If the stock markets are any guide, there is reasonable confusion of whether the world is on the edge of a trade war, or merely some localized skirmishes after which there will be a truce.
Unusually for the Trump administration, the list of Chinese products threatened by the US has been selected with much forethought. Technology-related items are high on the list while the sort of consumer products with US brand names and stores using China-based manufacturers largely escape, limiting the potential impact on US consumer prices and corporate profits.
China’s retaliatory list however shows the weak bargaining position of a nation whose exports to the US are double its imports. Top of the list is the US’s best-selling item, soybeans, currently worth US$14 billion a year. But China’s position here is much weaker than it might appear. The US and Brazil between them account for 80 percent of global soybean exports. Brazil is already the leading supplier to China with about 55 percent of the market compared with 35 percent for the US. But China has limited options to the US as it accounts for about 65 percent of global import demand.
A 25 percent Chinese tariff would of course favor Brazilian suppliers but Brazil alone cannot supply China. There is no underlying soybean surplus or vast global stockpile. The price will continue to be set by overall global supply/demand picture so some US exports will be diverted to other markets, and China will probably still have to keep buying from the US. The whole Brazil exports crop could still only meet about 75 percent of China’s needs.
The supply/demand situation could be changed if China is willing to draw down its stockpiles and not buy from the US. But global supplies would also be reduced if many US farmers, fearing the China tariff, opt to plant corn or other crops, in which case global soybean prices will rise.
The decision comes soon as spring is upon the farmers. In the end the tariff may thus have more impact on China’s consumers, who will still have to buy a lot of US soybeans, than the US growers. America’s farmers may not see it that way but that is the likely outcome once the initial fuss has died down. Nor does it mean the farm belt will desert Mr Trump just over this. There are partial alternatives to soybean meal for pig feed and fish farms – its main uses in China – such as corn and sorghum but they have less protein. The US is the leading global exporter of both these crops, with China the almost sole sorghum buyer, though only a small buyer of corn.
More vulnerable to Chinese tariffs are other foods from ginseng to pork and in particular the transport sector, notably Boeing, given the Boeing/Airbus duopoly over most passenger jets. But politics is already a factor in plane purchasing. Other industries have been targeted by China for their assumed political importance in US elections, but overall Trump will probably find that a tough stance, real or apparent, towards China trade is a vote-winner and meanwhile all the noise about trade wars provides diversions from the president’s problems at home – Russian influence peddling, sex scandals etc.
Not only may these tit-for-tat threats not be carried out, but even if they are the “war” could stop there as China acknowledges its weak position and the US accepts that its huge trade deficits cannot be addressed simply by tariff moves against China. The US could find friends elsewhere in the developed world, in Asia as well as Europe, for its claims of unfair trade practices, subsidies and theft of intellectual property. But so far they have been too upset with his broader anti-trade agenda to be of much help.
They also worry that the only way that the US deficit can be reduced substantially are to their disadvantage: a US recession, a steep, engineered fall in the US dollar or an across-the-board imports surcharge. Such Washington-delivered shocks have been used in the past to address US deficit problems.1971 saw the end of fixed rate dollar/gold convertibility as US gold stocks haemorrhaged. It also imposed an across-the-board 10 percent surcharge on imports which proved effective in forcing other currencies, notably the Deutschmark to appreciate.
A repeat came in 1985 with the so-called Plaza Accord when US Treasury Secretary James Baker engineered another sharp rise in the yen and Deutschmark (and also the New Taiwan dollar) to address a yawning trade gap.
Things are not so simple today. The US is less powerful, and China is a more specific target than existed in 1971 or 1985. Additionally, many US firms are embedded in manufacturing systems involving China. Changing that will take years.
The US may be able to engineer a further gradual decline in the dollar, but cannot readily force a sharp revaluation of the yuan. Equally, China’s threats of retaliation are also limited. Threats to stop buying US Treasuries would weaken the dollar – and reduce the value of China’s reserves – more than drive up bond yields. And threats to devalue the yuan could easily lead to allegations of currency manipulation accusations and retaliation by the EU and others. China’s overall trade surplus has been declining but it is still large enough to cause resentment – as does that of Germany.
Whether Trump can show he has mastered the “art of the deal” and make major progress on deficit reduction without seriously damaging the world trade system and broader US interests, remains to be seen. But at home – and abroad – he enjoys a broader level of support for his China trade policy than anything else he has done. It is now received wisdom, including among outspoken Democrats such as Elizabeth Warren, that for two decades China has exploited US naivete and the short-term greed of major US industries. They have provided China with many of the tools with which it is now challenging the US economically and technologically.
Xi Jinping himself almost daily proves this view correct. While on the global stage he proclaims himself a protector of free trade principles, at home the agenda is a nationalist one. Building up key industries to equal and overtake US and other foreign ones is top priority. It is driven by the state and the party and pays only lip service to market competition and liberal trade and investment flows.
Trump has broken a mold which lasted through four presidencies – two Bushes, Clintons and Obama – 28 years. But there remains a basic disconnect between the goal of stemming the flow of US technology to China and addressing the overall trade deficit, which can only grow while Trump pumps up the economy and federal deficit with tax cuts.