A game of chicken

President Trump thinks a trade war will be easy to win.

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!

Like so much of what he says, that is false.

Let’s consider the warring parties. The US still has the larger economy, but exports much less to China than it imports from China. Trump has tweeted we therefore have less to lose. But that nonsense is based on the notion that imports represent losses and exports represent gains. That just isn’t true: for everything sold by China in the US, there is a willing buyer. Ditto in China: for everything the US sells there, there is also a willing buyer. US imports of Chinese goods and services, and Chinese imports of US goods and services, are a net plus for consumers in both countries, no matter what their impact on producers.

So the question is not who has less to lose, but rather the more canonical one in negotiation theory: who has a better alternative to a negotiated agreement (BATNA)? It is true that China will run out of US products it can levy tariffs on faster than the US will run out of products it can levy tariffs on, but that really doesn’t matter. China is a highly centralized polity that has lots of levers it can pull to hurt US companies doing business in China, which by the way are also main importers of US products. The US government will have a harder time doing this, because it lacks the same degree of control over American media, business associations, consumer groups, and politicians. Trump is already getting a lot of backlash against the tariffs from the agricultural sector, which the Chinese have targeted with their retaliation.

Centralized control is however also a vulnerability for China. At the national level, there are no “safety valves” to release social and political pressures that build up against the tariffs. Trump may lose big in the November election, in part because he has precipitated a big trade war, but he will remain in power (unless impeached and removed from office for other reasons). Xi Jinping has no election he can lose but still hold on to power, free media that can air grievances, or civil society to pressure his regime. Discontent could go directly to the street, especially if the trade war precipitates China’s first post-Communist recession. An autocracy has one main instrument–the security forces–to use against its people in the street. Tienanmen hinted how risky and deadly its use can be.

So who is more resilient? Is it the liberal democracy with limited presidential control that allows for dissent, protest, and political opposition? Or is it the autocracy that controls the levers of power but leaves no room for dissent, protest, an political opposition? I would prefer not to find out, but I’ll enjoy that luxury only if Xi or Trump backs down.

My bet is on Trump to flinch first. He is all bully and bluster, not to mention the damage that the tariffs will do to China’s willingness to be helpful with North Korea and to the American economy. Xi has consolidated power and can’t flinch without losing face in a way that would put his hold on power at risk. His lack of resiliency means he has reason to be more inflexible, not less. In the short run, he has the advantage in a game of chicken. He’ll do his best, by targeting the tariffs against those states that voted for Trump, to make sure we never get to the long term. The US stock and labor markets are already signaling distress at the consequences, and the Fed will have to consider raising rates to counter the inflationary impact of the tariffs as well as the recent tax cut and budget deal. Trump  will need to have more staying power than he has demonstrated on many issues so far to win this game of chicken.