When Donald Trump first announced the idea of imposing 25% tariffs on imported steel and 10% on aluminum, there was never any doubt that the ultimate target was China. After all, China runs an annual trade surplus of $375 billion with the US and is the largest beneficiary of US trade. The intent to punish China became clearer when Trump announced plans to put tariffs on Chinese imports to the tune of $50 billion. While there may be tumult in markets and saber rattling, the trade wars are unlikely to be anywhere as bad as they are made out to be.
Retaliation is a big threat…
If the immediate reaction of China and the EU are anything to go by, retaliation could just be around the corner. The US exports nearly $2.35 trillion worth of goods each year and that includes everything from beer, motorcycles, coke, jeans etc. It is estimated that if EU and China were to put tariffs on US beer, then the real sufferer will be the US beer industry which employs nearly 2 million Americans. If you extend this argument to pork, apparel, food products and motorcycles, the actual damage to the US economy could be huge. It is hardly surprising that Republican senators representing these sensitive states are already up in arms against Trump’s tariff proposal. It is clear from Gary Cohn’s resignation that the pressure on Trump will come more from within than from outside the US.
Currencies and treasuries…
When the US tries to hit China hard with tariffs, the retaliation will not just be with respect to counter tariffs. It could come in a variety of ways. For example, the Chinese could just let the Yuan weaken. That will put pressure on all the emerging markets to weaken their currencies and even the US is unlikely to be spared. A weaker Yuan could negate the impact of US tariffs. Secondly, China holds $1.40 trillion worth of US bonds and will use that as a whipping tool to subtly threaten the US. After all, Xi of China is already the head of state for life. That means; Xi will be a lot more secure compared to Trump, who may not even be sure of a second term.
You lose and we lose…
The US in all its historical wisdom knows that nobody gains in a trade war. The last time we saw trade war was in the 1930s, which eventually led to the Great Depression with disastrous results. Economically, China is the factory of the world and is also the biggest source of demand across the world. A cornered China can do more harm to the global economy than a successful China. The US wills surely realize that. The US is betting on a recovery in the US and is counting on world demand to help the US grow. That is impossible without China’s support. We may see some rattling of sabers from Trump, but not much beyond that.
ConversionConversion EmoticonEmoticon