US put similar tariffs on solar panels.
That the chinese will understand.
Either way we can benefit by cheaper solar panels. The logic is if US reduce consumption the panels may be sold cheap elsewhere.
Go Donald.

Canadian solar panel industry hurt by Trump tariffs also like softwood from Ca
US love cheap Ca oil , gas & hydro electricity
As for Trump his time will pass & smarter minds will prevail
Globalism is and always has been the best way forward not simplistic tribal nationalism a proven failure

... Canada will be collateral damage ... an innocent bystander smashed underfoot by America's desire to trump China ... sorry aboot that , buddy ...

Things will improve in 2020 , when newly elected President Oprah Winfrey untrumps America's foreign and trade policies ...

China has nearly 1.4 Billion people with a huge land area
I think China holds the cards not Trumpism

... someone pointed out to me recently that China is essentially a capitalist country that in the 20'th century had socialism forced upon them ... whereas Japan is exactly the opposite ... socialists of long standing who had capitalism forced upon them after WW2 by the Yanks ...

It is probably closer to being a fascist country than a socialist one. I say that because govt and corporations there are so entwined, and they fit the basic description of fascism to a "T"
While capitalism is a bit of a natural fit for Chinese, it is not a free society.

Before communism I thought they had an emperor and it was feudal.
And Japan
Capitalism isnt a political system...more aristocratic, massive movement of wealth.

I find it interesting how the anti Trump brigade just can't help run him down. OK, he is an easy target, I get that.

The author carps on about the US current account deficit and how awful it is, but complains when someone actually tries to do something about it. Some of the things Trump tries will no doubt be spectacular failures, but some of them will probably work better than expected. The deductive armchair theorist types can't cope with trial and error and experimentation, presumably because they can be proved wrong and status is important to them.

Just repeat after me, in a suitable slow Southern drawl:
"Trump don't not care none."

I cant say I like Trump but his game is very up front.
Compare that with the neolibs...ukraine...syria...iraq...iran...libya..kurdistan...
Now what did they all have in common...

Well if you ignore all proven economic theory and assume you know best, I guess you are open to scrutiny. If your trial and error is indeed error (just like every other idiot that has tried trade sanctions) then you deserve what you get.

That is a sweeping statement but I dont know of even one economic theory that describes the past and the future.
Its strictly the realm of academics.
Business doesnt use them and I suspect Donald is in that camp.

Surely yours is a more sweeping statement...

The rational expectation hypothesis?
- That links past, present and future pretty well.

"Business doesnt use them and I suspect Donald is in that camp."
So, businesses don't seek to maximise profit?
Business takes no notice of economic costs or profit?
Business ignores marginal rates of capital and labor?

Interesting proposition.
Indeed a very incorrect one, too.

It was sweeping, to stimulate different views.
Very Donald.
I would think that progressive businesses have junior staff keeping an eye on costs while the senior are rewarded for playing strategic or tactical games in the market.
Thats Donald.
The markets are mostly irrational fueled by greed in my opinion, is that included in the rational expectations?
Ive only read two economists, Debord and Piketty, Debord thinks the consumers tend to be schizophrenic, which doesnt sound very rational to me.
But Im not an academic, just filling in time.

"I would think that progressive businesses have junior staff keeping an eye on costs while the senior are rewarded for playing strategic or tactical games in the market.
Thats Donald."
So game theory isn't an economic discipline, either?

"The markets are mostly irrational fueled by greed in my opinion, is that included in the rational expectations?"
Again, wrong.
The overwhelming majority of markets are actually very rational.
Bubbles are generally the only irrational phases of markets. Even those are technically rational, depending on your time horizon and perspective.

"Ive only read two economists"
I suggest then, you read more.

I cetainly would if the economists could come with work like Einsteins relationship between mass and energy. I would pay attention, the Phillips curve doesnt cut the mustard for me.

You want economists to start developing theories in physics, now?

I know what you mean, though.
On the topic of game theory, how about Neumann and Nash?
Given they weren't economists, The latter received the Nobel (memorial) prize in economics and the former would have if he lived a bit longer. Also, both of which significantly contribute positively to your current way of life now.

The original Phillips Curve didn't really cut the mustard for anyone.
Pretty much as soon as it was published, the notion of rational expectations highlighted it's flaws.
Hence the NK Phillips Curve; something that an entire semester could be devoted to in post graduate study.
By your own admission, you don't read much in the economics space. Interesting that you have the ability to instinctively denounce a quite pivotal theory in monetary economics.

But hey, develop your own irrational opinions how you see fit.

Good, we should spend more time testing irrational views, like the medias view of Donald
But in truth , like some othe billionaires, he is hard to like.

Is it proven, if it is still "theory"? Seems to me the Theory and real world reality tend to have a bit of a chasm between them.

Ah yes. There are camps of thought about what makes for good science. I seem to be loosely in the camp that thinks that experimentation is primary and theory secondary. The idea is that a theory that cannot be disproven isn't really very scientific. Also, there is no such thing as settled science, which is the same as flat earth thinking to me. It was settled science that the earth is flat.

Theories are essential but you never really know where the boundaries of their application lie. If it works here will it work in Alpha Centauri? No one knows.

When Rutherford's team got electrons bouncing back at them from a very thin piece of gold foil only a few atoms thick, it was totally astonishing. Like firing a cannon at a piece of tissue paper and it bouncing back, was how he described it. There was no theoretical context or expectation that atoms had a nucleus, the theory of nuclear physics had to be invented to explain what they had found.

I think this is why private sector businesses are often more creative than state owned ones, basically they do more experiments.

Thank you for the laugh you make a very interesting point about the need to test assumptions, experimenting, revisiting beliefs.
Nope, that is not the behaviour of a bureaucracy, our roads board is a fine example.

Roger - I'm reading Ray Dalio's book 'Principles' at the moment. He's come up with his way of interacting with 'reality' where he applies his principles to reality and see's what outcome he gets (success/failure). If its a failure he modifies the principles then reapplies them to reality and continues this feedback loop until he discovers the underlying principles of success (i.e. his theory works).

When you think about this, you realise that Reserve Banks/Governments/economists are just testing different ways of doing things and waiting for feedback before making another rule to try and control something that they don't yet understand (monetary policy)...for if they did understand what they were doing, there would be no doubt and we would be beautifully balanced without fear about the future...its because they don't yet understand the rules that govern what they're doing, it means that society is in a big economic experiment - and those running it pretend they know what they're doing...

You are right and then consider the impact on US employment, tax receipts and Banking of the repatriation of US corporate foreign profits retained overseas and consider that this little part of the Tax budget will have a huge effect as time passes. I see losers outside the US not least amongst some of the Fragile Banks.


Ok,but where does that leave Einstein's theories? I think they have been quite influential.

This trade war rhetoric is a side show.
The real action is on the erosion of the petrodollar.
So far the US military has destroyed all agitators but now the rebellion is getting very serious with the main actors becoming China and Russia. They are to big to invade and to dangerous to bomb. The CIA propaganda machine has been full throttle on Iran the major source of oil not sold for petrodollars. If Saudi Arabia cuts loose from the US oil monopoly the US economy will take a king hit.