Why US-China Trade War Is Scary, And Why It Probably Won’t Happen

SMITH BRAIN TRUST — Professor Gary Cohen at the University of Maryland's Robert H. Smith School of Business travels to China three times a year to speak to multinational companies. His latest trip in December 2016, he says in an interview from Shanghai, has been a bit different. That’s because across China, in his meetings with leaders of global companies, all anyone wants to talk about is President-elect Donald Trump.

"I'm hearing it every day from executives in China: 'What’s going to happen?'" says Cohen, who is in China to talk about the executive MBA programs and executive development programs at the Smith School.

From business leaders, that's a marked change in tone from just a few months ago, Cohen says. And it reflects a new uncertainty, one that comes with a president-elect whose plans have been laid out in far less detail than Trump’s modern presidential peers. What Trump has said about his plans — particularly, that he may support a 45 percent tariff on Chinese goods exported to the United States — has people worried, says Cohen, who is the associate dean for the Office of Executive Programs at the Smith School.

Trump made jobs and opposition to imbalanced trade deals a cornerstone of his presidential campaign. He has said the move to levy steep tariffs on Chinese imports is aimed at boosting the number of U.S. manufacturing jobs, in essence reclaiming ones that have migrated to cheaper markets in recent years. His campaign has said it’s an essential move in reducing the U.S. trade deficit with China, which last year reached $365 billion.

But experts say the move would risk retaliatory tariffs from Beijing and the start of a trade war that could significantly restrict U.S. competitiveness in China. And with China's position as a major source of growth for many U.S. multinational companies, the tariffs and resulting trade war could ultimately have the opposite effect on U.S. employment. "If you stunt the growth of American companies abroad, that is certainly going to impact their operations at home," Cohen says. And that means the potential for layoffs.

"For example, I worry about a company like Boeing, America’s largest exporter," Cohen says. "Is China going to choose to buy Boeing airplanes if we are slapping those kinds of tariffs on China? They could choose to buy Airbus. Boeing’s exports to China this year will exceed $10 billion. But Boeing might no longer be competitive under President-elect Trump's contemplated protectionist measures. Numerous U.S. multinationals are booming in China and these trade barriers would have a substantive impact on business in Greater China."

Similar consequences could ripple across other sectors, affecting large multinational corporations, as well as small and midsize firms that import heavily from China. Today's complicated and worldwide supply chains have tied U.S. companies of all sizes to China, which sends about 20 percent of its exports to the United States. "There is collateral damage to every move you make," he says.

Cohen teaches international business and is used to navigating tough questions for companies who want to expand their global operations. It was his role in the private sector before coming to the Smith School. Cohen will lead a five-part Industry Professional Workshop Series in Export Management at the Smith School, beginning Jan. 12, 2017.

Even if large tariffs are imposed on China, it wouldn't stem the flow of goods from emerging economies such as Vietnam, India and Honduras, where resources and labor are cheaper, Cohen says. "It is highly unlikely that the same jobs will come back," he says. "Too much has changed."

Without details from Trump, it's hard to say what protectionist measures his new administration plans to put forward. And it's also unclear what the response from Congress might be. But, Cohen says, there are steps that Trump's administration can take to improve the business landscape at home. It can work to encourage innovation and the creation of new, differentiated products that open the door to more exports. And it can encourage companies to be more efficient in their supply chains, highlighting the ongoing rise of near-sourcing, in which companies bring manufacturing closer to their final customers as a way of shortening what could be a long and expensive supply chain.

"The best opportunities for Americans to export are in a free market economy," Cohen says.

And that means avoiding a trade war, he says. "When the two biggest economies in the world forge a trade war — I don’t want to be a prophet of doom and gloom — but it has a material impact on the global economy," Cohen says. "If Trump really does this, it could fuel a global recession.

And that's why, Cohen says, it's unlikely to happen. "Here is something I do believe: I do believe that Donald Trump wants America to thrive," Cohen says. "So what does that mean? That means America doing a lot more exporting."