What if America Loses Its Trade War with China?

So far its a war of tariffs and countervailing tariffs, tit for tat, but it is escalating and that seems to be Washington's doing, not Beijing's. Donald Trump is plainly out to force the Chinese into submission but it's a gamble that could backfire on the Mango Mussolini.

China's leaders sound supremely confident that they can win a trade war with President Donald Trump. 

The state news media has depicted him as a reckless bully intent on undermining the global trading system, while presenting the Chinese government as a fair-minded champion of free trade. And China's leader, Xi Jinping, has used the standoff to reinforce the Communist Party's message that the United States is determined to stop China's rise — but that it no longer can. China is already too strong, its economy too big.

In the political realm, however, Xi enjoys advantages that may allow him to cope with the economic fallout far better than Trump can. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, even as Trump must contend with complaints from US companies and consumers before important midterm elections in November. 

The Chinese government also has much greater control over the economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from US tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy. 

"My impression is that there is in Washington an exaggerated sense of how painful these tariffs might be" in China, said Arthur R. Kroeber, managing director of Gavekal Dragonomics, a research firm in Beijing.
At worst, he estimated, the US actions could shave one- tenth of a percentage point off China's economic growth — hardly enough to force a drastic reversal of policies, given the enormous benefits that Chinese leaders see in the state-heavy economic model they have relied on in recent decades.

At the same time, Chinese officials seem to believe they can take advantage of what they consider vulnerabilities in the US political system.

Ultimately the question is what Trump would do if, after escalating what began as a petty trade squabble but grew into a major power death match, America did not prevail or even came off worse than the Chinese?  Trump is a bully, through and through, and China isn't budging which is usually where bullies fall apart. The American mid-terms are just half a year away and the Chinese are targeting Red State America. Cohn warned Trump not to do it and resigned in protest, leaving the way clear for Trump to appoint Larry "Wrong Way" Kudlow his successor. Trump has now surrounded himself with sycophants. Mattis and even Kelly may be nearing their "best before" date.

This could turn weird sooner than we might imagine.

Update;

Here's Krugman's take:

So is a trade war coming? Nobody knows — even, or perhaps especially, Trump himself. For while trade is one of Trump’s two signature issues — animus toward dark-skinned people being the other — when it comes to making actual demands on other countries, the tweeter in chief and his aides either don’t know what they want or they want things that our trading partners can’t deliver. Not won’t — can’t. 

As a result, incoherence rules: The administration lashes out, then tries to calm markets by saying that it might not carry through on its threats, then makes a new round of threats.

Why is “bilateral” trade between the U.S. and China so unbalanced? The answer is that it’s largely a kind of statistical illusion. China is the Great Assembler: it’s where components from other countries, like Japan and South Korea, are put together into consumer products for the U.S. market. So a lot of what we import from China is really produced elsewhere. 

It’s not clear why we should demand that China stop playing that role. Indeed, it’s not clear that China could even do much to reduce its bilateral surplus with the U.S.: To do so, it would basically have to have a completely different economy. And this just isn’t going to happen unless we have a full-blown trade war that shuts down much of the global economy as we know it.

It turns out Canada is also in a similar situation. For example, goods destined for the American market may be offloaded on Vancouver docks for transshipment but, when the arrive at the US border, they're logged as Canadian exports. All we had to do with it was to unload the freighters and put those containers on trucks for the trip south. But, such is life in the age of Trump.