TYLER COWEN: China Loses More From This Trade War. “It is vulnerable because it is a much poorer country with more fragile political institutions.”
To see why the full picture is more complicated, let’s say the U.S. slaps tariffs on the industrial inputs (whether materials or labor) it is buying from China. It is easy to see the immediate chain of higher costs for the U.S. businesses translating into higher prices for U.S. consumers, and that is what the afore-mentioned studies are picking up. But keep in mind China won’t be supplying those inputs forever, especially if the tariffs remain. Within a few years, a country such as Vietnam will provide the same products, perhaps at cheaper prices, because Vietnam has lower wages. So the costs to U.S. consumers are temporary, but the lost business in China will be permanent. Furthermore, the medium-term adjustment will have the effect of making China’s main competitors better exporters.
Obviously, no final long-run estimates are possible right now. But it is quite plausible that China will bear the larger costs here, not the U.S.
Another risk for China is this: As its access to U.S. markets becomes more difficult, China may be tempted to look to Europe. It remains to be seen whether the European Union will adopt additional protectionist measures, but China must consider that the possibility is more than zero.
Beijing has been enjoying the benefits of free trade with the West and the domestic political fruits of an increasingly anti-Western foreign policy. It’s time they were made to pick one.