Trump imposes more tariffs on China, but he’s out of ideas. Now China holds the cards.
President Donald Trump on Thursday tweeted that he would apply 10% tariffs on $300 billion worth of Chinese imports.
“Trade talks are continuing, and… during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%” the president wrote in a series of tweets.
But while the White House described this week’s trade talks between the U.S. and China as “constructive,” little progress was made.
Earlier in the day, the president tweeted that countries such as Iran and China, both embroiled in heated diplomatic contretemps with the U.S. (Iran, over the nuclear deal Trump violated and the sanctions he subsequently imposed, and China, over trade) are hoping he doesn’t get reelected in 2020:
China, Iran & other foreign countries are looking at the Democrat Candidates and “drooling” over the small prospect that they could be dealing with them in the not too distant future. They would be able to rip off our beloved USA like never before. With President Trump, NO WAY!
— Donald J. Trump (@realDonaldTrump) August 1, 2019
China still wants the United States to lift the tariffs the White House placed on $250 billion in Chinese goods, but the U.S. is not budging, insisting that China take a number of steps first — including opening its markets to U.S. business and stopping the forced transfer of technology.
As the deadlock has dragged on over the past year, negotiations have, at times, regressed, with each country slapping tariffs on an increasing number of categories of the other’s exports. Talks finally broke down entirely in May.
That China might be hoping to wait out Trump isn’t surprising as the Chinese government has historically taken the long view on most issues. In the meantime, however, the stalled talks and escalation of tariffs create new uncertainties for the U.S. economy as this contentious trade war persists with no end in sight.
“Over time, I have a hard time seeing a protectionist U.S. grow more than an integrated U.S.,” said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies.
But he doesn’t think the Chinese are stalling because they fear President Trump’s toughness at the bargaining table.
“My sense is that the Chinese have lost interest in a deal because they don’t trust the Trump administration any longer,” said Kennedy. And this drawn-out trade war, he said, will have a negative effect on the U.S. economy, one way or the other.
“How quickly that is reflected depends on where you are in the economy,” he added. Soybean farmers have already been hit, for example, whereas consumers will start paying higher prices when the latest round of tariffs are applied on Chinese goods in the fall.
By Kennedy’s reckoning, the prolonged trade war will adversely affect business and consumer confidence in the United States, piling onto the collateral damage that he believes has been wrought by the Trump administration’s “economic nationalism.”
He expects the International Monetary Fund and the World Bank to see this situation as a net negative, and issue estimates in August on its impact on global economic growth.
A deal won’t fix all that is broken
Robert E. Scott, senior economist and director of trade and manufacturing policy research at the Economic Policy Institute, said that the tariffs are a bad idea.
“I’m not a fan of these tariffs… there’s no strategy behind it and it’s unlikely to lead to an improvement in our trade relations, or that it’s going to help workers or American production,” said Scott.
While he doesn’t think a trade war that drags along for another year and a half will be catastrophic to the U.S. economy, Thursday’s fresh round of tariffs, he said, “ups the ante,” making it unclear “how long consumers can continue to fuel economic growth.”
It’s true that some U.S. farmers and manufacturers have already said that they are feeling the pinch, with consumers bracing for price increases.
But contrary to President Donald Trump’s claims, China isn’t footing the bill for his tariffs, American business owners are. Some are buffering consumers from drastic price hikesby taking the hit themselves, or are spending money moving their supply chains away from China.
Farmers took a hit at the start of the trade war, but the Trump administration started offering aid, and, it seems, is now over-compensating on some fronts, costing taxpayers more than $26 billion in 2018 and 2019.
But, Scott said, it’s not the trade war with China that is causing most of this pain: It’s a combination of slowing domestic economic growth (after the sugar rush of last year’s tax cut wore off), combined with a slow-down in global economic growth.
“That 0.5% negative impact of tariffs does loom larger when baseline growth is so low, and tenuous,” Scott cautioned.
He added that there was nothing in either the tax or spending bills that was going to “rebuild the domestic economy, and generate increased demands in the future.” The president also didn’t increase spending on infrastructure as he said he would, he added.
Yet President Trump’s former economic adviser Gary Cohn told the BBC on Thursday that the trade war has had a “dramatic impact” on the U.S. manufacturing sector. He added that with everything — including credit availability — being controlled by the state, China has a better chance of weathering this crisis.
Scott points out that Cohn is basically only talking about Wall Street.
“Wall Street is very dependent on the state of the manufacturing sector in China. They are very invested in globalization and offshoring,” he said.
Despite President Trump’s tariffs, trade deficits keep increasing, and even American companies aren’t bringing manufacturing jobs back home from China. Instead, they’re moving them to Taiwan or Vietnam, and China is shipping parts and components to those plants.
Over-valued dollar + protectionism = trouble
Is getting a deal important? Yes. Do both countries need it? Absolutely. However, it’s possible that no trade deal will solve the very real problems — the massive trade deficit and the forced transfer of technology, for instance — that the U.S. has with China.
China is the U.S.’s third largest trading partner, and a huge player in the global supply chain. But, said Kennedy, it is neither the savior nor the bane of the American economy.
President Trump’s protectionism, however, is another matter, with investors looking at this issue not strictly through a perspective of U.S.-China tension, but rather through the prism of the global economy as a whole. The president has imposed or threatened to impose tariffs on virtually every major trading partner: Canada, Mexico, the European Union, China, India, Japan, and South Korea.
This is the opposite of what Kennedy feels the president should be doing, which is to lift tariffs off allies, present a united front against China, and develop “new rules of the road” for international trade — all in the service of creating a more level playing field for global trade.
Scott, however, feels that the main culprit in hurting the American economy is the over-valued U.S. dollar — especially against the Chinese Yuan. Without rebalancing the U.S. dollar, trade deficits and manufacturing losses will continue.
American manufacturing and agriculture alike have been hit by the strength of the dollar, which makes prices of U.S. goods — especially farm goods, whose prices are set on the global market — uncompetitively high. Recent floods in the U.S. and decreased Chinese purchases haven’t helped matters. Nevertheless, the U.S. dollar’s appreciation (driven higher by increased U.S. borrowing) is the biggest culprit, said Scott.
Plus, China is happy to continue to devalue its currency — down 8.3% since February 2018 — which allows it to offset the effects of the tariffs.
“They have countered Trump’s move and he doesn’t have an answer,” said Scott, adding that they are also waiting for Trump to simply be voted out of office.
But what if he’s not? Kennedy said China will expect a bifurcated global economy — one centered around the U.S. and one around itself. It will continue to aggressively develop technology, build trade and investment partnerships, and make whatever moves it has at its disposal to weaken the U.S. economy.
“They will see this as part of a broader strategic partnership… they would be responding, very much in parallel, to what the U.S. is doing,” said Kennedy.
