Trump's China Policy Stance Spurs Trade War Worries : Parallels Trump has threatened to label China a currency manipulator and to impose large tariffs on its imports into the U.S. Economists say this would start a trade war, but what would that look like?
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Trump's China Stance Spurs Trade War Worries

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Trump's China Stance Spurs Trade War Worries

Trump's China Stance Spurs Trade War Worries

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KELLY MCEVERS, HOST:

Throughout his campaign for president, Donald Trump has threatened to label China a currency manipulator and to punish the country by imposing large tariffs on its imports to the U.S. It's a move that most economists agree would start a trade war. So what would a trade war with China look like? NPR's Rob Schmitz reports from Shanghai.

ROB SCHMITZ, BYLINE: At a campaign stop in August, Trump said that on his first day in office...

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DONALD TRUMP: I'm going to instruct my treasury secretary to label China a currency manipulator, the greatest in the world.

SCHMITZ: Trump told supporters China keeps its currency artificially low to flood the U.S. with cheap imports, putting Americans out of work. China-based economist Christopher Balding agrees that China is manipulating its currency.

CHRISTOPHER BALDING: What is very important to note, though, is this they're manipulating it the opposite of how President-elect Trump thinks that they're manipulating it.

SCHMITZ: Trump's understanding of this issue, says Balding, is outdated. Years ago, China did keep its currency weak so that exports remained cheap. But in the last couple of years, China's economy has suffered. Wealthy Chinese are sending their money out of the country, and China, worried about inflation, is now manipulating its currency to keep it artificially high. Moody's Analytics' chief economist Mark Zandi says if China allows its currency to float like Trump wants, it won't rise.

MARK ZANDI: It's likely to fall. I mean in fact right now it's falling (unintelligible). Market forces are pushing it down. So you may not get what you want.

SCHMITZ: And that'll make Chinese exports even cheaper, which is what Trump was mad about in the first place. One reason to label China a currency manipulator is that it'll provide legal and moral grounds to impose high tariffs on Chinese imports, another Trump campaign promise. Zandi and his colleagues at Moody's ran an economic model on what would happen if the U.S. imposed such tariffs on China.

ZANDI: The Chinese economy would weaken. And then of course the entire global economy would suffer because if the U.S. economy, which is the largest on the planet, and China, which is the second-largest on the planet - you know, this is kind of the path we took back in the 1930s.

SCHMITZ: A year after the stock market crashed in 1929, President Herbert Hoover signed the Smoot-Hawley Act which raised tariffs on thousands of imported goods. In the end, the Smoot-Hawley Act was disastrous. Other nations retaliated with their own trade barriers.

Zandi's economic modeling predicts that similar tariffs on China's almost half a trillion dollars' worth of imports to the United States would spur a recession by 2018 that would last at least two years. But not every economist agrees with this.

MICHAEL PETTIS: The U.S. is in a very, very different position today. It's in the opposite position that it was back in 1930.

SCHMITZ: Michael Pettis is an economist at Peking University. He says in 1930, the U.S. ran a large trade surplus with the rest of the world much like China does today. But today the U.S. runs a trade deficit with much of the world. Pettis says trade wars hurt surplus countries like China much more than deficit countries like the U.S.

SCHMITZ: If you intervene in trade, that's probably good for the U.S. and certainly bad for China.

SCHMITZ: Good for the U.S., says Pettis, because it would create more domestic demand and disastrous for China because it would lead to either higher debt or tens of millions of lost jobs. Pettis says the better path for sustained mutual growth is not tariffs but something else Trump has already proposed - a gigantic investment in U.S. infrastructure.

PETTIS: If you build infrastructure, that's great for the U.S. and good for China.

SCHMITZ: Great for the U.S. because it creates jobs and good for China because it would continue to export goods to America without trade barriers. And if there's anything most economists agree on, it's that the world's two largest economies have become so co-dependent that what's good for one is good for the other. Rob Schmitz, NPR News, Shanghai.

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