Just as the infamous Smoot-Hawley tariff of 1930 helped turn a severe recession into the Great Depression, Trump's tariffs and an all-out trade war with China could, if they escalate, threaten the world economy.
We're in Round 3 of the mini-trade war that has already begun: The U.S. last month announced tariffs on imports of steel and aluminum, in part targeting China. The next day, China fired back, matching Trump dollar-for-dollar with a plan to impose import duties on $50 billion worth of American products.
China responded with proposed tariffs on fresh fruit, pork and recycled aluminum, accounting for $3 billion of USA exports a year ago.
Chinese direct investment in the USA has grown quickly in the past decade to nearly US$70 billion, fast approaching the US$75 billion that the U.S. has invested in China over several decades.
Trump on Thursday instructed the U.S. Trade Representative's Office to consider tariffs on an additional $100 billion in Chinese imports, bringing to $150 billion the range of Chinese goods under consideration.
The White House said yesterday it has initiated a World Trade Organisation dispute against China and is examining potential restrictions on Chinese investment. But given every single political economy decision we've made post-millennium explicitly denied the possibility of, and leveraged us to, any ultimate economic (or broader strategic) contest between the United States and China, it's all a bit of a dark joke to tell us to do it today. The Dow fell more than 570 points, or 2.3 percent.
China commented on Trump's announcement saying it was fully prepared to respond.
"They are hitting soybeans, wheat, corn and cotton - so all the agricultural products - and this is in addition to what they announced already on pork and sorghum", said Wendong Zhang, assistant professor of economics at Iowa State University. "We don't have a trade war, we've lost the trade war", Trump said in a radio interview with NY radio show, 77 WABC's "Bernie & Sid".
Bharat Bhatia, CEO of Conares - the second largest private steel manufacturer in the UAE, said the steel manufacturers in the UAE are not anxious or concerned by the imposition of tariffs on steel imports by the US. A key reason is that in the absence of USA leadership, China faces less resistance in setting the global standards in trade and investment and technology development. The issue has been extensively discussed by officials, including the president and foreign minister, as well as in opinion commentaries ("China voice: Ten reasons China, U.S. can avoid Thucydides Trap", Xinhua, 2017).
Mr Kudlow, who has repeatedly sought this week to soothe markets with mention of possible talks, told Bloomberg Television there were always ongoing discussions on trade between the U.S. and China but that negotiations on the tariffs had not begun.
United States exports to China are equivalent to less than 5% of the output of the agricultural and other primary products industry. Which is also, not likely.
If the US follows through, that would mean $153 billion in Chinese imports would be subject to tariffs.
So far, only the tariffs on steel and aluminium have taken effect, but Trump's latest threats take the dispute to a new level.