Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Does Trump Really want a Trade War?

Nobody knows if U.S. President Donald J. Trump (R-New York) really wants a trade war. What is even less clear is who the Donald wants to fight his trade war with.

Trump’s rhetoric is directed at China, but his recent actions have targeted the European Union (EU). The EU retaliated for 25% tariffs on steel, and 10% tariffs on aluminum imports in the US, with a series of trade restrictions. Trump claimed he would retaliate with tariffs on European luxury cars.

The steel and aluminum tariffs exempt Mexico and Canada, and Trump might exempt Australia as well, The Guardian reported. Since Canada is one of the biggest exporters of steel to the US, the tariffs’ effect is questionable.

What is truly interesting is that China only accounts for around 3% of America’s steel imports. The tariffs would have little impact on the People’s Republic.

Does Trump want a Trade War with Europe, not China?

A number of interesting conclusions can be made here. The first is that Trump thinks the U.S. might be able to win a trade war against Europe but not China. He might believe that the USA can get concessions from the EU with tariffs, while China may be rich enough to ignore the tariffs.

Politics plays a role a well; Trump is beholden to both working-class white supporters who are strongly protectionist and mainstream Republicans that are staunch free traders. He might be trying to appease both groups with limited tariffs.

The tariff announcement at the beginning of what might be a tough Congressional election for Republicans is no coincidence. The Grand Old Party needs to shore up its base in the Rust Belt, because of potential defeats it is facing in the Sun Belt; particularly California and Arizona. One way to do that is to create more factory jobs in Ohio and Pennsylvania.

What is interesting is the lack of tariffs against China a key market for U.S. agricultural products. Chinese actions against U.S. agriculture might hurt the economies of Western and Midwestern states that are Republican strongholds.

Another political effect Trump might fear increases in the price of consumer goods like smartphones and clothing, which can enrage middle and working class voters. Something Trump might fear is a challenge in the 2020 Republican presidential primary. Many Republican voters are libertarians who favor free trade. Libertarian U.S. Senator Rand Paul (R-Kentucky) seems to be putting out feelers for a 2020 primary run.

Yet Trump also has to please economic nationalists who want a trade war with somebody.  The Donald might be trying to appease such voters by fighting the trade war he thinks America can win.

Why China might win a Trade War

The European Union is a weak alliance that is plagued by economic stagnation and reeling from Brexit. The Peoples Republic of China is a strong unified state and the world’s second-largest economy.

China may have the advantage in trade war because it is the world’s largest manufacturing nation. Chinese factories accounted for 23.2% of the world’s manufactured goods in 2013, the United Nations calculated. China may now have a dominant share of the world’s manufacturing, the Manufacturers Alliance for Productivity and Innovation (MAPI) estimated.

The Chinese made around 35% of the clothing sold in the US in 2016, Apparel News noted. That indicated clothing prices might increase by 35% if Chinese clothes disappeared from the US market. Such an increase would wreak economic havoc and destroy the electoral chances of whoever is in the White House.

Chinese dominance in electronics is even greater, the country might produce up to 90% of the world’s smartphones, The Economist reported. Just imagine the anger if the latest model iPhones or Androids disappeared from US stores.

The sorry truth is that the Chinese might have the economic leverage to win a trade war with the US right now. Trump undoubtedly understands that, so he wants to avoid that fight.

That leverage is growing dramatically because China’s gross domestic product (GDP) is projected to grow at a rate of 6.5% a year for the foreseeable future, while America’s GDP will expand at 2% a year. Bloomberg projected that China’s GDP will be larger than America’s by 2028, just 10 years from now if present growth rates continue. So all China will have to do to beat America is wait it out.

Another Chinese Advantage Authoritarian Government 

The Chinese have one other edge in a trade war that might prove crucial. The People’s Republic is an authoritarian regime with a Leninist government. Neither Xi Jinping nor the politburo has to face reelection. They might be able to win a trade war by simply waiting for the next U.S. election.

Trump; who has to face reelection in 2020 if he wants a second term, does not have the luxury. Congress, where all members of the house and many Senators face reelection every two years is under greater pressure.

A true nightmare for Trump would be Beijing simply ignoring his trade restrictions, and letting average Americans suffer. Such a strategy is rational given China’s economic growth rate. That might destroy both the GOP’s Congressional majority and Trump’s career.

History is not on Trump’s side here, back in 1930 a Republican Congress and President Herbert Hoover (R) responded to the onset of the Great Depression with the Smoot Hawley-Tariff the second most restrictive trade policy in U.S. history. Democrats won the next five Presidential elections and achieved an overwhelming Congressional majority that lasted for 14 years.

All this indicates that Trump is not serious about a Trade War with China. Instead, the President seems to think he can increase American influence by waging trade war on smaller weaker economies.

Such economic bullying is in China’s favor because many countries will turn to the People’s Republic as a counterweight against the United States. Whether it will help average Americans or the US economy remains to be seen.

The most important question to ask is not whether Trump wants a trade war, but if America has the political will to sustain it. Launching such a trade conflict without sufficient support would be a recipe for disaster for America.