In 2018, U.S. President Donald Trump famously tweeted about the implications of trade deficits, stating, “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.”
This week, the Trump administration took a significant step in its trade policy by imposing tariffs of over 100 percent on U.S. imports from China.
U.S. Treasury Secretary Scott Bessent supported this move, suggesting, “I think it was a big mistake, this Chinese escalation, because they’re playing with a pair of twos. What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.”
The Trump administration believes it possesses what game theorists call escalation dominance over China and other countries with which it has a trade deficit.
Escalation dominance, as defined by a report from the RAND Corporation, refers to a combatant’s capability to escalate a conflict in ways that impose disadvantages or costs on the adversary, while the adversary cannot do likewise.
Under this reasoning, countries like China, Canada, and others retaliating against U.S. tariffs are deemed to be at a disadvantage.
However, this perception is fundamentally flawed.
In reality, it is China that holds escalation dominance in the current trade war.
The United States is reliant on crucial goods from China that cannot be easily substituted or produced domestically at a feasible cost.
While reducing dependence on China may be a valid motivation, initiating this trade conflict before addressing this dependency could lead to dire consequences.
In Bessent’s poker analogy, the idea of having a losing hand is misapplied—by engaging in this trade war without readiness, Washington is, in fact, betting all-in on a losing hand.
The administration’s claims falter on two significant points.
Firstly, trade wars inflict harm on both parties involved, limiting access to goods that economies require and that consumers are willing to pay for.
Similar to how a traditional conflict endangers not only the aggressor but also the defender, a trade war poses risks to both involved economies.
The notion that the defending side would not retaliate effectively implies conceding defeat—a misjudgment in both traditional warfare and trade disputes.
Bessent’s poker analogy also overlooks a crucial distinction: unlike poker, which is a zero-sum game where one’s gain is equivalent to another’s loss, trade is fundamentally positive-sum.
In most cases, improved outcomes for one side can result in better outcomes for the other, creating a mutually beneficial situation.
In poker, participants do not recoup their investments unless they secure a win; in the realm of trade, economic exchanges offer immediate returns in the form of goods and services that are bought and sold.
The Trump administration assumes that having a trade deficit equates to reduced stakes in negotiations, mistakenly believing that increasing imports diminishes vulnerability.
This perspective is not only misleading but factually incorrect.
Blocking trade hinders a nation’s real income and purchasing capability; countries engage in exports to accumulate the necessary funds to acquire what they cannot produce themselves or what is too costly to manufacture at home.
Moreover, when considering the bilateral trade balance—a focus of the Trump administration—it becomes apparent that the trade landscape is unfavorable for the U.S. in a trade war against China.
By 2024, U.S. exports of goods and services to China reached $199.2 billion, while imports from China surged to $462.5 billion, resulting in a staggering trade deficit of $263.3 billion.
This data suggests that when assessing which side might prevail in a trade war, the advantage traditionally lies with the surplus economy rather than its deficit counterpart.
China, the surplus nation, faces a loss in sales, amounting solely to money, whereas the U.S., as the deficit economy, sacrifices goods and services it cannot provide competitively or at all domestically.
While money is inherently fungible, a loss of income allows countries to alleviate the burden through spending adjustments, diversifying sales, or utilizing savings.
Conversely, China, along with most countries enjoying trade surpluses, tends to save more than it invests, implying that it has an excess of savings.
Consequently, any necessary adjustments become comparatively easier for China, sparing it from significant disruption.
In stark contrast, deficit countries like the United States typically expend more than they save.
In the context of trade wars, they face cuts to the supply of essential goods whose prices inflate due to tariffs, creating dire shortages that cannot be easily substituted.
This impact reverberates throughout specific industries, regions, or households, often leading to scarcity of vital products, some irreplaceable in the short term.
Additionally, deficit countries require capital imports, amplifying U.S. vulnerability to shifts in investor sentiment regarding the reliability of its government and the attractiveness of its business environment.
In light of the Trump administration’s erratic choices to impose substantial tariffs and uncertainty upon manufacturers’ supply chains, it results in diminished investment into the U.S., leading to rising interest costs on its debt.
As a consequence, the U.S. economy stands to experience severe repercussions in the ongoing trade war with China, especially with tariffs now exceeding 100 percent.
Indeed, the potential for economic suffering is far greater for the U.S. than for China, and this suffering will likely exacerbate if further escalation follows.
Despite the Trump administration’s belief in its tough stance, it essentially subjects the U.S. economy to the whims of a retaliatory trajectory from China.
Critical sectors in the U.S. could experience shortages of essential inputs, ranging from pharmaceutical ingredients to affordable semiconductors used in various consumer products, and even essential minerals for industrial activities including defense production.
The potential supply shock resulting from drastically curtailing imports from China could lead to stagflation—a grim economic scenario witnessed during the 1970s and amidst the COVID pandemic where shrinking economies coincided with rising inflation.
In such dire situations—which may be looming closer than anticipated—the Federal Reserve and fiscal policymakers will face a dismal array of options, with limited avenues to prevent unemployment besides stoking further inflation.
When one considers the implications of aggressive economic action, it parallels a scenario of fearing invasion, making it reckless to provoke an adversary before adequately arming oneself.
Essentially, the risk of Trump’s economic offensive could mirror these dangerous dynamics—especially as the U.S. economy remains heavily reliant on Chinese sources for crucial goods.
With vital products such as pharmaceutical stocks and critical electronic chips predominantly sourced from China, the approach of cutting off trade prematurely is precarious without having established alternate suppliers or bolstered domestic production.
If trade connections are severed before laying a solid groundwork, the U.S. invites exactly the kind of repercussions it aims to evade.
While these actions may be intended as negotiating tactics, their effect may ultimately inflict more harm than good.
As previously noted in Foreign Affairs last October, the fundamental flaw in Trump’s economic strategy lies in the need to enact enough self-inflicted threats to sustain credibility.
This predicament leads to a climate where both market participants and households anticipate ongoing uncertainty, ultimately resulting in diminished investments in the U.S. economy.
Moreover, it risks eroding trust in the U.S. government’s reliability to uphold any trade agreements, complicating potential negotiation efforts towards de-escalation.
Ultimately, the trajectory of U.S. productive capacity risks decline rather than improvement, inadvertently heightening the leverage of China and other global economic players.
The Trump administration seems to be embarking on an economic venture akin to the Vietnam War—an unnecessary conflict that may plunge the country into a tumultuous quagmire while undermining domestic and international confidence in the United States’ credibility and competence, igniting memories of historical missteps.
image source from：https://www.foreignaffairs.com/united-states/trade-wars-are-easy-lose
