US-China Trade War: Ready, Aim

♠ Posted by Emmanuel in at 4/04/2018 03:40:00 PM
Dragging the world economy into his idiocy: Trump unleashed in the international political economy.
I'll offer short commentary here since it's been largely anticipated. Yesterday, the United States Trade Representative lifted some of the fog of trade war I talked about earlier by unveiling a list of China-originated products targeted for 25% tariffs in line with its Section 301 findings. The USTR originally suggested $50B worth of goods to be targeted; Trump himself increased the amount to $50B. There was some (false) hope before that the US and China could pre-negotiate a less extensive list, but the equity markets were proven to show quite a lot of wishful thinking.

Shortly thereafter, the Chinese government unveiled its own tit-for-tat list of $50B worth of US-sourced exports to the PRC. Again, I believe that there was some wishful thinking that just as the PRC restrained itself in response to steel tariffs to $3B worth of goods, it would not make such an extensive targeted list of products. Not so.

In effect, then, the US and Chinese have established what they would target: The US wants to slow Chinese plans (namely, "Made In China 2025") to enhance its development by focusing on high-technology industries (which are allegedly benefiting from widespread PRC-sponsored intellectual property theft). Yet, the US wants to have its cake and eat it too by slapping tariffs on non-consumer goods. If it did, it would raise the ire of price-sensitive consumers--especially Republican constituents. Meanwhile, China seeks to hit America where it hurts most politically--those very same Republican constituents like folks in the Rust Belt who voted for Trump or soybean farmers and other agricultural producers who by and large voted for the orange-colored  buffoon.

Over the next two months, the USTR will subject its list to "consultations" with affected constituents, their lobbyists, and other stakeholders. So the next move is largely in America's court as it finalizes what products to hit with 25% tariffs. The Chinese will simply match what the amount the US applies tariffs to with identical 25% tariffs. That is the very definition of tit-for-tat. We're at the "aim" stage of ready, aim, fire. The "fire" stage happens when tariffs are finally applied.

As a parting note, Trump believes the US will "win" a trade war easily because the trade balance is so heavily in favor of China. Figures show a $337B trade deficit the US is running with China; Trump says $500B (or $800B even after accounting for IP theft). Where he gets these numbers is anyone's guess. Like most other things, he just makes this stuff up, probably. The fallacy here is regarding trade as a zero-sum game: the size of the trade balance shows who is "winning" or "losing." Hence, a trade war is "easy" to win since if US-China trade comes to a full stop, the US would be "winning" back $375B annually.

If US-China trade comes to a full stop, I somehow believe that we will have far greater problems for the world economy than Trump gloating about how he "defeated" China or other such nonsense. Still, these are the times we find ourselves in that such a scenario is not entirely implausible.