China Trade War With Trump Can Only Be Avoided With Engagement and Balanced Trade Policies, Not Politics
Volatility appears to be returning to Wall Street as investors react to a government injection of uncertainty. With the Trump Administration imposing sweeping tariffs and China responding with retaliatory measures, both the S&P 500 and Dow Jones have experienced some of their wildest swings in years. For those who experienced the trauma of the Great Recession and the 2008 Wall Street Meltdown, the performance of the stock markets is both a product of troubling news, a self-proclaimed pro-business President implementing seemingly anti-business policies, and pure fear. If fear and volatility continue to spiral out of control, global recession could be a reality based solely on fear driven by politics. To calm fears amid a seismic policy shift away from the decades-long liberalization of trade, the economy needs clarity, the hand of steady leadership, and gradual rebalancing of trade relations.
Unfortunately Beijing, as well as other parties who benefit from ultra-low US tariffs, want Wall Street to react negatively to US efforts to balance massive trade deficits through tariffs. The reason is the same reason China, which owns roughly a fifth of all foreign held US Treasuries, has threatened to buy less US debt, which means a ballooning National Deficit faces higher borrowing costs. Beijing wants Americans to feel the pressure, so they put political pressure on Washington. Just as Russia responded to US sanctions under the Obama Administration by oddly banning US goods that their domestic consumers enjoyed for political reasons, thereby punishing their own people, China has responded to around $50 billion worth of US-imposed tariffs with $3 billion worth tariffs on 128 products, including pork, apples, and almonds.
The goal is to place political pressure on businesses that support the Trump Administration. Denying businesses access to the massive Chinese market is sure to upset business owners, who are almost guaranteed to exert their influence on Washington. The products China is targeting, however, are products that can be sold domestically or in any other foreign market. The reduced global demand could actually help drive down domestic prices and lead to increased domestic consumption, which would actually be a net positive for the American People. That said, China’s targeted goods are products the Chinese People need and want, thus Beijing’s tariffs are actually just a tax on the Chinese People. It is a tax that is likely to cause political friction among those who enjoy US products. The move could even spark civil unrest in China, which is something Beijing fears, so there is a limit to how far China is willing to go.
Unfortunately, Beijing’s strategy is purely political with little economic basis. It is a strategy designed to discourage US efforts to raise tariffs, even as China embraces higher tariffs than those of the US and numerous protectionist policies of its own. Beijing’s sole objective in trade and its promotion of free trade has always been to maximize exports and minimize imports. In many respects, the Trump Administration is now simply embracing China’s mercantilism. By targeting advanced information technology, automated machine tools, robotics, aerospace, aeronautics equipment, maritime equipment, high-tech shipping, new-energy vehicles equipment, modern rail transport equipment, agricultural equipment, new materials, biopharma, and advanced medical products from China, Trump is challenging China’s business model, thus Beijing is simply responding with a PR campaign that threatens global economic stability.
Ironically, Mr. Trump, who is infamous for his often erratic and controversial behavior, has actually approached sanctions against China in an extremely rational and controlled fashion. He also presents an argument that resonates well among working class Americans. Despite Chinese efforts, as well as the efforts of those who share a thoughtless love of free trade, to frame Trump’s actions as the consequences of a madman and ratchet up political pressure on the Trump Administration, the President is unlikely to yield. Given his defiant personality, Mr. Trump is likely to call out and embarrass anyone or any special interest group that tries to pressure his Administration while Americans are likely to coalesce around him on trade issues. Consequently, political efforts to stifle policy shifts will only result in harm to the US, Chinese, and global economies. The best course of action is engagement and a willing embrace of balanced, responsibly implemented trade policies.
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