There is a long established truth in macroeconomics, “No one wins a trade war;  there are only losers”. Trump must have slept through his economics classes in college and paid someone else to take his tests because he has stated more than once that, “Trade wars are easy to win”.

Now China is a bad actor on the world economic stage, but only logical course of action was to close ranks with our all of our trading allies and challenge the world second largest economy with a united front. Instead one of Trump’s first official acts was to tear up our Trans-Pacific Partnership (TPP) with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam negotiated by Obama’s administration which was specifically designed to prevent China from dominating trade in the Pacific region.  Then Trump alienated our European trading partners with threats of tariffs and chose a go it alone approach to confront China.

Trump was evidently only focused on the fact that China exports more than three times as many goods to the United states in terms of dollars than we export to them.  When you’re thinking simplistically, as Trump obviously was,  you might believe that getting into a trade war with China would be a no-brainer.  Surely such a conflict would hurt China more than the US because they  have so much more to lose.   Trump believed that sooner or later China would blink and be willing to sign an agreement favorable to the United States.  However, as Trump is learning. in international trade relations nothing is ever simple.

China’s hand contains some trump cards (no pun intended) to play as well, and this isn’t their first poker game.  They tossed their first card out early by placing their first retaliatory tariffs on items which were designed to hurt some of the people who helped install Trump in the White House, chief among them farmers and their rural neighbors who depend on the agricultural economy.  Farmers are hurting.  Prices of farm products hit by Chinese tariffs have bottomed out.  Farmers are not only worried about their current lost income; they are also deeply concerned that even when the tariffs are removed, their ability to sell to the huge Chinese market may be permanently diminished as farmers in other countries have already moved to take their place in the Chinese supply chain.

China has other cards it has not yet played as well.  China is by far the largest producer (72%) of rare earth metal.  Alloys made with rare earths are essential for the manufacture of computer memory, DVDs, rechargeable batteries, cell phones, catalytic converters, magnets, fluorescent lighting and much more. By comparison the US produces only 8% of the world’s supply. Chinese leaders are already making plans to cut off all exports of rare earths to the United States if the trade war continues, posing great danger to our technological manufacturing sector.

China also holds $1.1 Trillion the current $3.4 Trillion US Government debt.  If Chinese leaders decided to start selling that debt and refuse to buy more, US interest rates would skyrocket, disrupting our economy.

China, with its party dictatorship, can also manipulate the value of their currency in relation to the American dollar.  By devaluing the yen, they have already reduced the impact of the new American tariffs on their companies while making it more expensive to import American goods.

Ironically the most important card in China’s hand is the very thing that Trump considers their weakness.  Since we import so many products from China in such large quantities, Trump’s tariffs have the potential to do damage to the pocketbooks of American consumers.  Up until now Trump’s tariffs have mostly affected Chinese products which are used by American manufactures to make other products, so that the cost of those tariffs are hidden from American consumers. But as the tariff war has accelerated, Trump in now leveling tariffs on products we buy every day like clothes, toys, tools, and furniture causing millions of Americans to feel the pain and increasing our county’s inflation.

Trump also has a very serious local problem.  The current American economic expansion is already the longest in history and we are overdue for a recession. Some other nations including Germany are already in recession.  While the American economy is still relatively strong, it is already slowing and we are currently seeing financial events that usually proceed a recession by 12 to 24 months. Financial experts are everywhere in the American media saying that Trump’s tariff war with China could very well push the country into  and economic downturn even earlier than expected.

In addition Xi Jinping, China’s President for life, is very unlikely to capitulate to Trump’s demands.  Xi knows that Trump is very unpopular and that he has to stand for reelection in 14 months.  Xi on the other hand  has no such problem.  He controls the Chinese media and can easily convince his people that Trump is the cause of their financial hardships. He also knows that Trump’s only strength with the majority of the American voters is our country’s good economy and if that goes south Trump has very little chance of being reelected in 2020.  So while the tariff war may be hurting the Chinese worse than Americans, Xi knows that he can wait Trump out.  So if Trump continues to raise the stakes, look for the Chinese to do the same.

Which brings us to Trump’s dilemma.  He has always portrayed himself as the best negotiator ever born, not only publicly, but also in his own mind.  In order to maintain that image Trump must continue to pressure China with ever increasing tariffs. Given his mental makeup I am not at all sure that he can do otherwise.  However, if Trump continues down that path, our economy will suffer and so will his approval ratings, hurting his reelection chances.  If the country drops into recession he would be blamed for bringing it on, reducing his chances of being reelected to essentially zero.  On the other hand if he backs down his image of being the “Negotiator in Chief” would suffer terribly, destroying one of the main reasons he was elected in the first place.

Trump has already thrown away his best option which was pause his trade war with China until after the 2020 election by not announcing his recent latest round of tariffs.  Media attention would have dropped off and he could have at least be able to say that he would deal with China after the election.  Now that opportunity is gone.

The best that Trump can hope for now is to be able to signa  virtually meaningless agreement with China that does virtually nothing to address our problems with that country so that he can save face and both countries can repeal the new tariffs they have already put in place. Of course he would be severely criticized, but he could always lie to his base, most of which are not educated enough to know any better, and call the agreement “a great win”.  Following that path he could avoid driving the American economy in the ditch and perhaps even salvage a small chance of being reelected. That is if the economy doesn’t tank anyway.  However, again I find difficult to believe that Trump’s ego will allow him to go there.

Cajun        8/30/2019