How bad could it get? As China and the US swap tariffs and counter-tariffs, are we witnessing the opening salvos of a full-blown trade war between two of the world’s biggest economies? If so, would it lead to a fracturing of the international trade system and a return to the tit-for-tat reprisals and “beggar thy neighbour” policies of the 1930s?

Europe would, along with the rest of the world, almost inevitably get dragged into the mix (as we have seen with the recent furore over steel tariffs, though the EU was eventually granted an exemption in that case). Even if Europe can avoid the direct impact of tariffs, a falling tide lowers all boats, meaning everybody loses if the global economy starts to stutter. On the other hand, Trump argues that it’s not possible to lose a trade war if the current terms of trade are already totally unfair.

What do our readers think? We had a comment sent in from Yiannos, who believes that all this talk of trade wars may very well be exaggerated, because surely President Trump understands how damaging it would really be. In other words: Yiannos thinks that Trump may be bluffing. This is all part of the “art of the deal”.

To get a response to Yiannos, we spoke to Pascal Lamy, former Director-General of the World Trade Organization (2005-2013). How would he respond? Does he think Trump is bluffing?

Well, only the future will tell whether Trump is bluffing or not. Although, we know it’s part of how he proceeds. The problem being that if you start putting trade restrictions on China, China will do the same – which is, by the way, what they are doing. For the moment, we see a state where both sides announced that they have weaponry that they could use. Whether they will do it or not, I don’t know.

The optimistic interpretation is that they are both building negotiating positions, starting with Trump who says he is fed up with China cheating with the rules of world trade and China saying ‘no, no, no, we play by the rules and if you’re not happy, please go to the WTO.’ That’s the optimistic interpretation.

The less optimistic interpretation is that, as we all know, Trump doesn’t really understand the rules of world trade today and he may be inclined to take damaging measures, which will both damage the US economy and the Chinese economy, hence, the negative reaction of markets, which is what we have to expect.

To get another perspective, we also put Yiannos’ comment to Clyde Prestowitz, founder and president of the Economic Strategy Institute, a think-tank in Washington D.C. What would he say?

Trump is not bluffing. He truly believes the United States is being harmed by its trade relationship with China and is determined to do something about it. He is not counting the pluses and minuses of a trade conflict in the same way as the media and most economics and trade experts.

We also had a comment on Twitter from Jan, who would like to know what the biggest risks to the global economy are right now. How would Pascal Lamy respond?

Well, the global economy is [doing] really well – much better than any time during the last ten years. There is coincidental convergence of most engines creating the world economy in the right direction, in every region of the world. So the big danger is not in the economy, it’s in politics.

The first danger among the dangers is what we see happening between the US and China on the trade front. There is a risk because of the US stance on trade. There is a risk to damage what has served the world economy extremely well for the last decade, which is the multilateral, rules-based trading system. But the risk that this is damaged and the intention of the US to move back to the past, which is a sort of bilateralisation instead of multilateralisation, of trade conversations and trade agreements, which – of course – would not be as efficient as a multilateral one. So the danger is mostly moving back from multilateralism to bilateralism.

How would Clyde Prestowitz respond to the same question?

I think the biggest risks are China’s ‘Everything Made in China by 2025’ policy, China’s extremely high savings rate which is equivalent to the savings rates usually seen in countries at war, China’s huge national debt, America’s growing internal and external debt, and Germany’s enormous savings rate and consequent chronic and enormous trade surplus.

Finally, we asked Clyde Prestowitz whether he thought the world was truly on the verge of a global trade war and, if so, what would be the consequence. What would he say?

It is important to understand that we have been in a global trade war for the past forty or so years. Japan’s ‘catch up’ strategy which encompassed a highly mercantilist approach to trade and globalisation was a trade war against the US and the EU. Korea’s mercantilist globalisation policies have constituted a similar trade war. Then, China adopted not only an authoritarian kind of state capitalism, but also a very sophisticated form of mercantilist trade and investment policy. This has been going on for a long time now and we have become so accustomed to it that we take the situation as normal. But trade and investment between China and the EU or the US are something quite different than trade and investment between the US and the EU.

How bad would a US-China trade war be? Will the current tit-for-tat tariff hikes inevitably lead to a full-blown trade war, or is there still time to change course? Let us know your thoughts and comments in the form below and we’ll put them to policymakers and experts for their reactions!

IMAGE CREDITS: (c) / BigStock – MAGNIFIER, PORTRAIT CREDITS: CC / WikiMedia – World Trade Organization