By Eric Vandenbroeck and co-workers

Trade Wars are Easy to Lose

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with,” U.S. President Donald Trump famously tweeted in 2018, 'trade wars are good, and easy to win.” This week, when the Trump administration imposed tariffs of more than 100 percent on U.S. imports from China, setting off a new and even more dangerous trade war, U.S. Treasury Secretary Scott Bessent offered a similar justification: “I think it was a big mistake, this Chinese escalation, because they’re playing with a pair of twos. What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.”

In short, the Trump administration believes it has what game theorists call escalation dominance over China and any other economy with which it has a bilateral trade deficit. Escalation dominance, in the words of a report by the RAND Corporation, means that “a combatant can escalate a conflict in ways that will be disadvantageous or costly to the adversary while the adversary cannot do the same in return.” If the administration’s logic is correct, then China, Canada, and any other country that retaliates against U.S. tariffs is indeed playing a losing hand.

But this logic is wrong: it is China that has escalation dominance in this trade war. The United States gets vital goods from China that cannot be replaced any time soon or made at home at anything less than prohibitive cost. Reducing such dependence on China may be a reason for action, but fighting the current war before doing so is a recipe for almost certain defeat at an enormous cost. Or to put it in Bessent’s terms: Washington, not Beijing, is betting all in on a losing hand.

 

Show Your Hand

The administration’s claims are off-base on two counts. For one thing, both sides get hurt in a trade war because both lose access to things their economies want and need and that their people and companies are willing to pay for. Like launching an actual war, a trade war is an act of destruction that puts the attacker’s forces and home front at risk, as well: if the defending side did not believe it could retaliate in a way that would harm the attacker, it would surrender.

Bessent’s poker analogy is misleading because poker is a zero-sum game: I win only if you lose; you win only if I lose. Trade, by contrast, is positive-sum: in most situations, the better you do, the better I do, and vice versa. In poker, you get nothing back for what you put in the pot unless you win; in trade, you get it back immediately, in the form of the goods and services you buy.

The Trump administration believes that the more you import, the less you have at stake—that because the United States has a trade deficit with China, importing more Chinese goods and services than China does U.S. goods and services, it is less vulnerable. This is factually wrong, not a matter of opinion. Blocking trade reduces a nation’s real income and purchasing power; countries export to earn the money to buy things they do not have or are too expensive to make at home.

A trading chart on the New York Stock Exchange, New York, April 2025

What’s more, even if you focus solely on the bilateral trade balance, as the Trump administration does, it bodes poorly for the United States in a trade war with China. In 2024, U.S. exports of goods and services to China were $199.2 billion, and imports from China were $462.5 billion, resulting in a trade deficit of $263.3 billion. To the degree that the bilateral trade balance predicts which side will “win” in a trade war, the advantage lies with the surplus economy, not the deficit one. China, the surplus country, is giving up sales, which is solely money; the United States, the deficit country, is giving up goods and services it does not produce competitively or at all at home. Money is fungible: if you lose income, you can cut back spending, find sales elsewhere, spread the burden across the country, or draw down savings (say, by doing fiscal stimulus). China, like most countries with overall trade surpluses, saves more than it invests—meaning that it, in a sense, has too much savings. The adjustment would be relatively easy. There would be no critical shortages, and it could replace much of what it normally sold to the United States with sales domestically or to others.

Countries with overall trade deficits, like the United States, spend more than they save. In trade wars, they give up or reduce the supply of things they need (since the tariffs make them cost more), and these are not nearly as fungible or easily substituted for money. Consequently, the impact is felt in specific industries, locations, or households that face shortages, sometimes of necessary items, some of which are irreplaceable in the short term. Deficit countries also import capital—which makes the United States more vulnerable to shifts in sentiment about the reliability of its government and about its attractiveness as a place to do business. When the Trump administration makes capricious decisions to impose an enormous tax increase and great uncertainty on manufacturers’ supply chains, the result will be reduced investment into the United States, raising interest rates on its debt.

 

Of Deficits and Dominance

In short, the U.S. economy will suffer enormously in a large-scale trade war with China, which the current levels of Trump-imposed tariffs, at more than 100 percent, surely constitute if left in place. In fact, the U.S. economy will suffer more than the Chinese economy will, and the suffering will only increase if the United States escalates. The Trump administration may think it’s acting tough, but it’s in fact putting the U.S. economy at the mercy of Chinese escalation.

The United States will face shortages of critical inputs ranging from basic ingredients of most pharmaceuticals to inexpensive semiconductors used in cars and home appliances to critical minerals for industrial processes, including weapons production. The supply shock from drastically reducing or zeroing out imports from China, as Trump purports to want to achieve, would mean stagflation, the macroeconomic nightmare seen in the 1970s and during the COVID pandemic, when the economy shrank and inflation rose simultaneously. In such a situation, which may be closer at hand than many think, the Federal Reserve and fiscal policymakers are left with only terrible options and little chance of staving off unemployment except by further raising inflation.

When it comes to real war, if you have reason to be afraid of being invaded, it would be suicidal to provoke your adversary before you’ve armed yourself. That is essentially what Trump’s economic attack risks: given that the U.S. economy is entirely dependent on Chinese sources for vital goods (pharmaceutical stocks, cheap electronic chips, critical minerals), it is wildly reckless not to ensure alternate suppliers or adequate domestic production before cutting off trade. By doing it the other way around, the administration is inviting exactly the kind of damage it says it wants to prevent.

This could all be intended as just a negotiating tactic, Trump’s and Bessent’s repeated statements and actions notwithstanding. But even on those terms, the strategy will do more harm than good.

The fundamental problem with Trump’s economic approach is that it would need to carry out enough self-harming threats to be credible, which means that markets and households would expect ongoing uncertainty. Americans and foreigners alike would invest less rather than more in the U.S. economy, and they would no longer trust the U.S. government to live up to any deal, making a negotiated settlement or agreement to de-escalate difficult to achieve. As a result, U.S. productive capacity would decline rather than improve, which would only increase the leverage that China and others have over the United States.

The Trump administration is embarking on an economic equivalent of the Vietnam War—a war of choice that will soon result in a quagmire, undermining faith at home and abroad in both the trustworthiness and the competence of the United States—and we all know how that turned out.

 

 

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