China expert Nicholas Lardy, lays out various arguments of why a US trade war with the Chinese would be a losing enterprise. He agrees that China’s economy would suffer if the United States were to impose a 45 percent tariff on nearly $500 billion worth of Chinese import and fears of American protectionism is already stoking capital flight from China.
But Lardy also, states that China might be better placed than the United States to take the effects of protective trade barriers and will sure react. The voice of the Communist Party is probably not wrong when stating that “A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted.” A hurricane effect for many manufacturing corporations that cannot afford to lose or diminish trade with China.
Retaliation from China can take several forms: It could stop state-owned companies (SOE’s) from doing business with American businesses. It could stall access to essential commodities, such as exports of rare earth minerals crucial to the electronics industry. It could ignore efforts to combat the piracy of American patents and copyrights.
With these actions, some of the United States’ most successful companies would be in for a bumpy ride and recreating these entire corporations in different countries would be an almost impossible task without incurring in a massive out flow of cash.
“An analysis by the pro-trade Peterson Institute for International Economics concluded that a full-blown trade war with China and Mexico would push unemployment in the United States to nearly 9 percent in 2020, from 4.9 percent today. “ That would wreak havoc in the economic outlook for the millions of working-class Americans Trump has proposed to defend from “unfair trade.”
Moreover, a disruption at the American border with Mexico plays in favor of China in many ways. In this game of chicken, no matter how many deceits the Chinese government might arrange against American interests, China would remain the victim in the eyes of many nations, as a champion of the foundation of open rules-based trade.
Even if Trump is bluffing to get a better deal when negotiating with China his bulling has changed the perception role the United States has played in the world since the end of WWII. Specially, when China is the only major country in the world proclaiming the notion that globalization is a win-win for all nations and that will surely be a loss for the US. This issue is greatly reinforced by countries in the developing world that believe national prosperity depends on the integration into the supply chains that crisscross the global economy. Isolationism which has been a move reinforced by the rejection of the Trans-Pacific Partnership the United States appears to be on his own in this fight.
Slapping trade barriers against China would do little to slender the American trade deficit. American companies building things in China wouldn’t bring much manufacturing home; as in most cases they would seek other countries with cheap labor. Furthermore, restoring production in the US more likely than not will be robotized and automated which would result in more unemployment for Americans. Most economists would agree that balanced trade doesn’t bring back jobs. Trump’s rhetoric might seem a political winner but a hold or increase in popularity would be unlikely when the reality of the markets become apparent.
China faces more challenging issues on its transition toward a more service-dominated economy:
- Bloated savings in the Chinese Economy
- Large state-owned enterprise SOEs and its growing trend
- Complexity of the financial sector and fragile dependence on the governing party
- High SOE’s Corporate Debt
- Overcapacity of the industrial sector
“The only way to deal with a trade deficit is raise savings and investment rates,” Lardy said recently, referring to the reason deficits occur. In other words, Americans are consuming and spending more than they produce.” Lardy continues “It’s a strategy that’s almost certain to fail, that’s because U.S. trade deficits are largely the result of the shortfall in national savings relative to investments — a long-running imbalance that isn’t likely to change any time soon. Everything is working against Trump’s announced objective.”
Trump Tax Cuts are a Walk on the Brink
Can America under Trump win a trade war with China? One option to be considered might have a nuclear effect on world economy and that is— China’s dumping US debt and replacing its dollars holdings with another reserve currency. By planning to add to the bulging US debt newly printed $2 trillion dollars, the GOP is putting the US at the mercy of its debtors mainly China and Japan. Trump, ignorant of world economics hinted he wanted to renegotiate the US debt during his electoral campaign which was quickly walked back. Nevertheless, in the eyes of other world leaders Trump’s views of a US empire able to do as it pleases and seeking to negotiate sensitive world problems with the same grandiloquence and bully in the room as he negotiates a land deal or a new hotel with a weaker side is totally irresponsible conduct for his handlers.
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