As Chinese Find Ways to Cope With Trump’s Trade Bullying, Americans Are Still Set to Lose

Basically only the Trump team thinks the U.S. can survive a trade war unscathed. Photo: Bloomberg/Bloomberg via Getty Images

President Donald Trump on Monday evening announced another round of tariffs on about $200 billion worth of goods imported from China. The tariffs will start at 10 percent, effective September 24, before rising to 25 percent at the end of the year. In combination with those announced earlier this year, Trump has now imposed levies on nearly half of all Chinese imports to the U.S.

The new tariffs exclude a number of specific consumer products, including iPhones and Fitbits, car seats and bicycle helmets, along with certain chemicals used in U.S industry. However, these exempted items would likely not be spared if Trump follows through on his threat to slap tariffs on basically everything China exports. Trump repeated that threat on Monday, saying the U.S. would “immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports,” if China took any retaliatory action in response to this latest escalation.

Retaliation is all but guaranteed, so the only question now is whether Trump is actually willing to follow through. An editorial in a State-published Chinese tabloid on Monday warned that China would not play defense in this trade war, but rather would counterattack. In addition to imposing tariffs of its own, former finance minister Lou Jiwei reportedly told a forum on Sunday that Beijing could restrict the export of Chinese goods that are critical to U.S. manufacturers’ supply chains. These include rare earth metals essential to electronics manufacturing, of which China controls most of the world’s supply.

That in itself would represent a significant escalation, drawing an even more punishing response from Washington, so China might not play the export restriction card except as a last resort. Still, Lou’s remarks serve as a reminder that even though the U.S. may have the upper hand in this trade war, China has powerful weapons of its own, should it choose to use them.
U.S. manufacturers and retailers say the new tariffs will result in job losses and higher prices for consumers in the U.S. The Trump administration, however, sees no evil: “I don’t see any reason to believe at the present time that the president’s trade reforms are going to damage the economy,” National Economic Council director Larry Kudlow told the New York Times on Monday.

With the economy chugging along, a tight labor market, and little inflationary pressure (thanks in part to stagnant wages), the U.S. may indeed be able to absorb some of the downside risks of a trade war without too much bloodletting. China’s economy is slowing down as ours continues to grow, and the administration sees the current imbalance of economic power as a favorable position from which to extract maximal concessions from Beijing.

Nonetheless, tariffs are taxes, and American consumers and companies will be the ones paying them as they continue to rely on Chinese imports or inputs to their supply chains. U.S. manufacturers have attempted to persuade Trump that he is overestimating their ability to produce substitutes for the Chinese products he is taxing, to no avail. The negative economic impact of these tariffs in the U.S. might not be large enough to impose a political price on Trump in the immediate term, but he and Kudlow are practically alone in believing that the U.S. can conduct a trade war at no cost to American households.

Trump timed Monday’s announcement for after U.S. markets closed, ostensibly so as not to rattle them, but stock futures fell Monday night and major stock indices are set to open lower on Tuesday. The tiered nature of the new tariffs is meant to give U.S. companies time to adjust their supply chains in preparation for the 25 percent rate in January, but one quarter is not a lot of time for a business to make those adjustments, while some may not be able to find feasible alternatives to China.

Beijing, meanwhile, is unlikely to take this escalation lying down or kowtow to the Trump administration’s demands in the face of additional pressure. Chinese officials continue to insist that they will not engage in negotiations at gunpoint, as it were. Trump insists that he is ready to make a deal with China at any time, if only they would agree to his demands.

Some of these demands are reasonable, such as China curtailing its anti-competitive industrial subsidies and practice of demanding that foreign companies share proprietary technology with their Chinese partners in order to do business there. Others, like artificially closing the U.S.-China trade deficit, are neither feasible nor necessarily desirable. (The president and his closest economic advisors adhere to the highly unorthodox opinion that trade deficits per se hurt economic growth.)

In any case, Washington and Beijing now find themselves in a typical standoff position, with each insisting that they are ready and willing to negotiate, but the other side is being intransigent. This is a recipe for further escalation, especially since Trump has been itching to go all-in on this trade war for some time.

Meanwhile, China perseveres. Indeed, Chinese manufacturers in the Pearl River Delta tell the Wall Street Journal that Trump’s tariffs are actually spurring innovation there by encouraging them to find new ways to drive down costs, shift toward higher-end products, and improve the quality of locally produced electronic components to reduce their reliance on U.S. chip suppliers.

China is also making moves in the geopolitical space to reduce its dependence on trade with the U.S. At a meeting last week in the eastern Russian port city of Vladivostok, Chinese President Xi Jinping and Russian President Vladimir Putin discussed a number of avenues for cooperation, including a plan to use their own currencies in trade deals rather than rely on the U.S. dollar. Our allies are also looking at ways to circumvent the U.S. in international trade: E.U. countries are working on an alternative “payments channel” to enable companies there to do business with Iran without running afoul of the sanctions Trump re-imposed on that country when he pulled out of the agreement to contain its nuclear program.
These are relatively small steps, weighed against the outsize influence the U.S. still wields in the global economy, but their direction is unmistakably toward a new paradigm of global trade in which the U.S. is no longer the main arbiter and the greenback is not necessarily the currency of choice. Trump’s zero-sum trade policy, in which every American dollar spent abroad is treated as a giveaway to foreigners, is driving this trend.

It sends a message to the world that the U.S. will behave toward other countries as Trump and his companies have behaved in their dealings with partners, contractors, and financial institutions: unreliably, combatively, and always poised to screw the other guy if it profits us to do so. He is betting that the U.S. is so powerful it can afford to bully its way back to the global economic supremacy it enjoyed in past decades, and that other countries will simply have no choice but to do business with us on our — that is to say his — terms.

Even if Trump is right about this, the diplomatic consequences of such policies are plainly disastrous: driving our rivals further into each other’s arms, leaving our allies to go it alone, and isolating the U.S. in an inescapably interconnected world. If he’s wrong, on the other hand, Trump is putting the U.S. and global economies at risk just for the bragging rights of being the biggest fish in a smaller pond.

Trump Trade War: Chinese Adapt, Americans Still Set to Lose