economy

Trade War Against China — Easy to Win?

Trump and his supporters are convinced that we can easily win the trade war against China. After all, we buy ~$500 billion of goods from them, and they buy only $130 billion of goods from us. So the logic goes, “they need us more than we need them!” But is it that simple? Let’s analyze.

Tariffs are basically sales tax. This not only affects the manufacturers, but also re-sellers and consumers.

So, if a laptop made in China suddenly becomes 25% more expensive because of Trump’s tariffs, US retail stores and middlemen such as Best Buy and Amazon also suffer. US consumers will now either pay more or have to forego some of the products they like. Also, look at who supplies the parts for those laptops — Japan, South Korea, Taiwan and even US manufacturers (Intel, Nvidia and others). All of them will lose money in this scenario.

Similarly, there are countless American corporations — think clothing, shoes, accessories, toys, auto parts, home appliances, electronics — which manufacture goods in China and import them. A 10% or 25% tariff will decimate their businesses. This is why Trump has already promised Tim Cook that Apple products from China won’t be taxed. But if you make one exemption, then all the others — Nike, Levi Strauss, Home Depot, GM, Goodyear and the list goes on — who’re in the same situation as Apple will want to be exempted from the tariff as well.

The bottom line is this: attacking China also means hurting many of our allies and ourselves.

China is not like Russia or Iran who can be sanctioned without any repercussions to the US economy. China’s economy is deeply intertwined with the US economy, which means that China won’t be easily bullied by US tariffs or sanctions.

China’s Leverage and Attack Plans

China is the largest buyer of US soybeans and a significant buyer of other US agricultural/farm products (corn, sorghum, pork, beef, fish etc.). So, China can impose punitive tariffs on these US items, and switch to other countries — for example, get soy from Brazil, corn from Argentina, sorghum from Nigeria and so on. Losing China as a customer is going to cause a lot of pain for US farmers, especially if EU and Mexico also target those same US farmers. Here’s China’s strategy: hurt red states’ Trump-supporting farmers who will then put pressure on politicians to end the trade war.

China has issued a list of 600+ US products that will be targeted. Here is the highlight:

tariff - Chinese short list

China has leverage over some of the biggest American corporations such as Apple, Walmart, GM etc. Imagine if, in retaliation, China shuts down Apple’s assembly factories or stops shipment of products to Walmart for a month . That would devastate those mega corporations as well as the US stock market. It will take a long time — months or even years — for Apple and Walmart to find other countries who will be as cheap, efficient and reliable as China.

There are numerous US corporations that have huge operations in China. GM manufactures and sells more than 4 million cars in China (while it sells only 3 million in the US and fewer than 10 million globally). Similarly, various food, retail, hospitality enterprises — think Starbucks, KFC, McDonald’s, Sheraton, Hilton etc. — all make tens of billions of dollars every year in China. A nasty trade war between US and China will result in tremendous losses for these companies.

How many US businesses rely on China to a significant degree? 50%? 75%? A complete breakdown of US-China trade will also mean devastation of US economy, as empty shelves in the US stores will mean many bankrupt American businesses and furious American consumers. The US will look like Venezuela, at least temporarily.

Let’s not forget that China holds more than $1 trillion of US treasuries. If the trade war truly escalates out of control, China can dump the US treasuries and potentially disrupt our bond market as well as the value of the US dollar.

Finally, many people don’t realize that China is our primary, if not the only, supplier of rare earth elements (REE), which are needed to make touchscreens, MRI machines, missiles etc. China has a virtual monopoly on the mining, refining and processing of these minerals/metals. This gives China enormous retaliatory power.

China’s Defensive Strategy

First of all, China can mitigate the effect of US tariffs by devaluing Yuan. China knows how to do this very well. “You increase the tariff on my product by 25%? I will decrease the value of my currency by 15%!”

A trade war is won by the country that can tolerate more pain! Thanks to the authoritarian government as well as social cohesiveness, Chinese can endure economic hardship a lot better than Americans. If China has to reduce their pork consumption because of embargo on US soybeans, people won’t be marching on the streets of Beijing. Can’t say the same thing about America, as Antifa and others will be more than happy to riot!

Conclusion

The US has to negotiate mutually acceptable trade deals with China, EU and others. A tit-for-tar US-China trade war will be a huge drag on the global economy as well. And there won’t be any winners.

Trump is right about excessive trade deficit, but it’s a complicated issue. Please read my article to understand (1) why the official trade deficit numbers are misleading (2) how US elites created a financial system that requires other countries to have trade surplus with the United States, and (3) Without reasonable trade deficits, the US dollar can’t be a global currency and the US can’t be a superpower!

Author: Chris Kanthan 

center  Check out Deconstructing the Syrian War, my new e-book on the Syrian war, the most consequential war of recent times)