China

Top Crazy Logic for Why the US Will Win the Trade War Against China

The craziest logic for why the US will win the trade war against China is: “We buy more from them than they buy from us. Aha! So we stop buying & the Chinese go bankrupt!” This is also re-framed us, “They need us more than we need them.” Yes, we buy $500 billion worth of Chinese goods every year and they buy only $120 billion of our goods, but here’s why this simplistic logic has more holes than Swiss cheese.

Even tariffs on junk or luxury hurtThere are two types of items we  can easily live without: totally junk or sheer luxury. Silly, cheap toys or t-shirts? Sure, we can afford to not buy them and also hurt China in that process. Super luxury items such as $500 Pravda handbags? Yeah, not a big deal for most people.

However, without these super-cheap and luxury items, many stores will find their revenues and profits go down, which may lead to employees getting laid off, bonuses being slashed and even the stock prices getting hammered. Thus, tariffs on cheap or luxury products are not totally painless.

Imports

Most imports are essential: We are not engaging in charity when we buy stuff from China or elsewhere. Much of the imports from China include items such as smartphones, computers, ($18 billion of) auto parts, machinery or minerals, which are all essential for productivity or manufacturing/assembly of critical goods in the US. These significantly affect our economy and the jobs. Also, many FDA-approved drugs/devices, over-the-counter medications, supplements are made with ingredients and chemicals from China. Then there are rare-earth minerals from China without which MRI machines, fighter jets, Tesla cars etc. can’t function.

There are also not-so essential but still valuable products that are imported from China in vast amounts — for example, we imported 14 million bicycles from China last year! Look around your house — everything from apparel, shoes, furniture, bedding, luggage, kitchenware, appliances, lamps, tools etc. are mostly made in China. This is why 300 retailers — including big names such as Walmart, Target, Gap, Macy’s and Dollar Tree — are pleading with Trump to end the tariffs.

Some imports are American goods: When Nike and Apple ask the Chinese to assemble or make goods on behalf of US corporations, how does it make sense to tariff them as hostile imports? If you order pizza, don’t yell at the delivery guy and scream that he’s ripping you off. It’s your pizza. You paid for it!

Not many goods are 100% Chinese: It’s hard to identify goods that are 100% Chinese. When a $1000 iPhone XS comes from China, the US commerce department would jot it down as a trade deficit of about $400 (what Apple pays FoxConn for that phone). But out of the $400, only about $20 stays in China, and the rest goes to countries that provide the expensive components. These countries include our allies — Japan, South Korea, Netherlands etc. — as well as ourselves! Yup, Qualcomm, Intel, Micron etc. provide the semiconductor chips that China uses to assemble smartphones and laptops. Thus the tariffs on electronics affect us and our allies more than China!

No easy alternatives: Theoretically, US corps can find new factories and suppliers, but the global supply chain is so intricate that it will take 2-3 years to establish new, reliable, cheap and effective suppliers. Also, if the factories have to be moved, US corporations will simply go to another developing country such as Vietnam, Thailand or India.

This is why Trump’s 25% tariffs kick in after the holiday season. He didn’t want to wreck the holiday sales, which account for most of the revenue/profit for retailers. But this also means that the tariffs can’t last too long. So, all that China has to do is to put up with the trade war for six months or so. Then the US has to fold.

(And, don’t forget that China has plenty of means to fight back and hurt US companies as well)