Trump’s trade war is not about about being patriotic or protecting American businesses. It is about politics and bad economics. No one wins a trade war; everyone loses.
On July 5, 2018, the United States declared war on China. China mobilized and quickly counterattacked the U.S.
This war is a trade war which means governments enact tariffs taxes on goods we would like to buy which makes them more expensive for us. People aren’t killed in these wars, rather, they are made poorer.
The U.S. imposed a 25% tariff tax on $34 billion of goods imported from China. They include some 818 Chinese products including aerospace products, ball bearings (an important industrial product), information technology, auto parts, and medical instruments. Also included are restrictions on Chinese investment in America and limits on visas for Chinese nationals. Another $16 billion of goods are being targeted. President Trump has threatened to impose tariffs taxes on virtually all imported Chinese goods, some $450 billion worth, in an all-out trade war.
China has retaliated by imposing tariffs taxes on $34 billion of American goods such as soybeans, automobiles, seafood, bourbon, pork, and crude oil.
The tariffs taxes on Chinese goods are part of a larger, expanding trade war against our other trading partners (Canada, Mexico, and the EU) which has targeted imported lumber, washing machines, solar panels, steel and aluminum. The Trump Administration is talking about tariffs taxes on imported automobiles.
The Trump government is justifying these taxes to counter China’s “unfair competition” and “theft of intellectual property.” The idea is that Donald Trump, that consummate negotiator, will force China to loosen up its markets to American goods and companies.
Wars, like this one, as the song goes, are good for absolutely nothing.
The first thing we need to realize is that this is not about being patriotic or Making America Great Again. And it’s not really about protecting American businesses. It is about politics. And it is about Trump’s ignorance about foreign trade.
Donald Trump has built his political reputation on being the smart, savvy billionaire who talks straight and can fix things. His “Make America great again” was a smart play for him which gained him traction with voters who believed America was somehow “losing” the battle for “greatness”.
But it was all an illusion. Trump played up popular myths about foreign trade (we are “losers”). But the facts show that free trade has been good for America. Foreign trade has opened up markets for American goods and has created American jobs. Employment opportunities in America are booming despite being trade “losers”. Exports are a significant 12% of our GDP and account for almost 11 million U.S. jobs. Cheaper imported goods make Americans richer, not poorer.
Whatever. These inconvenient truths don’t seem to faze President Trump which is why this is about politics, not economics.
A recent article in the Wall Street Journal spelled out the politics of Trump’s trade policies.
“’[The fact that the economy is doing well]… gives President Donald Trump’s administration what it sees as leeway to hit China without worrying as much about blowback from U.S. households or businesses caught in the crosshairs.
‘This is the perfect time’ to use tariffs to press China to change its trade practices, said Derek Scissors, a China expert at the American Enterprise Institute, who consults with administration officials. ‘You start a process, which will cause pain to the U.S., and to China, when you have everything rolling in the economy.’”
The Chinese, being no dummies themselves, have targeted Trump’s political base. Their tariffs taxes on U.S. soybeans and autos will hit his heartland supporters the hardest according to a Moody’s Analytics report cited in the Wall Street Journal. We’ll see how long their support for Trump will last. “All’s fair …”
Who wins a war like this? No one, but I can tell you who the losers will be:
- Consumers of imported goods in both countries.
Eventually the tariffs taxes on imported Chinese goods will make consumer products more expensive for American consumers. The reason we buy Chinese goods is that they are cheaper than products made by American manufacturers. This issue is more complex than outlined here, and it will take time for these tariffs taxes to work their way through the economy, but ultimately consumers will pay more for imports which means they will have less money to spend on other products. We will be poorer as a result.
- American workers and companies whose jobs and businesses count on the China trade.
American companies relying on parts manufactured in China will have a difficult time finding replacements, so they will have to absorb the 25% cost increase or pass it along to their customers. For example, ball bearings: “Ball bearings are used in a broad range of goods including cars, tractors, trains and conveyor belts. … This tariff is going to hurt the U.S. manufacturers who import from China more than the companies who export from China to the U.S.”
Auto makers like Ford and Tesla export cars to China. China had already reduced their tariff on imported autos to 15%. Now they have slapped an additional 25% tariff tax on imported U.S. autos making them subject to a 40% hit. Tesla’s Chinese showroom prices have already been increased by 20% in anticipation of a trade war. BMW and Daimler (Mercedes-Benz) make autos in the U.S. and export them to China and their Chinese showroom prices are going up. What this does is give an advantage to Toyota, Nissan, and Honda who can export their Japan-made vehicles to China without paying the new higher tariff tax.
A further consequence of Trump’s war is that U.S. auto manufacturers will now be incentivized to open more plants in China to service Chinese domestic consumption, thus depriving American auto workers of jobs (see Tesla and Harley-Davidson).
Midwestern soybean farmers are already being hurt by Chinese retaliatory tariffs taxes. Chinese importers have stopped buying U.S. soybeans and have moved their business to Brazil.
- Trump is disrupting America’s global supply chain which many businesses rely on.
The reality is that the world now works on a global supply chain. In order to satisfy consumer demands for less costly goods, the entire world competes to supply us. For example, approximately 25% to 50% of the parts in U.S. manufactured automobiles come from all over the world. This has been a boon to American consumers since new automobile costs have barely budged over the past 25 years.
Trump’s advisers believe that China has more to lose than we do in a trade war. That is not a likely outcome. It is more likely that we will suffer more than China. Being that 50% of their economy is based on exports, only 19% is with the U.S., and, the $34 billion of targeted goods will only account for 2% of total Chinese exports.
One thing that the Trump administration may not have considered is the fact that China is still largely a command economy and the ruling Communist Party of China has shown little reluctance to impose hardship on its citizens. As Chinese president Xi consolidates his power, one of his main themes is to assert China’s role in the world and it is unlikely he will want to display weakness in the face of U.S. trade bullying.
I hear Conservative Trump supporters say that he has some secret agenda on trade and that he and we will end up on top of this fight. This is unlikely. No one can predict where this war will end up. It echoes the 1930s and the disastrous trade wars that helped cause the Great Depression. This war could last a lot longer than the Administration thinks and it could end badly for American consumers and businesses.
This war is not against China, it’s a war against us.