Donald Trump misread the US-China trade relationship. A rethink is not in America’s best interests

The US-China trade war, initiated early this year by US President Donald Trump’s administration, is escalating rapidly. Already, the Trump administration has imposed a 25 per cent tariff on US$50 billion worth of Chinese goods and a 10 per cent tariff on goods worth another US$200 billion.  

Unless the leaders of the two countries can strike a deal at this month’s G20 meeting in Buenos Aires, the situation is likely to worsen. That’s better news for China than it is for the US.

Trump believes that a country with a bilateral trade deficit is necessarily being taken advantage of by its partner. The reality, of course, is that whatever costs the US incurs from trade with China are vastly outweighed by the benefits. For starters, thanks to low-cost imports from China, US consumers pay less for a wide range of goods, from shoes to electronics.

Moreover, the US runs a massive current-account deficit, meaning that it is borrowing much more from its foreign counterparts – especially China – than it is lending. Without inflows of Chinese capital, the US Treasury would face higher interest rates, raising the cost of financing government debt and the cost of homeowners’ mortgages.

True, the trade deficit with China has cost the US jobs. But those losses have been in low-wage positions, and have been offset by new employment in other areas.