Donald Trump’s damn the torpedoes quest to slap tariffs on $517 billion worth of Chinese imports appears to be crystalizing nicely. The hope is that China will find God (God is American, by the way) and mend its wicked ways. The pain will not be one sided though. America may be the 800-pound gorilla in this dust up but it’s one hell of a pampered 800-pound gorilla. This is where Peter Navarro and Robert Lighthizer, architects of the U.S. tariff choke hold, could be miscalculating. And if we know anything about this administration it’s this: what could go wrong has not been discussed.
As Trump tells it, we hold all the cards. Thanks to their massive trade surplus, it’s impossible for China to respond with like-for-like tariffs. They’d run out of goods before we would. The U.S. economy is larger, more diversified and more resilient. Or as Commerce Secretary Wilbur Ross put it, “we have more bullets”. With the U.S. economy tick-tocking like a Swiss clock, America has the luxury of negotiating from strength. Always a plus. Trade wars really are easy to win. Just brandish your trusty tariff stick and let the Asian capitulation begin.
What if America lands its best tariff shots only to find China still standing? Tariffs on Chinese goods currently rest at $250 billion and it’s not as if Beijing is exactly gagging for a deal. What if we woke up one morning to find ourselves in a max-tariff world? That’s when things would get interesting. In this world, America isn’t nearly as intimidating. In this world, several things would undoubtedly occur. Since critical analysis isn’t our President’s strong suit, we’ll take on the task for him. Let’s ponder what might happen if Xi Jinping (that’s SHEE chin-PING) decides kissing Donald Trump’s pinky ring isn’t a look he’d prefer to be known for.
With such a heavy tax on Chinese goods — and let’s be frank, eventually these tariffs will become a tax levied against the American consumer — prices will rise. When the price of goods rises, consumers feel the pain. Not only will this dampen any wage increases American workers are starting to see, it will put pressure on companies to keep pace. Something they may or may not do. Your paycheck will increase but you won’t notice so much because the cost of goods has also increased. A sort of tariff induced inflation. This is problem number one.
The second issue and depending upon how you view debt perhaps the more hazardous, relates to America’s budget deficit. Already in a precarious position and further inflamed by Trump’s over the top corporate tax cuts, a fully tariffed China would surely do the undoable: accelerate an already runaway deficit. Let’s not forget who America leans on mightily for the funding of its deficits. China holds $1.3 trillion in U.S Treasury securities, making them by far our largest foreign debt holder. Boom goes the dynamite if the Chinese were to hang fire at the next round of Treasury auctioning. Or worse, start to unload some of it.
If China did rid itself of its U.S. debt, corporations and consumers would find it more expensive to borrow and this, to be sure, would weigh on the economy. Japan, the second largest holder, could pick up the slack, perhaps to curry favor with Trump. Or knowing he rarely honors such gestures, might think the better of it. While unlikely, dumping treasury securities is an option the Chinese have. The results run the spectrum from acting as a cooling agent on the U.S. economy to sparking a contagion and tipping the world into recession.
Before all this happens the Chinese economy may well be on life support. But what if the Chinese are bloodied and bruised yet are returning to their corner, readying for the next round? Then it becomes a game of pain. Of economic sacrifice and one Americans are ill equipped to play. We are a country that spends too much, saves too little and ignores the consequences. Reversing this nasty little habit will be too difficult. Our spending patterns are too tightly ingrained. Voluntary belt tightening can occur but rarely does so outside times of war. Real war. Blood and guts spilled on the ground war.
Even in this red-hot economic environment, because America relies so heavily on consumption as a component of growth, anything that diminishes consumption can have outsized effects. What Trump’s tariffs are really saying is he no longer wants U.S. corporations doing business in China. Change your playbook and do it now. To believe this can occur quickly and without adversely impacting consumer spending is fantastical thinking on any level. Companies do business in China to lower costs. Unless something has fundamentally changed, producing goods in America previously produced in China will cause prices to rise.
Some will argue that when gasoline prices rise, demand remains unchanged. A luxury handbag or the illest sneakers or the latest iPhone aren’t essential elements to get you to and from work. Or a doctor. Or one of the many other tasks where gasoline plays an indispensable role. Demand for discretionary goods will undoubtedly fall.
America’s inflated prosperity has been aided and abetted by excessive consumption and credit. Consumption does indeed stimulate growth but an over reliance on it can lead to the situation we have today. Where China and its export led economy allows the American consumer to party on. This greatly aided, rescued even, the American economy over the years. Donald Trump and friends would like to change the current paradigm. They’d like to bring manufacturing back to America by cutting it out of the womb of China. It’s not an impossibility but to think China would then allow those goods access back into their markets is the stuff of fairy tales.
The Chinese market is immense and while rapidly maturing is still largely untapped. This is the reason American companies have put up with doing business the Chinese way for so long. They want access to these fertile grounds. Imagine you owned a plot of land with enormous oil reserves. You may not know how to get the oil out and you may not want to sell up, but you sure aren’t forking it over to an oil baron for a pittance. Here we have the Chinese perspective.