Anybody remember Trump announcing that trade wars were easy and would be won quickly? This was over two years ago, and as we head toward the third full year of seriously compromised relations with China, is there anyone out there who still believes that?
Trump announced the imposition of an additional 10% tariff on $300 billion worth of Chinese imports, almost everything China imports to us in the area of consumer goods. This is on top of the 25% in tariffs he has already imposed, which will bring the total to 35% on most items. He repeats the completely false and misguided assertion that these tariffs are being paid by the Chinese, not us. In fact, and in most cases, the tariff is nothing more than a fancy sales tax imposed on top of the retail price and paid by the consumer.
Fox News faithfully repeats Trump’s moronic nonsense, and every Republican insider who should know better looks the other way. Treasury’s Mnuchin and Commerce’s Ross, who surely knows better, have kept their mouths firmly shut. Senator Risch and his foreign relations committee and Senator Wicker and his commerce committee remain silent.
Trump scoffs, and says the Chinese are having to absorb the cost through devaluing the yuan. This further demonstrates Trumps stunning lack of understanding of basic economics. Trump accuses China of manipulating the yuan not understanding that devaluation is the reverse of what a manipulator would attempt – it is going the wrong way. It is true that China raced to stabilize the yuan when the bottom dropped out, putting the floor at 6.99 yuan per dollar, but the fall itself was a market adjustment resulting from the ongoing trade war.
The only impact the fall of the yuan will have in the long run is to increase the inflation in China as the Chinese economy moves to absorb the deflation by raising prices. There will be some short-term opportunities in the U.S. for deals at old prices while the market adjusts, but the end result will be much higher prices reflecting real values underlying the yuan. The losers in China are those holding paper and fixed contracts at the old prices who have to accept payment with the revalued yuan. New deals will be at new values, and Trump’s notion that China will absorb any of the new tariffs will evaporate.
As the bottom was falling out under the yuan, our stock market tumbled down the worst drop of the year on Friday and Monday. China has ceased imports of soybeans, and the stockpiling has reached proportions in the U.S. never seen before. Farmers are going broke and Trump has in place a $16 billion bailout for farmers hurt by the trade war. And still nobody says anything.
According to the Wall Street Journal, Trump has collected $63 billion in tariffs on Chinese imports through June of 2019, paid by the American importers as the goods arrived in ports in the U.S. The associated press reports that the latest tariffs will cost the average family an additional $200 per year, starting just in time for the holidays. This is on top of the average $830 per year the existing tariffs already cost the average household per year, which will raise the total to over $1,030 per year in loses due to increased prices for the average family – meaning that every dime of the savings to the middle-class family allegedly granted by the so called 2017 tax reform bill will be erased completely beginning yet this year.
Further, China has announced that it will impose counter tariffs on U.S. imports, further slamming American exporters and potentially magnifying the damage to both of the world’s biggest economies. Trump claims he will continue to “tax China” until they make a deal, continuing to claim, with his eyes tight shut, that China is paying this bill not the American consumer.
So far, the impact of Trump’s war against China has netted the U.S. exactly zero in terms of new or improved marketing deals – no change in any quarter of any measurable kind in any area of trade relations with China. China is showing no sign of being willing to accept any of Trump’s demands. Instead, it is publicly hunkering down in an obvious strategy to wait out the end of Trump’s term. All of the Democratic candidates have promised to abandon Trump’s ill-conceived program of general tariffs as first orders of business if and when the administration changes in 2021.
This is a war of attrition here, and the question is who can hold out the longest as their economy crumbles, their exports dry up, and their consumers go without? We may have the stronger economy with probably greater resilience, but China, at a population of 1.386 billion, has four times our number to spread the pain around, plus a managed economy that can be regulated to smooth the ride, plus a thousand year history of being able to maintain with total self-sufficiency. On top of all this, China is our biggest creditor, holding some $1.1 trillion in U.S. treasury bills. While no one expects China to dump these investments, if it should even decide to rattle the cages a little, the bond market may well panic.
In China, all we are doing is slowing their growth rate from what was in the range of a whopping 10% to a still healthy 6%. In the U.S., we were hoping for a reasonable domestic growth rate of 3% or so – Trump promised 4% to sustain his 2017 tax cuts, but nobody believed this was in the cards. Now, after almost two full years of tariffs, most economists predict our rate of growth will soften to a middling 2% - it is currently healthy but wobbling at 2.1%. One study, released in February of 2019 by a non-partisan economic consulting firm in Washington, predicted that by three years out, the economic impact of the general tariffs in place then would be a decline in the U.S. GDP of just over a full one percent, an impact on an average family of four of $2,390 in increased prices per year, and a loss of 2.2 million jobs.
The majority of experts appear to expect foreign trade to continue a backslide which will significantly affect inflation and drag the profitability of American multinational companies towards if not over the brink. The heaviest cost will fall on the middle class in terms of increased prices on consumer goods and the loss of jobs. Even Trump supporters do not offer rosy pictures; most say only that it is not as bad as it seems, pointing to the fact that Caterpillar was able to absorb $70 million in tariff costs and still turn a profit. $70 million! It is astonishing to see someone try to make a positive statement of the government imposing this magnitude of unnecessary tax cost on a single business.
Congress could fix it, but it won’t. The Republican majority in the Senate behind Leader McConnell are paralyzed and have done nothing, despite the contention by most experts that Trump’s tariffs are against the law. Tariffs are supposed to require Congressional authority unless necessary for national security. Trump has jammed the entire general tariff structure, including all the consumer tariffs, under an executive order based on national security.
So, now what? As Trump surrounds himself with incompetent sycophants, refuses to accept advice from anyone genuinely knowledgeable, and continues to make stuff up any time he is faced with a tough question, one might ask, “How can it get any worse?”
Watch and learn, my friends, just watch and learn.