Watching the pundits and supposed political/business “experts” on TV would be comical if the stakes were not so high in the current US/China trade issues. I would suggest to those TV talking heads that they should read Trump’s past books in order to “get it” and understand what Trump’s play is in this “trade war”.
Trump has two primary and simple objectives:
- To rebalance our trade with China and eliminate the $500 billion trade deficit with China.
- To eliminate the intellectual property theft by China from US companies doing business in China.
That’s it! But, what is his strategy? His tweets are confusing! He seems to be jumping around with what he wants out of China from day to day.
Pay careful attention. Here is the Win-Win:
- Trump wins if China NEVER agrees to a trade deal! Really? Yep. How? Well, the US will collect about $100 billion per year in tariffs even if Trump does not raise them any higher. That will reduce our trade deficit to $400 billion by itself (20% reduction). During the ensuing months, US companies will have to find other countries, including the US, to produce their products. This is the “revamping of the supply chain” that you hear about. China will continue to lose manufacturing businesses to other countries and the US consumer will not see any significant price increases. (July consumer price index rise was well below the FED inflation target!) Why, because, until those companies leave China, China will have to keep devaluing their currency, negating the impact of our tariffs, as well as keep subsidizing its companies in order for them to compete with the tariff penalty. China has to pay for the tariffs or risk losing manufacturing business even faster! IF China continues to stonewall the negotiations, in time they will lose our business to other nations who are not subject to our tariffs. Further, since our companies are leaving China, no further intellectual property theft will take place. But the biggest prize Trump is seeking IS THE WEAKENING OF CHINA AND A WEAKENING OF THEIR MILITARIZATION POLICIES. Without US trade, China’s cash flow will dwindle and they will be forced to reduce military spending just to keep their domestic base happy.
- Trump Wins If China Agrees to a Trade Deal! Trump will not back down on rebalancing our trade and eliminate our trade deficit with China as well as stopping China’s theft of our intellectual property. He has no need to negotiate these away as he benefits that longer this drags on. The only risk he is running is whether inflation, based on price increases due to his tariffs, starts hitting our consumers. But, Trump is keeping pressure on oil producing nations to keep gas prices down (1 cent at the pump puts $1 billion back into our consumer’s pockets), all the while using the tariff income to subsidize our industries who may be suffering from China backing out of purchasing US goods.
Trump is also betting that he has a second term as this trade war may not end, either way, during a single term. China thinks that it has nothing to lose by waiting Trump out in the hopes that he is defeated in November of 2020. Think again. Trump will win again and at that point he will NOT need China to sign the deal. He can merely wait them out until all of our companies have revamped their supply chains and abandon China altogether… Then, Trump also wins the “cold war” with China in terms of its military build-up.
Trump is already warning US companies to stop putting all of their eggs in China’s basket. Apple is probably the most vulnerable as it relies almost 100% on China to product its products. This would be a bad strategy regardless of the tariff war. To give China that kind of power over your company is simply bad business. Others are in a similar predicament.
All the talk about how strong China is economically is rubbish. The US GDP is $21.5 Trillion while China is only $14.2 Trillion. Looking at per capita GDP, the US in 2019 will come in at $65,062 per person while China will continue to lag behind at $10,099 per person. The current “trade war” is hurting China and will continue to do so unless they come to the table.
When you hear the talking heads say Trump’s China policy is not effective, change the channel. They clearly do not get Trump’s policy, economic or military.