🔒 Next week 10% tariff, next year 25% – Trump’s trade war gets real

LONDON — After a four month “phoney trade war” US president Donald Trump has now triggered hostilities against China with dire implications for Emerging Markets like SA. – Alec Hogg

This is The Rational Perspective and I’m Alec Hogg. In this episode America’s Trade War against China gets real. Most analysts have discounted the prospect of a Trade War between Donald Trump’s America and China’s Xi Jinping. Even when high level talks broke down in May, Trump’s threats were interpreted by most as a massive bluff in a high-stake poker game. He seemed to believe that China would definitely back down, make the required reforms and the world would get back to business. Those hopes have now been dashed. The world woke up this morning to news that from next week roughly half the $500bn in goods, which America imports annually from China will cost 10% more. And unless there’s breakthroughs in the talks during the next three-months that tariff will jump to 25%. China’s richest man, Jack Ma, this morning told a packed CGTN conference in Hangzhou that the Trade War is indeed for real. But typically, for the super entrepreneur, he tried to put a good spin on it.
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We need to have a long-term preparation. It’s impossible to get over this Trade War in two-months or two-years. It’s going to be a 20-year long-term preparation. We believe that the Trade War will create a tough situation for small and medium enterprises, but I also believe that among the difficulties a number of outstanding enterprises will rise. They have to perfect their own jobs as 20-years is long enough to form any enterprise into the future. Another Alibaba or Amazon, Alibaba is only 19-years-old, after all.”

And if you still doubted how serious this is, listen to the former EU trade commissioner, Peter Mandelson describe it.

What is being threatened here is not some dispute or spat. We’re looking at quite treacherous waters here, which could considerably de-stabilise global economic confidence and threaten a future recession.

So, the end of the Trade War’s phony stage, in the beginning of the real conflict is bad news, especially for emerging markets like SA. For 10-years developing countries have benefited from tailwinds of quantitative easing and an expansion of China’s economy. Those breezes have reversed. Liquidity is being sucked back out of the system and this Trade War is sure to hurt Chinese economic growth. So, what the heck is Donald Trump thinking? That’s a question that’s baffled 95% of the world’s population but for Trump and his cohort it’s all completely logical. Here’s the Trump insider, Steve Moore, who’s a senior fellow at the Heritage Foundation and was an economic advisor on the 2016 presidential campaign.

I’ve made this case many times that this is a risky strategy that Trump is engaged in, with respect to trade. I’m on record as opposing the auto tariffs. I think those are a bad idea. I think the steel and alum tariffs probably cost America more jobs than they gain. But I think most Americans agree with Trump that China is a big problem on the international scene. That they’re a bad actor. That they are an enemy and not a friend of the USA and they’ve acted as such, with their hostile actions on trade. They cheat. They steal. They’re building up their military and these are things that we can’t continue to live with. So, I think Trump’s view, and I sort of share this view is that we’re either going to have to confront China now or we’re going to have to confront them at a time and a later day, when they may be in a stronger position. If there’s ever a good time to confront China on trade it would be right now. We have a booming economy and China’s is receding. Their stock market has fallen by 20% and I think Trump is really playing that card right now.

Xi Jinping Donald Trump
After a four month “phoney trade war” US president Donald Trump has now triggered hostilities against China with dire implications for Emerging Markets like SA.

Do you support the tariffs on China then?

I don’t really see any alternative. I think that the strategy has to be let’s get Mexico done, which we’ve done. We’ve got a trade deal now with Mexico. We’re going to get a trade deal with Canada, right. It looks like we’re well on the way to getting a pretty good deal. Trump has got some concession for the Europeans. So, now it looks like China is increasingly isolated and I think Trump is in a stronger position today than he was 3 or 6 months ago, when he was picking a trade fight with everyone at the same time. So, look, it’s a hard question – do I support these? What I support is getting really tough with China and I support, and Trump can’t back down here, nor can the US. We have to force China to change their ways and I think the American people are, you know… Remember, this is going to cost Americans money, right. If you go to Walmart and buy things that are made in China they’re going to be more expensive. Cellphones are going to be a little bit more expensive. There’s going to be some retaliatory actions from China so, I’m not making the case that this isn’t going to come without some pain. I think it’s either a short-term pain or potentially real long-term gain in terms of a very fair deal for the US.

I take your point that you say the president shouldn’t back down. You call it short-term pain but could it turn into long-term pain if, as we are seeing from China, they’re not backing down either?

Well, that’s the question no one knows the answer to, right. I think the ball is clearly in Beijing’s court. I think that they are in a bit of a panic in Beijing. They don’t quite know how to deal with Donald Trump because as Peter well knows, this has been a change in American trade strategy from the way we’ve operated for the last 40 years, where we’ve been the country offering the olive branch of lower tariffs and now Trump comes along with this billy club saying, ‘we’re going to beat you over the head unless you start behaving.’ What Trump wants is reciprocity, he wants a level playing field and frankly, we don’t have that with China. I’m not hung up on the trade deficit, Trump is, but it is pretty alarming that we buy $500bn from them a year, and they buy $150bn from us. They’re going to have to buy more of our stuff. They’re going to have to buy more of our wheat, and our soya-beans, and our blue jeans, and our bourbon, and our manufactured goods, and petroleum goods and they should.

Steven, you hear so many different conflicting voices on trade in the administration. Who do you listen to? Who should we listen to?

Well, first of all if you want to know where it’s going, you should listen to Donald Trump because this is his baby, and he obviously has advisors, like my buddy Larry Kudlow, and advisors like Peter Navarro, and of course Bob Lighthizer, the trade rep. But you know, what I’ve discovered in talking to Trump a lot about trade is really, he makes up his own mind about this. He listens to his advisors but ultimately, the direction of this is going to be decided by Trump himself. Having talked to him a lot about this, he really does believe that China is an existential threat to the US and that they are becoming more mercantilist. Their human rights violations are becoming worse. They are moving away from freedom and not in the direction of freedom, as they had been for the previous three decades. It’s a problem and I think Trump wants to alleviate it. Incidentally, this was one of the central promises that he made to voters in states like Ohio, in Michigan, and Iowa, Wisconsin, West Virginia where, I’ve got to tell you and I travel a lot with him, the American people, the middle-class American workers really think that China’s situation has not worked well for American workers.

So, there you have it. Trump believes China threatens the very existence of the US, existential threat, as Moore put it, and as there has to be a showdown someday it’s best to do it while the US is strongest. We can’t say that we haven’t been warned. This has been a consistent theme from the day the new administration took office. What Moore shares with us now is that the US has finished its negotiations with other trade partners, Mexico, the EU, Canada, and Japan and it’s ready for the big fight. But what does this 10% soon, and 25% in January tariff mean for Americans themselves, the very people, on whose behalf Trump has gone to war. The high profiled economist, who called the 2008 global financial crisis, NYU, economics professor, Nouriel Roubini visited the Bloomberg surveillance studio to share his perspectives with Tom Keene and Jon Ferro and just like 10 years ago, he isn’t pulling any punches.

Well, it means two things. One is that any farmer selling soya beans or other products to China is going to face massive tariffs and therefore they’re starting to irk and complain. Two, as a consumer, think of it, if you impose a 25% tariff on $500bn of imports from China that’s the tax of $125bn a year, on the US consumer. It’s a massive tax increase, $125bn, so it hurts the consumer. It hurts the producer and it makes the US economy worse off. It’s a disaster.

Do you think the consumers understand that they are the individuals paying this?

Well, it’s saying China is paying the tax in the same way we say that Mexico is going to pay for the wall. That’s nonsense because once you impose the tax what’s going to happen is that the price of imported goods from China to the US is going to go up, mostly by the amount of the tax. It could go up by less than the amount of the tax if the Chinese cut down the dollar price of their goods but most of the impact of a tariff is imposed on importers and that’s the US consumer, it’s as simple as that. It’s $125bn tax on the US consumer/household, and is the most regressive tax of all because those consumer goods are bought from China. Those you buy at Walmart that are cheap goods they allow you to have per capita income rising so, it’s a regressive tax. Not only is it tax but it’s a regressive tax. The most regressive tax of all.

Okay, are you dragging the Corn Laws into the 21st Century, is that what we’re doing?

Effectively, it’s the same thing – it’s protection. Is that protection, it might benefit at the margin some producers in the import computing sectors but that’s a very small number of people but it hurts all consumers. So, the same workers or consumers are worse off and anyone who is in an export producing business, their jobs – their income and profits are going to go down. So, you are making worse off consumers and exporters for the benefit of a very small number of, essentially, producers. Taxes on tyres are imported by China was estimated that the cost for every job that was saved in the car industry in the US, was a million dollars. You can just give a subsidy to those workers and not impose the tax on all the consumers so, it’s a tax that is totally distorted.

Nouriel, a final question and it’s an important one. The Chinese behaviour hasn’t changed towards change, it needs to change. That’s an overwhelming consensus among economists that it needs to change. The objective of this administration is to get the Chinese to change. You’re saying, this is the wrong way. What’s the right way?

Well, it’s the wrong way because they’re going to retaliate – they cannot lose face. You want to control the rise of the power of China. The right way is to do it multilaterally, not just alone but with Europe, Japan, and others who have complained about China, and do it in a way that you start negotiations and you put pressure on them. If you start unilateral tariffs they’re going to retaliate and yes, they have a limit to how much they can retaliate on goods but they can impose massive restrictions on 100’s of billions of dollars, of foreign direct investment by Apple, GM, and hundreds of businesses that have done business in China. So, they’re going to hurt. The currency now weakened by 8% and they could even eventually, have the option of dumping US Treasury. So, they have a wide variety of options and they take the long-term deal. They don’t have elections in three months so, they can wait and play it out over the next two decades.

There are sure to be some very practical consequences of this fight, especially for emerging economies. We’ve already seen interest rates higher in Argentina, Turkey, Russia and Brazil, as the Central Banks of those countries try to defend falling currencies. South Africans we believe, won’t be spared. When elephants go to war it’s always the grass that gets flattened.

This has been The Rational Perspective, until the next time, cheerio.

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