On Friday, the trade war between the United States and China accelerated. This is after China announced its retaliatory tariffs on the previously-announced tariffs by the United States.
The new tariffs on American goods worth more than $78 billion will go into effect on October 31st. Shortly afterwards, Donald Trump sent some angry tweets, asking US companies to just give up on China. Later on, he announced fresh tariffs and increased the existing ones.
….better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing..
— Donald J. Trump (@realDonaldTrump) 23 agosto 2019
All this made US stocks to have a sharp decline, with the Dow shedding more than 600 points.
In this article, we will look at how things are and why Donald Trump has already lost the war.
How the Trade War Started
Decades before Donald Trump ran for office, he complained seriously about the trade deals that the United States had made with other countries such as Mexico, Canada, European Union, and China. In full-page ads in the major papers in New York, he complained that the deals would decimate the American economy.
During his campaign, Trump focused his message on trade and immigration. On the latter, he promised to build a wall between the US and Mexico, and on trade he promised to rework the existing trade deals.
In his first year of his presidency, he focused on reforming the country’s tax system. Shortly afterwards, he started focusing on trade. His first move was relatively measured: in it, he placed tariffs on imported washing machines.
Shortly afterwards, he placed tariffs on imported steel and aluminum. Later, he placed tariffs on Chinese goods worth $65 billion, and then escalated them by adding tariffs on goods worth $200 billion. These tariffs went into effect this year, after talks broke down.
Shortly afterwards, he announced plans to put goods worth $300 billion. As he did this, China too announced tariffs to counter Trump’s actions.
Why Trump Will Not Win this War
Trump’s thinking on this trade war is relatively simple. Partly, this was made clear on Friday, when he asked whether the US needed China. His thinking is that the US ships goods worth more than $200 billion to China every year while China ships goods worth more than $500 billion to the United States.
As such, he believes that he has a leverage, to coarse China into submission. Indeed, on a dollar-to-dollar approach, he has a point to make.
However, realistically, he is wrong on so many ways.
First, while most American companies don’t ship products to China, most of them do a lot of business in China. Therefore, instead of shipping goods from the United States, they sell to them within the country. These companies do trade worth more than $300 billion in China every year. On the other hand, Chinese firms do trade worth slightly above $25 billion in the US. For example, Apple does not ship iPhones from the US to China.
Therefore, China can make it difficult for US companies to do business in the country.
Second, most American companies use China to source their products. They use China because of the low cost of doing business there. The Chinese also have a lot of skills on doing some complex things like sewing.
Therefore, by making it expensive for them to do business in China, Trump is hurting American small businesses.
Third, Trump is only interested in winning the next election. China’s Xi on the other hand does not have any political interests. As such, he is in this for the long-term. This means that he can wait a little longer to inflict a lot of damage to the US economy.
Finally, China has the nuclear option in all this. As the US budget deficit increases, it is now relying on China more than ever. The country needs Chinese money to fund the budget. This is because China is the second-biggest holder of US treasuries. If it announces that it will stop buying US debt, it will be game over for Trump.
Useful external resources about Trade War
- China hopes for ‘calm’ resolution to tariff war – Marketwatch
- China Loses Status as U.S.’s Top Foreign Creditor to Japan – Bloomberg