Trade War with China - Easy to Win?

-by Chris Kanthan, Sott.net

Trump and his supporters are convinced that we can easily win the trade war against China. After all, we buy $500 billion worth of goods from them, and they buy only $130 billion of goods from us. So the logic goes, "they need us more than we need them!" But is it that simple? Let's analyze. 
 

Tariffs are basically sales tax. This not only affects the manufacturers, but also re-sellers and consumers. 

So, if a Lenovo laptop - made in China by a Chinese company - suddenly becomes 25% more expensive because of Trump's tariffs, US retail stores and middlemen such as Best Buy, Target and Amazon also suffer. US consumers will now either pay more or have to forego some of the products they like. Also, look at who supplies the parts for those laptops - Japan, South Korea, Taiwan and even US manufacturers (Intel, Nvidia and others). All of them will lose money in this scenario. 

Moreover, there are countless American corporations - think clothing, shoes, accessories, toys, auto parts, home appliances, electronics and more - which manufacture goods in China and import them. A 10% or 25% tariff on all goods from China will have terrible consequences. Seeming to acknowledge this fact, Trump has already promised Tim Cook that Apple products from China won't be taxed. But if you make one exemption, then all the others - Nike, Levi Strauss, GM, Goodyear and the list goes on - who are in the same situation as Apple will want to be exempted from the tariff as well. 

The bottom line is this: attacking China also means hurting many of our allies and ourselves. This is why powerful groups such as the US Chamber of Commerce, Business Roundtable, National Retail Federation, American Soybean Association and 50 others are now lobbying Congress
 to stop Trump's tariffs. 

China's Leverage and Attack Plans 

China is not like Russia or Iran who can be sanctioned without any repercussions for the US economy. China's economy is deeply intertwined with the US economy, which means that China won't be easily bullied by US tariffs or sanctions. 

China is the largest buyer of US soybeans and a significant buyer of other US agricultural/farm products (corn, sorghum, pork, beef, fish etc.). China can impose punitive, retaliatory tariffs on these US items, and switch to other countries - for example, get soy from Brazil, corn from Argentina, sorghum from Nigeria, oil from Iran and so on. Losing China as a customer is going to cause a lot of pain for US farmers, especially if the EU, Canada and Mexico also target those same US farmers. Here's China's strategy: hurt red states' Trump-supporting farmers who will then put pressure on politicians to end the trade war. 

China has issued a list of 600+ US products that will be targeted by July 6. Here are the highlights: 

China has leverage over some of the biggest American corporations such as Apple, Walmart, GM etc. Imagine if China shuts down Apple's assembly factories or stops shipment of products to Walmart for a month . That will crush those mega corporations as well as the US stock marketIt will take a long time - months or even years - for Apple and Walmart to find other countries who will be as cheap, efficient and reliable as China. 

There are numerous US corporations that have large operations in ChinaGM manufactures and sells more than 4 million cars in China (while it sells only 3 million in the US and fewer than 10 million globally). Similarly, various food, retail and hospitality enterprises - think Starbucks, KFC, McDonald's, Sheraton, Hilton etc. - all make tens of billions of dollars of profit every year in China. A nasty trade war between US and China will result in tremendous losses for these companies. 

How many US businesses rely on China to a significant degree? 50%? 75%? A complete breakdown of US-China trade will devastate the US economy, as empty shelves in the US stores will mean many bankrupt businesses and furious American consumers. The US will look like Venezuela, at least temporarily

China's government may also encourage a boycott of US products. Japanese and South Korean companies have many sad stories to tell on this topic. 

In 2016, more than 3 million Chinese tourists came to the US and spent over $33 billion. Perhaps they will be more inclined to visit Europe during a US-China trade war. 


Nuclear Options 

Then there are the deadly arrows in the quiver, such as China's holdings of more than $1 trillion of US treasuriesIf the trade war truly escalates out of control, China can dump US treasuries and potentially disrupt our bond market as well as the value of the US dollar. In a recent interview, a Chinese government economist warned that the US-China trade war could lead to a "financial war beyond our imagination." 

Finally, many people don't realize that China is our primary, if not the only, supplier of rare earth elements (REE), which are needed to make touchscreens, hybrid cars, MRI machines, missiles etc. China has a virtual monopoly on the mining, refining and processing of these minerals/metals. This gives China enormous retaliatory power. 

Of course, the US also has a nuclear option: semiconductor chips. China depends on the US and America's allies for 90% of semiconductor chips, without which the Chinese economy will grind to a halt. The ongoing saga of ZTE illustrates how a massive Chinese company with 75,000 employees can go bankrupt in a couple of months without American (Qualcomm) semiconductor chips. The Chinese are hoping to close this gap with the Made in China 2025 plan, but this Achilles heel exists for the near future. 


China's Defensive Strategy 

First of all, China can mitigate the effect of US tariffs by devaluing the Yuan. China knows how to do this very well. "You increase the tariff on my product by 25%? I will decrease the value of my currency by 15%!" 

A trade war is won by the country that can tolerate the most pain. Thanks to the authoritarian government as well as social cohesiveness, the Chinese can endure economic hardship a lot better than Americans. If China has to reduce their pork consumption because of an embargo on US soybeans, people won't be marching in the streets of Beijing. No one should expect such good behavior in America in the same scenario! 


Conclusion 

The US has to negotiate mutually acceptable trade deals with China, EU and others. The result of 25 years of extreme globalization is not going to be swiftly reversed by tariffs. A tit-for-tat trade war will be a painful drag on the entire global economy. And there won't be any winners in this game of chicken. 

Americans should be concerned about the excessive trade deficit, but it's a complicated issue. As I explained in my previous article, the official trade deficit numbers are misleading, US elites created a financial system that requires other countries to have trade surplus with the United States, and without reasonable trade deficits, the US dollar can't be a global currency and the US can't be a superpower!

Chris Kanthan 

Chris Kanthan is the author of a new book, Deconstructing the Syrian war.. Chris lives in the San Francisco Bay Area, has traveled to 35 countries, and writes about world affairs, politics, economy and health. His other book is Deconstructing Monsanto.. Follow him on Twitter: @GMOChannel


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