Did China Just Win the Trade War?

China just won the Great Trade War with the United States and nobody noticed. In fact, President Donald J. Trump (R-New York) could surrender on trade.

Trump is trying to return to the Bush/Obama era policy of ignoring Chinese trade abuses to keep export levels high, Business Insider’s Linette Lopez speculates. Lopez claims the Trump administration is proposing an end to all tariffs on Chinese goods.

In exchange, the Chinese could increase purchases of soybeans and other crops, Lopez notes. Tellingly, they grow those crops in heartland states; such as Kansas, Nebraska, and the Dakotas. Farmers in those states are suffering terribly because of Trump’s trade war, Arc Digital’s Max Burns observes.

Trump will need to carry those states if he wants to win the 2020 presidential election. Notably, Trump ally; and Republican, Kris Kobach lost last year’s Kansas governor’s race. Thus, Trump will end the tariffs; or turn them off, until after the election.

The Meaningless Trade War 

In addition, Trump and his advisers could believe they cannot use tariffs to change Chinese policy. Under those circumstances, the Trade War is meaningless, Lopez observers.

Therefore, the Chinese won the trade war and demonstrated the People’s Republic is the world’s dominant economic power. I think Trump is afraid to admit the obvious truth because the admission could offend his supporters.

Trade war failure could be fatal to Trump’s reelection effort because one of Trump’s promises in 2016 was to “get tough on China.” Abandoning tariffs could make Trump look weak and drive his working-class followers away.

Trade War Damage

Even a meaningless trade war could do significant damage to the US and Chinese economies.

The Trade War has increased uncertainty, tightened financial conditions, and shrank Gross Domestic Product (GDP), Goldman Sachs (NYSE: GS) economists estimate. For instance, Goldman Sachs’ financial conditions index shrank by 50 basis points (bp) between April 2018 and November 2019, because of trade war effects.

Moreover, Baidu (NASDAQ: BIDU) algorithms show searches by Chinese worried about the economy increase after bad news about the trade war, Goldman Sachs notes. For instance, searches for gold or alternative financial products; such as cryptocurrencies, grow with trade war fears.

In addition, both the US and Chinese economies have been taking small hits from the trade war. For instance, Chinese trade fell by 0.2% since the start of the trade war.

Is the Trade War a Sham?

Importantly, the U.S. lost more money than the Chinese. Goldman Sachs estimates U.S. real income fell by 0.15% because of the trade war. However, Chinese real income fell by just 0.1%.

Thus, the trade war’s effects have been small but the effects so far favor China. However, Goldman Sachs finds the Chinese are more afraid of the trade war’s effects because of higher levels of uncertainty.

In total, China’s gross domestic product (GDP) fell by 0.7% because of the trade war. Meanwhile, the U.S. economy lost 0.5% of its GDP because of the trade war.

Hence, the Americans are losing more money but the Chinese are suffering slightly more. However, neither side is suffering badly. Therefore, you can argue that the trade war is a sham, because neither side is suffering.

Is Trump afraid of a Trade War?

Yet Trump is surrendering in the face of some tiny trade war losses. Possibly out of fear the trade war could lead to major economic losses.

Trump could fear a trade war because such a conflict could make a recession worse as he faces reelection. I think Trump faces a close election next year. Thus even small economic losses could cost him reelection.

Therefore, Trump is telling the Chinese you will win the trade war because America cannot bear any trade losses. One reason for this is that U.S. leaders need to run for reelection. In contrast, the Communist Party chooses China’s leaders through backroom deals.

Thus, Chinese President Xi Jinping has a huge advantage in a trade war. Xi has the luxury of sitting back and waiting until the next election. Trump has to complete negotiations before the election.

Consequently, it could be impossible for a U.S. president to work out an effective trade deal. Thus, we will be stuck with the status quo of no tariffs and limited trade wars and deals for the foreseeable future.

Can Trump Win without Trade?

Under those circumstances, the President will ignore trade and concentrate on other issues.

That political reality favors candidates who focus on popular domestic issues; such as increasing benefits, over Trump. Hence, trade puts Trump at a serious disadvantage, and favors Democrats in 2020.

Given that reality, Trump’s best strategy is to make the election about something about something else. Immigration, or the Culture War, for instance.

Under those circumstances, Trump could put trade issues on hold until after the election. I think putting trade on hold makes sense for the President because trade issues could distract him from reelection.

Trade Surrender Makes Sense for Trump

In addition, Trump could hope to implement a long term trade strategy after the election. Interestingly, Trump is pressing forward on trade on other fronts.

The President is quietly trying to dismantle the World Trade Organization (WTO), The South China Morning Post and Politico allege. For instance, Trump is blocking the reappointment of judges to the WTO’s supreme court or Appellate Body.

Leaving the Appellate Body seats empty could cripple the WTO. Many American isolationists; and union leaders, blame China’s entry into the WTO in 2000 as the beginning of the end for American industry.

Hence, leaving the WTO is the American Brexit; a paradigm shift in national policy and the isolationist Holy Grail. Thus, Trump could surrender on trade now for what he sees as bigger gains later. Hence, surrendering on trade now is a smart strategic move for Trump.

Blame the Machines not the Trade

Personally, I think leaving the WTO is a mistake because we cannot revive or recapture American economic dominance. Neither the industrial jobs or America’s economic power will come back.

Many observers blame technology; not trade, for destroying American manufacturing factory jobs. For example, EconLib’s Scott Summers claims automation killed 20 million U.S. jobs between 1987 and 2016.

Summers notes that U.S. manufacturing output rose by 85% between 1987 and 2016. Meanwhile, the percentage of U.S. manufacturing jobs declined from 17.3% of the workforce to 8.5% of the workforce in the same period.

Trump vs. The World Trade Organization

I think the best global economic order America can get is a somewhat fair international trade arrangement. In other words, the WTO.

If Trump smashes the WTO, he will pave the way for a Chinese economic order. To clarify, if there is no WTO, the People’s Republic will be free to build its own international trade regime, Americans will hate.

If the Donald wrecks the WTO. I predict America Firsters will one day denounce Trump; and his trade advisers, as Chinese agents. To elaborate, those nostalgic for the American Century will need a scapegoat for their policy’s failures. Trump; whose family has done lots of business in China and with Chinese companies, is a perfect scapegoat.

Sorry Donald, The American Century is Over

I predict, history will disappoint both the America Firsters who think they can recreate the American Century and the Brexit backers who believe they can rebuild the British Empire. America and Britain need to abandon fantasies of global domination and concentrate on building better lives for their citizens.

In the final analysis, the trade war is over and China won. Americans need to get used to that uncomfortable reality.