Who can win the trade war: U.S. or China?

Ok. Let’s admit that it is a long shot for that kind of prediction. Nevertheless, we will give it a try.

The U.S.’s economy is the world’s biggest. In 2016, U.S.’s GDP stood at $18.62 trillion, while China’s was $11.2 trillion. If we compare the GDP growth of both countries, we will find while USA’ GDP climbed in a straight line from 2015 to 2016, China’s GDP was flattening.

U.S.’s exports to China in 2016 was valued at $115.6 billion. On the other hand, China exported $462.6 billion of goods and services to U.S. So, contrary to U.S., there is lots of billions for China to lose from being deprived of the American market and consumers.

U.S. till now imposed tariffs on only China’s steel and aluminum and other $50 billion worth of Chinese merchandise (with thoughts to increase it to $100 billion). China retaliated by slamming the American goods with about $100 billion. Doing that, there is not much merchandise left to be taxed by the Chinese government. Again, that is not the case for the Americans who can slam more and more tariffs on the remaining goods.

Americans may face prices’ problem.

There is a possibility that prices may rise inside the U.S. market in response to the ongoing protectionist measures. However, another factor will kick in.

The newly reduced corporate taxes that was lately introduced to the U.S. economy will force the big U.S. companies to absorb any price increase of their products. In addition, those big companies might face some tension if they have factories and plants inside China, but most likely, the Chinese would not risk trying to harass their inland U.S. companies since it will surely push those companies out of China causing further damage to the already flattening Chinese economy.

China has another weapon: U.S. debt. They own lots of it. Therefore, theoretically speaking, by dumping that debt, the U.S. dollar will tumble and fall. Surprisingly, they cannot. This debt is a Chinese asset. It is a part of their wealth. Dumping U.S. debt will shatter the value of the Chinese’s huge foreign reserve ($3.9 trillion), adding insult to injury and causing extra damage to the Chinese economy.

You may be a dragon, but it may still be very challenging to defeat just a cowboy!