Trade wars and the nuclear option by Lucas Durand

In the intricate web of global trade, few relationships are as consequential as that between the United States and China. Over the past few years, this partnership has been marked by tension, underscored by coming President Donald Trump's trade wars, which imposed tariffs on billions of dollars' worth of Chinese goods. While the trade war cooled under subsequent administrations, its legacy lingers, with both nations viewing each other with skepticism. A critical question emerges: What if China, in a dramatic escalation, decides to halt all exports to the U.S.?

The scenario seems unlikely, but it warrants serious analysis given its potentially seismic impact on the global economy.

The U.S. and China are deeply intertwined in a symbiotic relationship. The U.S. depends on China for a wide range of goods, from consumer electronics and medical equipment to rare earth elements critical for defense and renewable energy technologies. In turn, China relies on the U.S. as a key consumer market and source of investment.

In 2022 alone, China exported $536 billion worth of goods to the U.S., making it the largest single contributor to the U.S. trade deficit. Disrupting this flow would not be a mere inconvenience; it would be catastrophic for both economies, albeit in different ways.

Supply Chain Chaos. American businesses, already stretched thin by pandemic-era disruptions, would face an unprecedented supply chain crisis. Critical sectors such as electronics, pharmaceuticals, and automotive manufacturing would grind to a halt without access to Chinese components and finished goods.

Inflation Surge. Prices for goods would skyrocket as American companies scramble to source alternatives. While domestic production might eventually fill some gaps, the transition would take years, leaving consumers to bear the brunt in the form of higher costs for everything from smartphones to groceries.

Labor Market Turmoil. Industries heavily reliant on Chinese imports would face massive layoffs. Retail giants like Walmart and Amazon, which depend on inexpensive Chinese goods, would need to reconfigure their operations, likely passing costs to consumers and cutting jobs in the process.

While the immediate pain might be sharper for the U.S., China would not emerge unscathed.

Economic Slowdown China’s economy is heavily export-driven, with the U.S. serving as one of its largest markets. A complete halt in exports to the U.S. would exacerbate China's existing economic challenges, including a real estate crisis, slowing growth, and rising unemployment.

Global Supply Chain Disruption Chinese manufacturers depend on raw materials and intermediate goods imported from other countries to produce exports for the U.S. Cutting off exports would disrupt global supply chains, potentially triggering retaliatory actions from other nations.

Geopolitical Isolation Such a move would alienate not just the U.S. but also its allies, accelerating efforts to decouple from China and shift manufacturing to alternative hubs like Vietnam, India, and Mexico.

Economic Recession. A trade freeze between the world’s two largest economies would likely trigger a global recession. Countries reliant on the U.S. and China as trade partners, from Germany to Brazil, would face cascading economic consequences.

Acceleration of Decoupling. This dramatic escalation would force companies worldwide to reassess their reliance on Chinese manufacturing. Over time, this could weaken China’s dominance in global supply chains.

Rise in Protectionism. The breakdown in U.S.-China trade could fuel a wave of protectionist policies as countries prioritize self-sufficiency over globalization, fundamentally altering the structure of the global economy.

For the U.S., such a scenario would be a political quagmire. Leaders would face immense pressure to respond decisively, likely with even stricter sanctions on China. Conversely, China’s leadership would need to navigate domestic backlash, as the economic fallout would disproportionately impact its middle class and manufacturing hubs.

Both nations would face heightened tensions that could spill over into military confrontations, especially in contested areas like the South China Sea or Taiwan.

While the notion of China halting all exports to the U.S. might sound like economic warfare’s “nuclear option,” it serves as a stark reminder of the interdependence that defines modern globalization. Neither side would emerge victorious in such a conflict; the devastation would be mutual and profound.

Policymakers on both sides must prioritize dialogue and cooperation over brinkmanship. Investments in supply chain diversification, strategic decoupling, and domestic resilience are prudent steps. However, these should be pursued alongside efforts to preserve the benefits of global trade rather than dismantling it entirely.

Ultimately, the lesson from the last Trump-era trade wars and the potential fallout of a Chinese export ban, is clear: economic nationalism might win political points, but it risks undermining the prosperity and stability of a deeply interconnected world.