Adam S. Posen, president of the Peterson Institute for International Economics, points out that Trump's belief in U.S. dominance in the tariff war due to its trade deficit is completely misguided.

"America loses billions of dollars in trade with almost every trading partner," Trump tweeted back in 2018. "Trade wars are good, and easy to win."

The Trump administration has imposed more than 100% tariffs on goods imported from China, triggering a more dangerous new trade war. U.S. Treasury Secretary Bessent defended the move by saying: "I think this was a major mistake by China to escalate, because they're holding a two and a jack. If China retaliates, what do we lose? We only export one-fifth as much to China as they export to us—that's them playing a losing hand."

In simple terms, the Trump administration believes it holds a so-called "escalation advantage" in game theory terms over China and any country with which the U.S. has a bilateral trade deficit. According to a rand corporation report, escalation advantage means "one side can escalate the conflict in ways that are costly or damaging to the opponent, while the opponent cannot respond in kind."

If this logic were valid, then China, Canada, and any country retaliating against U.S. tariffs would indeed be playing a losing hand.

But that logic is wrong: in this trade war, the true escalation advantage lies with China. The U.S. depends heavily on China for essential goods that cannot be easily replaced or affordably manufactured domestically in the short term.

Reducing dependence on China might be a valid long-term goal, but launching this trade war without preparation is tantamount to paying a steep price for near-certain defeat.

To borrow Bessent's poker analogy, it's Washington—not Beijing—that is going all-in with a weak hand.

Trump's assumptions fail on two fronts.

First, both sides suffer in a trade war, as each loses access to goods essential to their economy and demanded by businesses and consumers. A trade war is like real war—destructive, and fraught with domestic risks even for the aggressor. If the defending party doesn't believe its retaliation can inflict damage, it would simply surrender.

Bessent's poker metaphor is misleading because poker is a zero-sum game: one's win is another's loss. But trade is a positive-sum game: usually, the more profit you make, the more I make too.

In poker, money in the pot is all-or-nothing. In trade, money instantly converts into goods and services.

The Trump administration believes that importing more makes the U.S. less vulnerable—since the U.S. has a trade deficit with China, it supposedly faces lower risk. This claim is not just a misinterpretation; it is factually incorrect.

Cutting off trade reduces a country's earnings and raises its costs, ultimately impoverishing its people. Countries export to earn revenue that they use to buy things they lack or can't produce affordably.

More importantly, even using the Trump administration's favored metric—bilateral trade balance—the trade war has hurt the U.S. more. In 2024, U.S. exports to China totaled $199.2 billion, while imports from China reached $462.5 billion, resulting in a $263.3 billion trade deficit. If trade balances predict success in trade wars, then the advantage lies with the surplus nation, not the deficit one.

As a surplus country, China sacrifices revenue—cash. As a deficit country, the U.S. sacrifices access to goods and services that it cannot competitively produce or produce at all. Cash is fungible: when revenue drops, you can reduce spending, find new markets, distribute losses nationally, or dip into savings (e.g., fiscal stimulus).

Like most surplus countries, China saves more than it invests—in effect, it has surplus savings. Such adjustments are relatively painless, avoiding shortages of key goods, and the goods once sold to the U.S. can be redirected to domestic or third-country markets.

The U.S., as a deficit country, spends more than it saves. In a trade war, losing access to needed imports (due to higher tariffs) causes immediate and painful supply shortages. Unlike cash, many of these goods can't be easily replaced. The consequences fall directly on specific industries, regions, and households, especially when essentials become scarce.

Deficit countries also import capital—making the U.S. more sensitive to investor sentiment about government reliability and attractiveness as an investment destination.

When the Trump administration arbitrarily raises taxes on manufacturers' supply chains and injects uncertainty, the result is reduced investment in the U.S. and rising interest rates on government debt.

In short, if Trump's over-100% tariffs remain in place, the U.S. economy will suffer heavily in a large-scale trade war with China. In fact, the damage to the U.S. economy will likely exceed China's, and will only worsen with further escalation.

Trump may believe he's playing tough—but he's placing the U.S. economy under China's retaliatory control.

The U.S. faces looming shortages of key materials: active ingredients in most pharmaceuticals, cheap semiconductors used in autos and appliances, and critical minerals essential for industrial and defense production. If Trump follows through on his threat to drastically cut or end imports from China, it would trigger a supply shock and cause stagflation—a macroeconomic nightmare of shrinking output and rising prices, reminiscent of the 1970s or the COVID-19 era.

Faced with such a scenario, the Fed and Treasury would have no good options—forced to choose between high inflation and high unemployment.

If you're worried about an enemy attack, provoking them before you're ready is suicidal. That's exactly the risk Trump's economic assault poses: given the U.S. dependence on Chinese goods (drugs, cheap chips, minerals), cutting trade without replacements or domestic capacity is recklessly premature.

Maybe this is all just a negotiation tactic—though Trump and Bessent's repeated statements make that hard to believe. But even as a tactic, the harm outweighs the benefit. As I warned in October, Trump's economic strategy requires real self-damage to make threats credible. This creates long-term uncertainty in the minds of investors and consumers.

Americans and foreigners alike will reduce investment in the U.S. and lose faith in the government's ability to honor agreements, making it harder to resolve conflict or reach new deals. The result: U.S. productive capacity falls, not rises, while China and others gain leverage.

Trump's administration is launching an economic "Vietnam War"—a deliberately started conflict that ends in a quagmire, eroding faith in American credibility and capability at home and abroad. And we all know how that war ended.