The United States/China trade talks are supposed to “resolve” the tariffs situation. So far, they’ve been exacerbating the problems. China is accused, on an unknown basis, of “reneging” on a deal that hasn’t yet been done. The US, meanwhile, is sticking to the protectionist mantra. Experts aren’t impressed.
That’s ironic, because for decades the US has been preaching at Baptist Church revival levels the benefits of free trade, i.e., without tariffs or other restrictions. China, meanwhile, endlessly tweaks it’s foreign investment and trade regulations, to the exasperation of many.
The US/China trade balance
In 2018, the trade balance gap remained pretty much the same, tariffs or no tariffs. The howlingly obvious fact is that China’s trade surplus is based on US imports, which are discretionary purchases. The customers pay for the tariffs, dollar for dollar. If you want to correct the import balance, all you need to do is stop importing. You don’t create a cumbersome, expensive to administrate added cost base to imports and expect miracles.
Given that most US goods are still made in China for production cost reasons, it’s absurd to claim that adding tariffs does anything but drive up prices. Creating a situation where US companies may fall foul of Chinese trade retaliation doesn’t make a lot of sense, either.
More to the point – Until Trump, the US/China trade balance was an accepted, known factor. America wasn’t complaining about cheaper Chinese products. Quite the opposite, the entire economic food chain was doing quite well out of this trade. There simply wasn’t an issue, until the tariffs were imposed.
Also relevant – A “trade imbalance” doesn’t mean everyone’s going broke. It may mean too much money going out, not enough coming in, but that situation doesn’t apply to the gigantic, complex economies of the US or China. A modern trade balance is one of a set of performance indicators these days, not a “state of the economy” as such.
The Chinese issues
China’s reaction to the tariffs has been uncharacteristically mild. On many issues, China is quick to respond, condemn, and accuse. On this issue, the silence is deafening.
There are several possible reasons for this:
1. China knows it can simply wait out the Trump administration, which may be gone in 18 months.
2. America and China won’t stop doing big, mutually profitable business on the basis of some political tantrum.
3. The actual effect on US imports of Chinese goods has been irritating, but not that serious for the Chinese. The big issue is profit margins, and the higher prices are being applied at the US end, not the Chinese.
4. The restrictions on trade due to tariffs are obviously irritating enough to make talks worthwhile, but China seems less than enthusiastic.
5. China may worry, rightly, about the price incentives for black markets created by the tariffs. The global black market will see an opportunity in this situation, and that could cost them big money.
6. China has done extremely well on the basis of free trade, and there’s no good reason for them to like any kind of protectionism. They may want to see the tariffs fail, preferably spectacularly, for that reason alone.
7. In 2017, 50% of global manufacturing was done in China. They hold some good cards in this game, and they can use this overwhelming percentage of manufacturing as leverage in any situation. Tariffs, schmariffs.
8. Making trade compromises of any kind may be an own goal for China. That may be the biggest obstacle of all in this environment.
9. The US isn’t China’s only customer. Global trade is rattling along, inconsistently but growing. The US is only significant as a percentage of trade, and that’s likely to diminish, if slowly, as global trade grows.
Meanwhile, on planet Earth….
The rest of the world, notably China’s suppliers like Australia, has been groaning long and loud about this trade war that shouldn’t even exist. Our “politically eclectic” American friends (and the bizarre “businesspeople” they associate with for no comprehensible reason) are currently famous for their multi-directional, if brief, attention spans and total lack of forward thinking.
Usually, that’s normal and easy to ignore, but at this infantile, dysfunctional level, it’s extremely annoying, and potentially expensive for us if things get nasty. The tariffs haven’t had much clear impact on our commodities, in fact iron and metal prices have drifted upward, but who needs the amateur theatricals? Most countries seem to have taken a dislike to the US current policies. America has left itself truly isolated and very unpopular in justifying these unnecessary obstacles to global trade.
Meanwhile, the global financial markets are sending mixed, and usually wrong, signals about China. The classic case is “Chinese manufacturing index down” followed by a market downward move. Then, a few months later, the Chinese manufacturing data and sales show the exact opposite to be the case. Again, tariffs don’t seem to do much.
To clarify- If the profit margins aren’t there, the Chinese simply won’t produce the goods. That’s the one ironclad certainty in Chinese trade, and it won’t change. A consistent recent 6% domestic economic growth rate also indicates little serious impact from the tariffs.
The tariffs will end, sooner or later. They’re useless impediments to business. The US has walked off the bus while it’s in motion. A few boo-boos may result, but the real damage is to US credibility. Suddenly imposing tariffs, the things that caused the Great Depression, is like going back to the Stone Age. It can’t last, and it won’t.
