This Is What A Trade War With China Would Actually Look Like

Joe Weisenthal (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:13)

And I'm Tracy Alloway.

Joe Weisenthal (0:15)

Tracy, there's a new story that's made our jobs very exciting again.

Tracy Alloway (0:19)

Whoa, there's any number of things at the moment, but I think I know what you're talking about. It's trade, right?

Joe Weisenthal (0:24)

Yeah, but you're actually right, that we're in this moment for markets where there just seems to be a lot going on again, lots of different crosswinds and narratives and themes, whether it's anxiety about rising inflation, concern about the Fed, the changing leadership in the market with regards to tech stocks. And now, as you say, trade has really come to the fore as a major thing that people are trying to wrap their heads around.

Tracy Alloway (0:50)

Right, so what we've seen just over the past couple of weeks is the Trump administration unveiled a big set of tariffs on goods imported from China, and then China retaliated. They announced, I think it was tariffs on about $50 billion worth of goods, including aircraft parts, soybeans, and cars, which are some big ones for the market and for the economy.

Joe Weisenthal (1:16)

Right, because a few days earlier, China had announced some retaliatory tariff measures, but they were on pretty minor stuff, like ginseng exports, which I doubt the US exports a lot of ginseng to China, or macadamia nuts and stuff like that, or wine earlier, stuff that's kind of a little bit more marginal. But when they announced the tariffs on soybeans, given that that's a major crop in the US and given how much China consumes of soybeans, then people were like, whoa, this is maybe a little bit more serious than we expected.

Tracy Alloway (1:48)

Right, this is the week that everyone decided that soybeans were actually very, very important.

We are sort of dancing around one issue, Joe, that we've been speaking a lot about internally, and that's what do we call this? Are we calling it a trade war?

Joe Weisenthal (2:04)

Right, we've had this discussion internally because I kind of get the impression that trade war is one of these things that doesn't have a very crisp definition. It's kind of like, you know it when you see it. So some people are using that term, others aren't.

But that's obviously something we have to figure out. And are we just seeing sort of a standard early stage negotiation or is this a serious thing? And that's sort of what we're all trying to wrap our heads around.

Tracy Alloway (2:30)

Right, and some people are being really cute about it and calling it a trade skirmish or a trade standoff or a trade tiff. Any number of synonyms for that. Yeah.

All right, so for the purposes of this podcast, can we just agree that we're gonna call it various things and no one can get mad at us?

Joe Weisenthal (2:48)

That sounds good. Well, we actually have the perfect guest to tell us exactly what we're seeing right now.

We're gonna be speaking with Brad Setser. He's the Steven A. Tananbaum Senior Fellow for International Economics.

He's written for years about trade and other macroeconomic issues. He blogs. He used to be at the Treasury. Anyone who follows this space has surely seen his work. He's here with us now. Brad, thank you very much for joining us.

Brad Setser (3:13)

My pleasure.

Joe Weisenthal (3:14)

So Brad, what is a trade war?

Brad Setser (3:17)

I think a trade war is a series of measures, I guess a significant set of trade restrictive measures by one country that prompt an equally significant response from another country. And you could call that a trade war. You could say you need another round of escalation before you have a trade war.

I wouldn't use the term trade war if you're playing in what you might call the standard trade remedy space, a standard dumping case, a standard safeguards case. But the US is doing a 301 case, which is a tool that hasn't been used for a long time. And 50 billion is, it's not enormous relative to the size of our economy, but for a trade measure, it's quite large. So if we proceed to the stage where we actually implement the tariffs, which we haven't done, and if China proceeds to implement the tariffs in response, I think for all intents and purposes, that would meet a reasonable standard for a trade war.

Tracy Alloway (4:16)

So we want to focus on what actually happens to the international economy when such a trade war is underway. But before we do, this is a big question that's currently hanging over markets and people who are watching this entire spat unfold.