Escalation dominance? – Econlib

Kyle Chan has recently put forth a bold assertion in a blog entry:

Escalation dominance is a myth. Trump operates under the belief that the US will emerge victorious in a trade conflict due to the imbalance of trade, where China exports more to the US than vice versa. In this tit-for-tat tariff war, the US could theoretically impose more tariffs on Chinese goods than China can on American products. However, Adam Posen posits that it’s China that possesses “escalation dominance” (a concept borrowed from RAND’s nuclear deterrence theories), as they have alternative means of escalation beyond tariffs, such as restricting American access to crucial products ranging from smartphones to essential medications. Yet, the stark reality is that neither side has true escalation dominance since both have already ventured far beyond just trade measures. . . .

Both the US and China are under the illusion they have escalation dominance, exacerbating the situation. US Treasury Secretary Scott Bessent stated on CNBC that China made a “grave error” in retaliating against Trump’s tariffs, asserting that China was “playing with a pair of twos.” In contrast, China’s Ministry of Commerce has declared that the nation would “fight to the end.” Despite indications that Trump may be retreating, the confidence emanating from both sides—or at least the bravado they attempt to project—only spirals the situation into a reckless and emotionally charged downward trajectory.

While I find myself largely in agreement with these observations, I wish to introduce additional insights. In China, there is a notable surge in nationalistic sentiment. As reported by Bloomberg:

Financial investors, manufacturers in China’s coastal regions, and policymakers across various sectors, including even those elite factions sidelined by Xi’s consolidation of power, are rallying in support of him. Even former critics and entrepreneurs adversely impacted by his policies have united in standing firm against what they perceive as an unprecedented economic assault. . . .

“A few months ago, I would have said I’ve never known people to be so unhappy — with their lives, with Xi, with worries about the future,” remarked a Chinese toy and textile manufacturer who oversees factories in Guangdong, India, and Southeast Asia.

“Now, that’s all changed,” he continued. “People are still deeply concerned about their jobs and income — they’re curtailing spending — but now the enemy is the US. They’re blamed for everything that’s gone awry.”

Conversely, public sentiment in the United States is sharply polarized. President Trump’s support is dwindling, particularly on issues related to the economy and tariffs.

Moreover, the Chinese population exhibits a greater capacity for enduring economic hardship than American consumers, who have been largely insulated from severe adversity, such as those experienced during the Cultural Revolution. The concept of “eating bitterness” is integral to Chinese culture, representing a stoic acceptance of hardship that is often absent in American society. Here’s a brief overview from AI Overview:

The Chinese idiom “eating bitterness” (吃苦, chīkǔ) describes enduring hardship and adversity without complaint, often in the pursuit of a greater goal or personal growth. This signifies a resilient attitude towards difficult situations, where the ability to suppress emotions and endure pain is highly valued.

How did the administration misjudge the situation so drastically? It’s possible they adhered to a flawed economic paradigm. Economists recognize that the greatest advantages from international trade accrue to the nation importing goods. Yet, many ordinary citizens hold the belief that exporters benefit most from such exchanges, leading them to mistakenly assume that our trade partners possess a weak negotiating position. Public statements from Trump administration officials, like Scott Bessent, suggest they might be ensnared in this misconception.

I foresee that the upcoming months will yield an unpleasant awakening. While I cannot guarantee this outcome, there is one assertion I can make with near absolute certainty: if a trade agreement with China is reached, the administration will herald it as a “victory” for the US, regardless of the actual terms negotiated.

PS. The term ‘escalation dominance’ originated during the Cold War era in the context of the Soviet Union.