US-China Trade War Fears Grow: 'It Would Mean Slower Growth in Both Countries'

© REUTERS / StringerA laborer works at a steel plant of Shandong Iron & Steel Group in Jinan, Shandong province, China July 7, 2017
A laborer works at a steel plant of Shandong Iron & Steel Group in Jinan, Shandong province, China July 7, 2017 - Sputnik International
Donald Trump has gone ahead with his plans to impose new tariffs on steel and aluminum, exempting Canada and Mexico, sparking fears that a trade war is now imminent. This comes after China's foreign minister Wang Yi said that Beijing will take all the necessary measures in the event of a trade war with the US but hopes it won't go that far.

Sputnik discussed a possible trade war between the United States, China and also the European Union with Michael Every, Head of Financial Markets Research Asia-Pacific at Rabobank International.

Sputnik: How likely is the United States to actually launch a trade war?

Michael Every: I don't have an inside line to the White House, I'd like to make that publicly clear, but the rumors that we're hearing circulating are that the tariff order will be signed off on today (on Thursday Trump signed executive orders enacting tariffs) by Donald Trump. That doesn't start a trade war it starts what we call a trade spat or a trade disagreement between the US and whichever countries are on that particular list. It remains to be seen how many countries will be on the list, it's a very fluid situation, we have had rumors and suggestions that everyone will be on it, and equally that some countries that are considered to be US allies may have an exemption in terms of national security so we have to wait and see what kind of measures are going to be implemented before we say trade war or trade spat (Canada and Mexico will be exempt from the tariffs).

READ MORE: 'Reckless Damage': Chinese Metal Industry Seeks Vengeance for Trump's Tariffs

Sputnik: Can we just clarify, how long is it before a trade spat evolves into a trade war?

Michael Every: Well, that's a fantastic question and the answer is how long is a piece of string. It depends how large that spat is, how serious it is and whether you get any tit-for-tat retaliation. For example, were the US to say that Europe is not exempt, we've already seen what Europe would boycott, peanut butter, orange juice, Levi's, Harley Davidson, all products deliberately designed to try and hit the US politically and then does the US say, well that's fine, you do that and the US will say now we'll increase tariffs on other products from Europe, and Europe counter retaliates and effectively you can see the kind of downward spiral I am describing. Now at some point you hope that cooler heads get together and say what are we trying to achieve here, why are we doing this, what's it all actually about, and if that happens then of course things can just stop, come to a halt, or you can see everyone realize there's a different game being played and actually refocus their tactics, so I think that may happen.

Sputnik: Let's look at China, it is the world's largest producer of steel, a leading aluminum exporter, how is its economy going to suffer from this spat or the war if it comes to that?

Michael Every: A spat will not really scratch China very much, largely because the US put in place tariffs on Chinese steel and aluminum imports already back under President Obama a few years go, because China was flooding the market, so the US has already been protected against China to a certain degree and I think China is only the 11th largest exporter of both those products, to the US, Canada and Mexico are both far more important relatively. So China really could shrug off if we stick just with steel and aluminum as it is at the moment, it would like an insect bite, but were the US to say that all Chinese products face a tariff or were the US to say that only China faces the tariffs and threatens more measures are to come, and that's very much of what some of the suggestions are, then things can get much more serious. I can assure that the Chinese rhetoric will be that no one wins in the trade war or the US will lose the trade war, actually, history shows you very clearly that the person who loses the trade war is the one who runs the trade surplus and in that case it's China.

READ MORE: UK Trade Minister Will Discuss 'Wrong' Metal Tariffs With US Next Week

Sputnik: How would a trade war between the United States and China, should it actually come to that, affect the global economy, what would the ripples be like?

Michael Every: It depends how badly it plays out and how aggressive it gets, because it can always escalate in various different dimensions, in a worst-case scenario it can tip both countries into a growth slow-down or a near recession, and certainly even in the best-case scenario it would definitely mean slower growth in both countries and in China's case it would definitely heighten the risks of some kind of economic crisis, because while China looks like this economic powerhouse it's only in that position because it has a vast trade surplus and the US provides 50%, five zero of China's trade surplus. So if the US and Europe were to combine together and say we will no longer buy from China, strategically the intent to try and resource production back or to limit Chinese purchases as much as possible, China doesn't buy very much in Europe and the US anyway and what it does tend to be necessities like food rather than the luxuries it can afford to not buy, so in that respect China would have a much lower trade surplus and it would look much more vulnerable to a financial crisis of some sort.

Sputnik: How much would China's steel and aluminum producers suffer from new US tariffs, but now I'm guessing a lot?

Michael Every: I think steel and aluminum not particularly, as I said because they don't sell much to the US, but the larger picture here and the reason why these measures are about to be put in place apparently, if you read the report that the US published, it makes clear that China has massive oversupply in both aluminum and steel, and in fact Europe agrees, Canada agrees, Mexico agrees, every other country, including Russia, agrees that China produces far too much steel and far too much aluminum and its economy is completely unbalanced in that respect. It's flooding the globe with it and it's hoping that other countries will just give up production and they can remain the only steel and aluminum producer and one by one others will give up, and I don't think the US is going to, that's what their measure is saying and what they're effectively pointing to it must be other counties, whether it's Canada, Mexico, Russia or China to say we will massively downsize our steel and aluminum industries to reduce oversupply and the US is making clear that it won't be them.

READ MORE: France, EU to Prepare "Appropriate Response" to US Metal Tariffs

Sputnik: Will the decision to hike tariffs affect the economy of the European Union, would it likely retaliate?

Michael Every: I don't think the European Union is going to take an enormous hit, the only country there that really sells a lot of steel to the US is Germany and it's not a game-changing amount of steel were the US to buy less of it. The Europeans are very-very fond of free trade, well they claim to be, they actually have extremely high tariff barriers on many areas including agriculture, but ostensibly they are very-very pro-free trade and they tend to react aggressively when any other country does take trade measures against them. And as I said, they're talking about slapping tariffs on several different products which would make them more expensive for European consumers, some of them are foods, some of them are leisure items, things like clothing, motorcycles, etc., and then the US will respond likewise and say we will not buy x, y, z from Europe and then it would start to get much more messier.

The views and opinions expressed by Speaker in this article are those of the speaker and do not necessarily reflect the position of Sputnik.

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