Thread by @Brad_Setser

Many have noted that a trade war (or skirmish) will be hard for anyone to win. US tariffs will raise US prices/ force changes to existing supply chains. But China also faces challenges if it wants to match the US dollar for dollar

bloomberg.com/news/articles/…

$60b is close to half the $130b in goods the US exported to China, and about a third of the $170b the US exported to China and HK combined.

Hard to get to that number without touching soybeans, aircraft, autos or semiconductors (over $10b in imports if you count HK)

all four categories have downsides for China.

Soybeans for example. To meet its internal demand (huge), China would need to more or less buy the entire Brazilian crop .. and lose the benefit of offsetting northern/ southern hemisphere seasonality.

and soybeans are both a intermediate good (input to pork and chicken production) and a commodity -- Chinese tariffs would no doubt hurt US farmers, but likely hurt Chinese consumers more.

See: dimsums.blogspot.com/2018/04/chinas…

h/t @andrewbatson

US semiconductors are an input into Chinese electronics exports - in the first instance limiting US exports would hurt Chinese firms like Lenovo (though it also creates incentives for US firms to produce outside the US/ make even more use of contract manufactures)

China can tilt new orders toward Airbus and away from Boeing, but if it tilts too far toward Airbus it loses leverage to get Airbus to do tech transfer/ invest in its A320 line in China and the like. China's industrial leverage hinges to a degree on maintaining the duopoly

in some ways autos are China's best target - a final, luxury good, & clear domestic alternatives. But the big US exporters of SUVs to China are the German firms, so it would broaden the fight (while also encouraging the Germans to shift production for China away from US)

Lou Ji Wei put autos toward the top of his list, so I don't think I am giving anything away here!

getting big numbers outside these categories is hard. Quickly end up looking at crude oil and natural gas liquids, wood pulp and the like, or plastics ...

e.g. commodities, where China would likely do more damage to itself than to the U.S.

of course, China could also expand the playing field by targeting the Chinese operations of US firms ...

logical end point of an escalating tariff war is a shift of global supply chains for meeting US demand out of China (likely toward others in Asia) especially in electronics, and shift of supply chains for meeting Chinese demand out of the US ...

do not doubt that China has adopted an import substituting industrial model in last ten or so years. but best solution to that in theory is a strong exchange rate -- a China that doesn't want to import would thus naturally end up as a less significant source of global supply.