A Campaign Promise Kept.
Like or dislike President Trump, he is doing what he said he would do: going after the trade policies of other countries. He is portraying other countries as tariff villains and the United States as the victim.
The Democrats, who have been standing on the political sidelines since the presidential election, have been looking for a political opportunity. Maybe the president's tariff policy will help them. They are already blaming the president for what they claim is impending hyperinflation, but are frustrated by the fact that the tariff edicts have yet to produce inflationary pressures. In fact, inflation has abated, at least for the time being. To President Trump's credit, he has protected consumers, in part, by persuading companies to absorb some of the inflationary costs resulting from the tariff skirmish. This will not last forever.
Some countries have caved under the pressure of President Trump's attacks; others are fighting back. One of his prime targets, and certainly one of the most important, is China.
Tariff Fundamentals.
Before addressing the current tariff disagreements, it is necessary to state the underlying tariff principles. They are:
- Article I, Section 8 of the Constitution grants Congress the authority "to lay and collect Taxes, Duties (tariffs), Imposts and Excises." Parenthesis added. Somewhere along the way, Congress allowed presidents to set tariff policy without getting Congressional approval. Therefore, if Congress is upset with Trump's tariff plan, it has itself to blame.
- In the long run, no one wins a tariff fight.
- When setting tariff policy, it is necessary to remember the other country's political environment, culture, economic condition, and strategy, not just its tariff rates. Looking only at tariff rates is easy, but it is also naive.
- We are not in a tariff war. The president's actions are not even a battle. We are enduring a skirmish.
China's Challenges.
Now to China. To accurately evaluate the president's success in dealing with China, it is necessary to separate the tariff dispute with China into two parts. They are the short-term and intermediate-term. The good news is that he is winning the short-term skirmish with China, sort of. The United States and China agreed to a 90-day truce on tariffs. This was turned upside down when the United States Court of International Trade ruled the president had overstepped his authority and blocked the president's tariffs, including the one applied to China. The next day, the United States Court of Appeals for the Federal Circuit stayed the United States Court of International Trade's ruling. So, the president won, lost, won, at least temporarily. Surely, the Supreme Court will have an opportunity to rule on this issue.
The 90-day truce was crippled not only by court rulings but also by the president's comments. He has gone from saying he is saving China to saying that China has breached the conditions of the 90-day agreement. Of course, China responded, accusing the United States of wrongdoing. All this is a sideshow.
Let's examine the short-run skirmish. The president should win this skirmish for reasons unrelated to his negotiating skills, though he certainly seems to understand the art of the deal. China is in a challenging economic state for myriad reasons. It would not be possible to cover all of these reasons in this blog; however, a sampling will illustrate why China is likely to yield to Trump's demands.
Population.
China has a significant number of problems. First, it spent years encouraging its citizens to have male children. This type of misogynist attitude has proved problematic. In the United States, slightly less than 50 percent of the population is male, whereas in China, more than 51 percent is male. This male bias can lead to unrest if China fails to provide employment opportunities. A protracted tariff war will likely force China to shut down plants and result in layoffs, weakening the economic underpinning for the entire population.
Real Estate Bubble.
Second, China has a fragile real estate bubble that is already showing signs of deflation. Without a strong trade relationship with the rest of the world, particularly the United States, China's real estate bubble could collapse, potentially sending the country into a recession similar to the one that occurred in the United States in 2009.
Industrial Spying.
Third, if companies relocate to the United States or other countries, such as India or Vietnam, China will have a harder time appropriating technology. All governments have spies. Even companies utilize spies. All governments try to appropriate the expertise of other countries. Some companies do, too. My observation is not made from a position of superiority or criticism of the Chinese. I do not hold any moral high ground. It is just that China happens to be really (really) good at appropriating technology, so it cannot afford to lose the intellectual golden goose.
Transshipping.
Fourth, China has not been adept at circumventing the United States. It has approached other countries to allow it to do transshipping. That is, to ship goods through another country to avoid the United States' tariffs. This approach has not gone well for two reasons. Most countries are wary of allowing China to transship. Specifically, they are concerned that the United States could retaliate if they help China. Second, in the case of some large countries, China has been a competitor, not a friend. India is an example. China has encouraged its companies not to build plants in India but instead to seek more favorable economic environments, as India is a strong economic competitor. It is currently challenging for China to approach India and request assistance with transshipment, given its history with the country. Even if India were approached, it has already taken steps that indicate it will not accommodate China.
Waiting Game.
Fifth, China cannot afford to outwait President Trump. While it is valid to say China takes a long-term perspective, it cannot wait three and a half years until Trump is no longer president. By the end of Trump's term, China would be in economic chaos if it did not cut a tariff deal. There is a high probability that the Chinese government would undergo an upheaval.
Rare Earth.
Sixth, China holds a significant proportion of the world's rare earth minerals, which are key to AI and economic growth. President Trump adroitly cut a deal with Ukraine. The deal enables the United States to access Ukraine's rare earth minerals and could provide a partial buffer in the long run in the event that China restricts the export of its rare earth minerals for an extended period. China's rare earth trading chip is less valuable in the long run..
Buying Influence.
Seventh, China maintains tight controls on its currency. Any economic unrest will hurt the valuation of its currency. More importantly, China is trying to buy off the rest of the world. It is making inroads from Bermuda to Africa to South America. A weakened economy and currency would undermine its ability to buy allies. Again, I am not claiming any moral high ground; the United States also tries to buy off other countries. That is what governments do.
Appropriate Retreat.
Not only have the Chinese read Sun Tzu, but many others have as well. President Trump must have read some of Sun Tzu's writing, or he intuitively understands that the art of the deal includes allowing a retreat. In the "Art of War," Sun Tzu stated, "Leave the enemy a way to escape; otherwise, he will fight you to the end." President Trump initially claimed he was helping China and acted as if he wanted to give them a way to save face. That would be smart, and in the short term, he may be bolstering the Communist Party. However, I doubt that the Chinese will appreciate his supposed kindness, even though they might accept it.
Who Won?
In twenty years, some brilliant economist at Chicago, Yale, or Georgia State will tell us if Trump won the short-term skirmish. Of course, it will be data-driven and lack any practical insights. At my age, I am not sure I will be here to hear the pronouncement. What I do know is that Sun Tzu was right when he said, "The best sword if thrust into salt water will eventually rust." We do not have to wait twenty years. Much sooner, we will know if President Trump's tariff sword will rust away. We will know then who is winning the war, not just the tariff skirmishes. And we will know if the president has not only left the Chinese an escape route, but also has left himself one.
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