Using a model for analyzing military conflicts, we weigh the cost of a trade war to the U.S. and to its trading partners. 

by George Friedman
March 6, 2018

During the 1970s, the Soviets developed a model for analyzing military conflict through measuring the correlation of forces. This measured the military force each side would bring to bear in an engagement, from nuclear war to small unit combat. It did not address the question of whether the battle or war was wise, whether victory was worth the price, or the long-term consequences. It focused on a single, partial, yet indispensable question: Who would win? This is a question that should be applied to the current debate over steel and aluminum tariffs: Who would win a trade war? It would not answer the question of the wisdom of the war, or the cost. It would simply measure the likely winner, however damaged that party might be by the war.

The first question to be asked is simple, as all first questions should be: How important is trade, particularly exports, to the major players? According to 2016 World Bank figures, global exports make up 29 percent of global gross domestic product. For high-income countries, exports make up 30 percent of GDP. Exports account for roughly 20 percent of China’s GDP, 26 percent of Russia’s, 42 percent of South Korea’s, 31 percent of Canada’s and 38 percent of Mexico’s.

By comparison, exports make up 12 percent of U.S. GDP. This means that the decline in exports has less impact on the United States than on most other countries. Put another way, the United States’ economy maintains higher domestic demand than other countries relative to production, and therefore is less dependent on exports. This is connected to the sheer size of the American economy. It dwarfs others, including China.

The United States is also the largest importing country in the world. (The European Union as a whole is larger, but the EU is not a country. It is a treaty organization, and a dysfunctional one at that when it comes to economic issues.) China’s exports to the U.S. in 2016 were worth $386 billion, while it’s imports from the U.S. were worth only $135 billion. In a trade war, this trade surplus would become a Chinese weakness. China derives about 3 percent of its GDP from exports to the United States; the United States derives around 0.5 percent of its GDP from exports to China. Similar or greater imbalances can be found in other countries mentioned.

What Happens in a Trade War?

The United States currently runs a large trade deficit. That actually makes the U.S. the stronger party in a potential trade war. The U.S. is less dependent on exports than the countries that export to the U.S. market. As a result, the “correlation of forces” is such that the cost of a trade war is greater to U.S. trading partners than to the U.S. If the U.S. does institute the steel and aluminum tariffs (and it appears that it will), U.S. consumers will have to worry about an increase in the price of goods, and U.S. companies that are disproportionately exposed to exports will face significant problems. But the countries that depend on the U.S. to buy their goods have a much bigger problem. There is simply no other market in the world that compares to the U.S. in size and demand. The U.S. would not emerge from a trade war unscathed – but it would fare better than U.S. trade partners who depend on access to the U.S. market. This puts it in a powerful position against smaller economies that are efficient exporters and therefore much more vulnerable in a trade war.

It follows that the risks from an escalating trade war would be substantially greater on China, South Korea or Canada than they would be on the United States. Each countermove costs the United States less than it does its counterpart. So even if other countries hurt the United States in a countermove to President Donald Trump’s threatened tariffs, the reaction from the United States can hurt them far more. The percentage of GDP at risk in a trade war for U.S. counterparts is much greater than for the United States, which means, on the surface, that the United States will win such a war. More to the point, it makes it unlikely that opponents will risk a trade war.

I want to emphasize that this is a simplistic analysis, as it is meant to be. Evaluating the correlation of forces necessarily excludes evaluation of other key elements to the battle – in this case, elements like supply chain disruption, the threat to ruling political coalitions and so on. War is a complex thing, and the correlation of forces tells you only about the exchange of fire. But talking about trade wars without starting with the simplistic is dangerous. The core reality of a war is, after all, the exchange of fire and a summation of the net consequence of that exchange. Leaping to more sophisticated models that exclude the correlation of forces risks putting the cart before the horse.

What the simplistic model says is that U.S. partners can bluff a trade war, but not wage that war, because with each move, the damage to them will be greater than the damage they can inflict. Efficiency in exports creates pyramiding vulnerabilities in a trade war. But of course, this does not take into account sectoral damage, strategic relationships outside of trade or unequal domestic consequences. Having stated the obvious, these are the questions we will turn to next.

— Trade War and the Correlation of Forces originally appeared at Geopolitical Futures.