I woke up this morning to the news that Donald Trump had escalated his trade war with China by increasing the 10% tariffs he had already imposed on $200 billion of Chinese imports to 25%. In addition, Trump has also already promised that will increase US tariffs on the entire $540 billion of Chinese goods which we import each year if the Chinese don’t cave in to his trade demands. It is almost certain that China will retaliate by increasing their tariffs on our exports to China.
While it is most part true that Trump has no real ideology, he just says what he thinks his base wants to hear, there is one notable exception. For thirty years he has harped on his belief that the US is getting screwed in our trade with other countries. Consequently I believe he is deadly serious about his intention to continue escalating his trade war with China and that should scare the hell out of all of us.
Trump claims to have earned a Master of Business Administration degree, but if he did he must have slept through his MBA economics classes and paid someone to take his tests. I also have an MBA and I was a member of the national economics honor society and I can tell you with great certainty that that if he knew anything about macroeconomics, Trump would never have said that “tariff wars are easy to win”. Both liberal and conservative economists almost unanimously preach exactly the opposite, that no one wins a tariff war and every country involved loses. Trump has surrounded himself with the only oddball economic advisors who believe otherwise, and that is no accident.
Now Trump probably thinks that he can win his current tariff battle with China because he believes that the numbers on his side. To some extent that’s true. In 2018 we imported $539.5 billion worth of Chinese goods while we exported only $120.3 billion worth of American goods to China. That means that we had a net trade deficit of $419.2 Billion with that country. Trump, believing he is the best negotiator in the world, is trying to send a message to China’s President Xi Jinping with his tariffs, economic threats and tough talk. The message is, “Jinping, you had better sit down with me and negotiate a way to cut our trade deficit with your country. You sell us a lot more stuff than then we sell you, so you have a lot more to lose if a full-fledged trade war breaks out between our two countries”.
Unfortunately, though Trump sees the world in simple terms, our trade situation with China is very complicated. Trump is essentially demanding that the Chinese abandon much of their economic strategy which elevated them from an economically backward country to one that is expected to having the largest economy in the world in the not too distant future. China also has some trump cards (pun not intended) in their hand and they are usually not timid about playing them aggressively. We have good indications that the Chinese are more than willing to play hard ball if they are pushed to their limits, which means they don’t plan to lose.
What is normally lost in this conversation are the advantages which Chinese imports provide to the rest of us, the consumers of this country. Think of all products you have bought recently which had the label, “Made in China”. As much as we would like to buy American made products, we the consumers in this country on average save hundreds, even thousands of dollars each year when we buy Chinese goods. And often we have little choice because many of those products are no longer made in this country.
Trump likes to advertise his tariffs as a tax on China, but make no mistake it is the American consumer, you and I, who are bearing that cost. The tariffs are paid by the distributors of Chinese made goods at their port of entry and the increased costs associated with tariffs are normally passed on through the supply chain to the ultimate consumers, you and me. Trump’s latest 15% tariff increases will cost consumers in this country an estimated $66 billion dollars. In summery Trump’s Chinese tariffs are really a tax on the American people, not China.
The tariff increase which took effect at midnight last night will cost the average American $500 a year. That raises the total cost of Trump’s Chinese tariffs to over $830 a year for each of us when the impacts of the 10% tariffs which he imposed earlier are included. And that situation could get much worse. If Trump ultimately carries through his threat to impose 25% tariffs on all imported Chinese products, the average American consumer will be hit with $2,300 in yearly price increases.
However, Trump’s tariffs will have yet another direct affect on the American economy. As the prices of finished products increase, the less of them will be sold and less people will be needed to distribute and sell them. When Chinese goods are used in the manufacture of products made in this country, the same thing happens. As reported by Forbes, 94,303 full-time jobs have already been eliminated as a result of Trumps first round of tariffs. This estimate was provided the non-partisan Tax Foundation which also estimated that Trump’s newest tariffs on Chinese goods are expected to cost an additional 292,648 American jobs. Estimates from other sources show that over 900.000 American jobs will be loss if Trump follow through with his threat to impose tariffs on all products imported from China.
The estimates by the Tax Foundation are conservative because they take into consideration only of the jobs lost in the industries directly affected by the tariffs. These jobs losses reverberate through the communities where the jobs were located. That loss of that income affects the companies and individuals which formally sold products and services to those individuals who lost their jobs resulting additional job losses which in turn affect still other businesses. By the time that process cycles through the community, several additional jobs will be loss for each job loss associated directly because of the tariffs.
But the damage to the American economy does not end there. If trade talks break down, and the prospects don’t look as I am writing this, the Chinese have vowed to retaliate with additional tariff increases of their own. Before the Trump’s trade war began, American farmers exported over $15 billion in soybeans, $3.4 billion in cotton, and $1.2 billion in corn to China each year. American soybean farmers are already reeling with prices falling for their product to their lowest level in 10 years after the Chinese imposed a 25% retaliatory tariff on the soybeans they import from the US. Growing soybeans has become unprofitable for many American farmers. At the same time Brazil has massively increased their exports of soybeans to China and there is a fear is that American farmers may permanently lose much the Chinese market to their global competitors
US manufacturers also export tens of billions of dollars’ worth of aircraft, passenger vehicles, copper and aluminum materials, electronic integrated circuits, and coal to China every year. These products are the likely targets for future Chinese retaliatory tariffs. Increased Chinese tariffs mean American products will become less competitive on the Chinese market meaning in turn substantial losses of sales by American business to their competitors in other countries. For instance the Chinese airline industry might buy passenger aircraft from Airbus rather than American manufactures. The loss of billions of dollars of sales will result in large layoffs by American companies.
The biggest problem with Trump’s approach is that the primary cause of our huge trade imbalance with China is not only caused that county’s economic policies. For the most part that imbalance exists because China has a huge work force and their people are willing to work for much less than the typical American worker. That alone makes products made in China much cheaper than comparable products made in the United States. US manufactures simply can’t compete with China’s cheap labor market. Nothing can be done to remedy that situation over the short term so our large trade deficient with China will continue well into the future regardless of what Trump does.
It’s obvious that Trump is attempting to use tariffs and the threat of additional tariffs to drive Chinese President Xi Jinping to the negotiating table where he believes he can force the Chinese to dismantle what he believes are unfair trade practices and stop the theft of US intellectual property. (And to be honest, the Chinese are not the most honest trade partners.) Trump believes his plan will work because the Chinese have far more to lose than the US in a trade war because they export far more goods to us than we export to them.
That’s absolutely true, but China also has potent economic weapons of its own. If this trade war continues there will be no winners, both countries will take huge economic losses, but the biggest loser will be the country that blinks first. However, the real problem is that it might be quite some time be before anyone blinks meaning that Trump’s tariffs and China’s retaliatory tariffs may be in place and causing economic harm to both countries for quite some time to come. Trump’s determination to win at all costs seems obvious, but since Chinese leaders are far from defenseless in this economic war, they have reason not to blink as well.
While obviously the Chinese have more to lose in the long run, the appears to be much better prepared than the US to weather a prolonged trade war. China has a centralized government controlled economy and it is sitting on a $3 Trillion cash surplus. It can use that surplus to provide subsidies to Chinese companies hurt by a tariff war. With our national huge debt and its future massive projected increases attributable to the Trump administration, we are in a much poorer position to subsidize our farmers and industries when China imposes a heavy tariffs on their products, dropping both the demand for those products and the prices our companies can ask for those products on the open market.
The Chinese also own almost $1.2 Trillion in US government debt which constantly comes up for renewal. If the Chinese decide to retaliate against Trump’s trade policies by refusing to continue to buy up new US government debt, our government will have to increase the interest rates paid on that debt in order to incentivize other parties to buy it instead. That in turn will also drive up inflation in this country, further penalizing the US consumer.
So the Chinese also have the ability to inflict a lot of pain on the US economy while somewhat mitigating the pain of their own people. What it comes down to is which leader, Trump or Xi Jinping, can politically withstand the political heat caused by the downturn of their economies the longest. The one that blinks first is the loser. Either Xi will be forced to surrender to Trump’s demands or Trump will eventually be forced to back off of his tariffs. Again the biggest problem is that neither side may be willing to blink for an extended period of time and the economic damage to both countries will continue unabated.
To answer the question as to whether Trump can ultimately win his trade war, we have to consider the respective political positions of the Chinese and American leaders. Xi Jinping has been consolidating his political power and has recently been named Chinese leader for life. He is not going to lose his position as a result of this trade war. The Chinese government to a large extent controls the Chinese print and broadcast media and even its citizens access to social media. It can thus craft the messages consumed by its people. You can bet that their message on this topic will be that the economic hardships which the Chinese people are enduring can be attributed to the crazy American president and that they need to all Chinese citizens stand with their government as it tries to protect them from this economic attack.
On the other hand Trump job approval numbers continue to hover in the low 40% levels and the 2020 presidential and congressional elections loom large. Except for Fox News and conservative talking heads which continue to spew Trump propaganda, the US media has been very critical of his recklessness in starting a tariff war. The only thing that Trump has going for him right now is a good economy which he inherited from President Obama. If he ruins that with his stupid, impulsive scheme . . . well, let’s just say it will be pretty clear to me who is going blink first.
Xi Jinping and his government have made it clear that they are going stand tall and match Trump blow for economic blow. They obviously believe that the political pressure on Trump will ultimately cause him fold or he will be booted from office so he will no longer be able to harass them. All they have to do is wait him out and let the political pressure in the US continue to build. On the other hand what ultimately might happen could be that the Chinese will decide to toss Trump a bone and agree to some minor concessions (which won’t matter in the long run) so both sides can save face, but nothing will really be solved. Both sides will then be able to retreat to their respective corners to lick their economic wounds.
The real problem is Trump’s narcissistic belief that he has the negotiating talents to make the entire world bend to his wishes. As he has already found many times since he moved into White House, he will again eventually discover that he is not omnipotent and that he has more than met his match in Xi Jinping, but of course he will never admit that. The only question is how much economic damage will he cause in the meantime?
Cajun 5/10/2019