Trade war could raise costs, slow economic growth in Hawaii

There are no winners in trade wars, and the one looming between the United States and China could affect Hawaii residents’ wallets and household budgets through rising prices on everyday goods.

Hawaii is fortunately not directly in the crosshairs of this gradually unfolding trade war between the world’s two-biggest economies. This is mainly since our state does not export much to China in the priority sectors targeted by Beijing for potential retaliatory tariffs: agriculture, airplanes, petrochemicals and auto parts.

Nonetheless, if this trade war escalates, it will most likely mean higher prices for Hawaii consumers and further financial volatility that dampen economic growth and add to our already high cost of living.

What makes Hawaii especially vulnerable economically is that nearly all of our consumer goods are shipped to us. These include everything from food products to electronics that are already priced higher than the rest of the nation because of costs to ship here in the middle of the Pacific.

The Chinese imports targeted by the Trump administration under its Section 301 investigation include electronic items built more cheaply in China, including flat-screen TVs and smartphones. Earlier actions have already targeted imports of solar panels, aluminum and steel from China. Higher prices for these could significantly impact our state’s construction and solar industry, which has helped boost the local economy recently.

If a trade war escalates further, China could target U.S. service exports to the country, including in-bound tourism.

This could potentially put a crimp on the growing Chinese tourism flow to Hawaii.

Fortunately, there are signs that cooler heads will prevail on both sides of the Pacific.

U.S. Treasury Secretary Steven Mnuchin said on April 21 he was considering a trip to China to discuss the trade dispute with Beijing. Mnuchin said he’s “cautiously optimistic” of reaching an agreement with China that bridges their differences over trade.

Business news source Bloomberg reported that China’s Ministry of Commerce said last week it is aware that the U.S. is considering a visit to Beijing to negotiate economic and trade issues and welcomes such a move. A visit by the U.S. Treasury secretary to China could signal a breakthrough in the spat between the two countries, whose threats to slap tariffs on each other have rattled markets.

Chinese President Xi Jinping also delivered a speech at the Boao Forum for Asia on April 10, addressing some U.S. concerns about China’s economic management and proposed to liberalize foreign ownership limits, lower tariffs on imported cars, and improve protection for intellectual property rights.

Despite this olive branch from Xi, economic relations between the U.S. and China are not out of the woods.

Elements of President Donald Trump’s economic team are holding out for an omnibus agreement that constrains Chinese industrial policy and creates full reciprocity in U.S.-China economic relations.

The problem is that such an agreement would necessitate a wholesale restructuring of China’s political economy.

No country would entertain such deep changes to its economy due to outside pressure. It would be political suicide.

Given this, one can only hope that the Trump administration takes a win, declaring that the current round of U.S. pressure has forced China into making concrete concessions.

In negotiating such a deal, the United States could demand strict implementation benchmarks, including effective ways to improve the trade balance and measures to stop forced technology transfers by foreign investors in China.

Conversely, to hold out for a “grand deal” that restructures the Chinese economy wholesale along the lines of American capitalism borders on fantasy. It will most likely end up escalating the trade war that is already unfolding.

Christopher A. McNally is a professor of political economy at Chaminade University.