The Long View – Is Trump Winning the Trade War?
Every politician dreams of heroically leading their country through a crisis. U.S. President Donald Trump has even gone as far as generating his own crisis by levelling import tariffs against China (https://www.nytimes.com/2018/08/01/business/china-tariffs- trump.html), thereby triggering a trade war.
Trump always claims that he’s winning at everything, but is that true this time?
How Do You Win a Trade War?
To work out who’s winning, we first need to work out what winning would look like.
Trump has said that this trade war will lead to more jobs and wealth in America.
The U.S. has been trying to reduce Chinese intellectual property theft, which costs the country an estimated $600 billion per year (http://www.ipcommission.org/press/IPC_press_release_030818.pdf).
If the trade war hurts China more than the U.S., it could create the leverage to tackle these thefts.
Trump’s career has been built on public attention. His rallies and tweets show a deep concern with shoring up his support and ensuring he keeps power.
That gives us three win conditions to consider – jobs and wealth; IP enforcement; and domestic support.
The Impact of the Trade War on China
There are some hard limits on how much damage Trump’s tariffs can do to China.
Around 3% of Chinese manufacturing revenue comes from exports to the U.S (https://www.nytimes.com/2018/08/08/opinion/trump-tariffs-china-trade-war-who-will- win.html).
Of this, roughly half the added value comes from elements produced elsewhere, such as Japanese microchips and American software.
Based on this, a fall in exports to the U.S. could be damaging but not catastrophic.
A few companies, such as Hasbro and Honeywell, are moving parts of their supply chain out of China (https://www.bbc.co.uk/news/business-45028014)to avoid tariffs.
But establishing supply and manufacturing are long-term projects, so unless the trade war drags on for years, this isn’t a viable option for most companies.
Their investment will stay in China.
The value of Chinese stocks and currency have fallen (https://www.msn.com/en- us/money/markets/the-trade-war-is-turning-chinese-stocks-into-bargains/ar- BBLTp7f)since the start of the trade war.
But again, the impact isn’t vast. Shares in companies like Alibaba are now severely undervalued relative to their profits, making a bounce back likely
The Impact of the Trade War on the U.S.
In the U.S., the tariffs have hit farmers hard. Soybeans, America’s biggest agricultural export, saw a 20% price drop alongside a 40-point fall in the value of their futures (https://www.newsweek.com/farmer-soybean-industry-devastated-tariffs-trump-trade- war-1069593).
The promise of government subsidies has done little to balance the loss of vital long- term stability.
Around 60% of Chinese exports to the U.S. are made by foreign companies using Chinese factories.
Components made in America are important to this manufacturing. The majority of tariff costs are therefore being borne by American and European companies (https://www.nytimes.com/2018/08/08/opinion/trump-tariffs-china-trade-war-who-will- win.html).
Because they can’t practically move their production lines to avoid the tariffs, these companies are passing on the cost to consumers.
Washing machine prices in the U.S. went up 16.4% (https://www.aei.org/publication/washing-machine-tariffs-started-trumps-trade-war- result-historic-3-month-increase-in-washing-machine-prices/)after Trump slapped a 20% tariff on components.
As the next round of tariffs kicks in, the costs will be passed on to ordinary Americans.
The Wider Impact of the Trade War
America and China aren’t the only ones affected by the trade war. Trump’s policies are undermining the stability of global markets
(https://articles.nj.com/business/index.ssf/2018/08/opportunity_trouble_what_a_trump_trade_war_
Some investors will gain from smart investments in these troubled times. But for people at the bottom of the economic heap, the impact will be uncertainty and financial hardship.
Meanwhile, other nations are looking warily at a less reliable trade partner in the U.S.
The Chinese Response to Trump’s Tariffs
In recent years, China has developed a mature, consumer-driven economy.
Internal demand gives it the stability to weather this storm and Chinese politicians are making the most of it.
China has matched America’s sanctions but not exceeded them. All the escalation lies on Trump’s side, turning him into the aggressor.
China’s tariffs have been carefully chosen not to hit imports that feed its factories (https://www.nytimes.com/2018/08/08/opinion/trump-tariffs-china-trade-war-who-will- win.html), whether domestic- or foreign-owned. Trump has been less careful, leading to more self-destruction on the American side.
By loosening control of the yuan while quietly making currency swaps (https://www.msn.com/en-us/money/markets/the-trade-war-is-turning-chinese-stocks- into-bargains/ar-BBLTp7f), China has limited the damage to its currency.
China is investing heavily in neighbouring countries (https://www.bbc.co.uk/news/business-45050204), spending money on their infrastructure to improve trade.
In principle, trade with China may endanger IP. But in practice, the country is proving itself a more reliable trade partner than the U.S., laying the foundations for long-term economic growth.
Is Trump Winning?
So is Trump winning?
In terms of jobs and wealth, there are no winners here, but China’s carefully selected tariffs mean that it’s losing less.
There’s no sign of a shift on IP enforcement. With the tariffs hitting the U.S. worse than China, that’s unlikely to change.
Even if things were even, Chinese leaders have the patience to ride out the storm – patience Trump lacks.
In terms of Trump’s domestic support, the best measure is the ballot box.
Though we’ll have surer signs in November, it currently looks like Trump is strengthening his hold within the Republican party even as Republicans haemorrhage votes (https://www.bbc.co.uk/news/world-us-canada-45119533).
That’s not promising for his long-term political future.
In picking a fight with China, Trump has taken on a foe with greater patience and political nous.
On every relevant measure, he’s losing the trade war. But he’s not the one who feels its impact.
That falls upon farmers, manufacturers, and those living on the edge of poverty – people hurt by the chaos he has caused.
If this continues, America’s economy and trade relations will worsen while China’s improve.
Trump’s attention-grabbing tantrum is no match for China’s long game.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
