US – China Trade Conflict Part I: What Trump can learn from China on Economics

If you want to understand the developing trade conflict with China, the first thing you need to realize is that nothing Donald Trump is currently doing makes sense. His views on trade are incoherent, His demands are incomprehensible. And he vastly in our opinion overrates his ability to inflict damage on China while underrating the damage China can do in return.

The second thing you need to realize is that China’s response so far has been fairly modest and measured, at least considering the current situation. The United States has implemented or announced tariffs on virtually everything China sells to the US, with average tariff rates not seen in generations. The Chinese by contrast, have yet to deploy anything like the full range of tools at their disposal to offset Trump’s actions and hurt his political base.

So why haven’t the Chinese gone all out?

It looks to us as if they’re still trying to teach trump some economics. What they’ve been saying in our opinion through their actions, in effect is: “you think you can bully us. But you can’t. We, on the other hand can ruin your farmers and crash your stock market. Do you want to reconsider?”

There is, however, so far no indication that this message is getting through. Instead, every time the Chinese pause and give Trump a chance to rethink, he takes it as vindication and pushes even harder. What this suggests, in turn, is that sooner or later the warning shots will turn into an all-out trade and currency war.

About Trump’s views: His incoherence is on view almost every day, but one of his recent tweets was a perfect illustration. Remember, Trump has been complaining nonstop about the strength of the dollar, which he claims puts America at a competitive disadvantage. He got the US Treasury Department to declare China a currency manipulator, which was true seven or eight years ago but isn’t true now. Yet the very next day he wrote triumphantly that “massive amounts of money from China and other parts of the world is pouring into the United States,” which he declared “a beautiful thing to see.”

Um, what happens Mr. Trump when “massive amounts of money” pour into your country? THINK! Your currency rises, which is exactly what you, Mr. Trump, are complaining about. And if lots of money were flooding out of China, the Yuan would be plunging, not experiencing the trivial (2%) decline that Treasury condemned.

Oh well. Let’s please not guess that arithmetic is just a hoax perpetrated by the deep state.

Still, even if Trumps isn’t making sense, will China give in to his demands? The short answer is, “what demands?” Trump mainly seems exercised by China’s trade surplus with America, which has of course multiple causes and isn’t therefore really under the Chinese government’s control. Others in his administration seem concerned by China’s push into high technology industries, which could indeed in our opinion threaten US dominance. But China is both an economic super power and relatively poor compared with the US; it’s grossly unrealistic in our opinion to imagine that such a country can be bullied into scaling back its technological ambitions.

Which brings us to the question of how much power the US really has in this situation. America is, of course, a major market for Chinese goods, and China buys relatively little in return, so the direct adverse effect of a tariff war is larger for the Chinese. But it’s in our opinion also important to have a sense of scale. China isn’t like Mexico, which sends 80% of its exports to the United States; the Chinese economy is less dependent on trade than smaller nations, and less than a fifth of its exports go to America.

So while Trump’s tariffs certainly hurt the Chinese, Beijing is in our opinion still fairly well placed to counter their effects. China can pump up domestic spending with monetary and fiscal stimulus; it can boost its exports, to the world at large as well as to America, by telling the yuan fall.

At the same time, China can inflict pain of its own. It can buy its soybeans elsewhere, hurting US farmers. As we just saw recently, even a mostly symbolic weakening of the yuan can send US stocks plunging.

And America‘s ability to counter these moves is in our opinion hindered by combination of technical and political factors. The Fed of course can cut rates, but not very much given how low they are already. The US could do a fiscal stimulus, but having rammed through a plutocrat – friendly tax cut in 2017, Trump would have to make real concessions in our opinion to Democrats to get anything more – something he most probably won’t do.

What about a coordinated international response?

That’s in our opinion unlikely, both because it’s not clear to anyone what Trump really wants from China and because his general belligerence – not to mention his racism – has left America with almost nobody willing to take its side in global disputes. So Trump in our opinion is in a much weaker position than he imagines, and our guess is that China’s mini – devaluation of its currency was an attempt to educate him in that reality. But we at Calvin • Farel very much doubt that he has learned anything. His administration has been steadily hemorrhaging people who know anything about economics, and reports in our opinion indicate that Trump isn’t even listening to the band of ignoramuses he has left.

So in our opinion this trade dispute will probably get much worse before it gets better.