We should have left it.

When Trump first announced his steel and aluminium tariffs, I wrote that we should let him get away with it. Don’t retaliate.

To be clear, letting Trump ‘get away with it’ would only work assuming Trump really was trying to extract concessions from the rest of the world; that threatening to destroy Western alliances and the modern world order was just a risk of his approach, but wasn’t, in fact, the entire point. Hey, economics is built on crazy assumptions.

Anyway, I knew non-retaliation wasn’t a realistic hope – politics is rarely rational. And even to the extent that our retaliation would hurt us too, it wasn’t surprising that we refused to let it slide.

The EU, Canada, Mexico and China (among others) all announced retaliatory tariffs[1]. And these tariffs have been far more strategic and effective than Trump’s. Not only did Trump’s tariffs hit intermediate goods used by other US industries (thereby directly costing the US more than it gained by an employment factor of 16:1), we targeted US exports in very politically sensitive areas[2].

To the extent that it’s possible, we’re winning.

But Trump hasn’t backed down. On Friday 6^th of July at midnight, $34 billion of new tariffs on China came into effect[3] – and China retaliated with an equivalent amount at 12:01am[4] (they were prepared). Consequently, a massive soybean shipment from the US didn’t make it to China in time to beat these new tariffs.

This means the Trump trade war now covers over $100 billion worth of trade. But it won’t stop here.

Trump has threatened to retaliate against China’s retaliation against Trump’s ill-informed retaliation against China (right?) with a further $400 billion+ of tariffs. To which China has vowed to respond potentially on close to $100 billion more US goods, plus a series of additional non-tariff barriers[5].

Trump’s also pushing further 20% automotive tariffs, which could exceed $300 billion. And in response, the European Commission has listed $294 billion worth of US exports that could be subject to further tariffs – a whopping 19% of the US’s total exports.

Yep. Using these estimates – just from announcements already made – the Trump trade war could escalate to over $1 trillion (yes, trillion).

Add to this the fact that Trump has ordered the drafting of a bill that will effectively give him the authority to abandon the WTO entirely and impose whatever future tariffs he wants without congressional consent[6]. Furthermore, I haven’t even mentioned what Trump might do to NAFTA, which alone covers $1.1 trillion of trade between the US, Canada and Mexico.

Unfortunately, I can no longer see a way that this will end well (short of impeachment or a landslide victory for the Democrats in the mid-terms, neither of which I expect will happen).

So why, if the rest of us are ‘winning’ this trade war against the US, won’t we … you know … win?

Because Trump will never back down. The rest of us may be playing this game better than Trump, but that only matters if Trump is willing to concede defeat. He won’t. So even if we’re hurting the US more than they’re hurting us (and more than our own retaliation hurts us), Trump won’t concede. We’re now stuck in a staring contest with a man for whom his own people’s suffering isn’t enough to make him blink. He doesn’t care how many of his own people he hurts – as long as he wins.

Which means the only way out is to continue the trade war and completely destroy the existing world order, or spectacularly back down from our current retaliations – a move Trump will take as a massive victory (again, assuming breaking up the West isn’t the entire point).

This doesn’t absolve Trump. He’s still an economically-illiterate wannabe-dictator whose destroying decades of international relations for no discernible benefit (except to Russia and China). All of his tariffs are first and foremost, hurting the US itself. But if we’d just let him get away with his silly steel and aluminium tariffs (maybe thrown in another concession or two), he could have taken his little win and gone home. Now it’s too late and the only options I foresee are widespread pain or (if it’s even possible) an even more smug Trump. And who knows what he will feel empowered to do next?

All because we couldn’t swallow our pride.

---

[1] Specifically (though not exhaustively), to date, there have been tariffs announced in retaliation to Trump on: Iowa pork; Kentucky bourbon; Florida orange juice; Wisconsin-manufactured Harley Davidsons and yoghurt; Ohio washing machines; and US-made sunscreen, jeans, footwear, ketchup, blueberries, cranberries, peanut butter, rice, soybeans, beer kegs, autos and metal products.

[2] See Footnote 1. While many of these are key exports in States that voted for Trump, he is not the only target. Retaliatory Canadian tariffs on US yogurt – which only amount to $3 million worth of exports – mostly come from one plant in Paul Ryan’s native Wisconsin.

[3] And like the ill-conceived steel and aluminium tariffs, Trump’s latest tariffs will probably hurt the US and its allies more than China. They will actually mostly miss Chinese companies and instead hit US and other non-Chinese companies operating in China. For example, non-Chinese companies operating in China supply 87% of the computer and electronic products affected by these tariffs – Chinese companies only 13%. And they again significantly hit intermediate goods rather than finished goods, forcing US companies further down the supply chain to suffer (including Trump's beloved manufacturing industry). This ironically will hinder any corporate intentions (if any) to increase investment in response to Trump’s corporate tax cut. Some companies are even already relocating to countries like Vietnam and Mexico. And to the not insignificant extent that these tariffs filter down to US consumers, this will offset the minor benefit they received from Trump’s income tax cuts.

[4] China’s 12:01am retaliation covered things like soybeans, cars, port, dairy and other goods, disproportionately made in Trump Country.

[5] China can’t match the US’s $400 billion (even if you overlook the damage this would do to Trump’s own people) because it only imports around $135 billion from the US each year. But given how much more strategic China has been with its attacks (and how strategic Trump has not been), they are likely to make it count, along with many other non-tariff retaliatory measures to make up the difference, including making it more difficult for US companies operating in China with unplanned inspections, delays in approving licenses, M&As and financial transactions, additional regulations, and other administrative headaches. Furthermore, China is compensating its own companies caught up in the trade war, and encouraging their businesses to shift their demand away from US products like soybeans and automobiles – all of which will lessen the US’s impact on them. Nor does China’s government face mid term elections in November which would potentially hinder their ability to retaliate.

[6] The unlikeliness of Congress actually passing this bill is almost irrelevant – Trump’s motivation and direction is clear, and there are an infinite number of other ways he can continue in this direction.