The warning of voided trade agreements comes after a series of on again/off again threats by the United States to impose tariffs to improve the balance of trade between the two countries for the US. The US claims China trades more exports to the US than China receives from the US.
That’s sort of true in net figures, but it’s also highly misleading in one very important way. It selectively ignores the very high values of US goods made in China, which are making billions for US companies in the domestic and global markets. Those profits are gigantic, and they do provide a sort of balance to the net export/import scenario.
President Trump has made it an article of faith that he’ll get a better trade deal for America, another apparently immovable position. The Trump administration has been hammering away on the “better deals” motif since inauguration.
Dumber Than Dumb Has Any Right To Be
A few points to illustrate the hideous logic of US tariffs on Chinese goods:
1. The net value to America importing its own products from China hasn’t even been estimated, to my knowledge. If a trade war starts, and China stops producing American products, what happens to those profits, and those companies?
2. America cannot produce these goods at a competitive price domestically. Nor are US companies likely to be too keen on spending billions to build hundreds of automated factories to do so. It’d take many years to achieve a rough parity with Chinese productivity, even if work to build the factories started now.
3. Chinese exports to American underpin the core cashflow lot of American import businesses. From a purely practical perspective, a sudden end to those exports could be catastrophic for Americans importing from China.
4. China is not at all dependent on the US market. A sudden end to current trade would have a pretty significant impact, but not fatal. More like a sort of bruising effect. China trades with the world, and has plenty of markets for its goods.
5. Starting a trade war with China will terrify the financial markets. You can expect a lot of crashes across all sectors if such a trade war actually happens.
6. The 1929 Great Depression was started specifically by tariffs being imposed. The tariffs had a disastrous impact on global trade. In some countries, the Depression continued until the start of the Second World War. The modern global economy is far more vulnerable, because it’s far more integrated than it was in 1929.
How Tactless Is Your Trade Reality? Guess.
Chinese officials have left the door partly open, including a willingness to accept more imports. The Trump threat of placing tariffs on $150 billion of Chinese imports, however, has gone nowhere.
If this was a game of poker, China is holding some very good cards. Two aces, in fact, in the form of US dependency on Chinese manufacturing, and the ability of China’s very large, resilient economy to absorb losses from US trade restrictions.
A third ace is also likely to be acquired as a direct result of the tariffs idea – All of America’s allies and trading partners will continue to trade with China, without tariffs. They won’t stop trading with China because the US is creating problems for its own businesses. Adding a further serious blow to American credibility, already under serious question after many weird moves, isn’t going to help much, either.
US allies and trading partners have no reason to believe the US tariffs are anything but a truly lousy idea. From a purely objective perspective, it’s a no-brainer. Chinese trade since the big manufacturing boom has always been based on very clear policies, clear and ruthlessly enforced margins, and a pretty no-nonsense approach to doing business. Everyone knows that. Why start bitching about it now?
US claims that Trump is simply responding to China “breaking trade rules” are absurd. The US has been known to do more than bend trade rules itself, and so have American companies, dodging taxes worldwide for generations. China is different; it makes its own rules, exactly like the US does when it feels like doing so. Countries that don’t charge tariffs on US products have no reason to be grateful for this much-too-sudden emphasis on the rule of law which everybody knows doesn’t exist.
Until now, the US hasn’t had a problem with Chinese trade. Now, suddenly, it’s a “bad deal”, after decades of record profits for US companies using Chinese manufacturing? It’s not even credible. America outsourced its manufacturing decades ago, gutted local manufacturing in the process, and there’s no turning back the clock.
Trade realities are very unambiguous; obstruct trade, and you inevitably lose money, simply because trade is obstructed. This has been the case since the Silk Road. If your big dumb friend jumps off a cliff, you don’t have to follow them, America’s highly disenchanted allies and partners simply won’t. The whole idea is insane, and it’s not getting any saner.
Worst Case – Lethal Backlash In The American Domestic Markets?
Assume an all-out trade war. A worst case scenario would include US companies crashing due to manufacturing issues, stock market collapses like nothing ever seen before, and utter chaos in the equities, derivatives and financial markets. American markets would suffer worst of all, including all those offshore tax-dodging trillions of dollars in foreign markets. The “safe” money would be in play, and very much at risk.
At the national level, China could also dump its huge holdings in US bonds, hitting another supposedly safe market very hard indeed. The net losses could be enormous, and fatal to some investors. The American financial sector is hardwired in to global business; they can’t get out, if there’s a major crisis.
Even the super-rich couldn’t be immune to the multiple big shock waves, which would hit every part of the US economy. American domestic prices could also be affected, and badly, by shortages of products, parts, electronics, consumables, and most of the typical shopping lists for consumers and businesses. That sort of collateral damage could hit the domestic economy like a meat axe, slicing through everything from wages to banking.
Prices would have to rise, but would people be able to afford the price rises? Property prices, too, could become very volatile. You’d think that a highly leveraged property market guy like Trump would also be aware of the likely risk to property prices, in a major meltdown. Last time American property prices fell dramatically, it was foreigners who bought up big, as much as Americans. If the property market really hits a major pothole as a result of capital starvation, Americans might not be able to buy in at all next time.
So Many Other Options
Exactly why is the Trump administration so relentlessly creating a cross to crucify itself, and America, upon? There’s no need to do anything of the kind. They’d do better to modernize their trade position, boost global exports and enter new markets with the usual tide of new products America produces every year.
The trade situation can be managed, quite easily. It’s not like America can’t export and improve its trading position. US technologies, intellectual properties, and other assets are still very high value; it’d be easy enough to develop those to improve balance of trade.
It’s hard to imagine a more suicidal idea for America than the tariffs idea. If you were to define 100 ways of totally destroying the American economy, tariffs would be a front runner by a very long margin. Second would be simply shooting as many American businesses and employees as possible.
If American wants to do better business with China, doing better business with better margins for US businesses will achieve a lot more than this empty, stupid, threat. The days of unquestioned US supremacy in trade are gone, and it’s a history of extremely bad ideas that made those days end.
This is the worst idea of the lot, and there really will be hell to pay if it happens. If I were an American, I’d call it treason. Every move in this scenario has major risks for the US, with no redeeming features. As an Australian, I’ll call it what it is -A load of unbelievable crap, with no redeeming features. Any deal maker knows to bargain from a position of strength – This is the exact opposite. There can be no innocent parties on the US side, if a real trade war starts.
