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Why the US would never win a trade war with China
By Kristina Hooper for CNN Business Perspectives
Updated 10:22 AM ET, Thu January 3, 2019
Over the last several decades, lower tariffs and relaxed trade barriers strengthened global supply chains and fueled a major increase in global trade.
In fact, the average rate of tariffs on imports by World Trade Organization members declined from slightly more than 12.74% in 1996 to 8.8% in 2016. Global trade went from $5 trillion in 1996 to $19 trillion in 2013.
We are now moving backward. In its efforts to achieve what it believes to be fair trade, the United States has started trade disputes with several different economies.
Its conflict with China is by far the most intense, resulting in a series of additional tariffs. Some people believe that because America is the net buyer and China is the net seller in their trade relationship, China will lose the trade war and ultimately surrender. I believe that's wrong.
Tariffs will hurt both countries. Many tariffed products can't easily be substituted, so they will continue to be purchased — just at higher prices. When a tariff is applied to a particular good, one of three things can happen.
Profits suffer
In some industries, companies will be unwilling or unable to pass the cost onto its customers. This means the company's profits are reduced. For public companies, this of course hurts earnings — and therefore could also impact stock prices.
At first blush, for instance, one would assume that Alcoa, a US company, would benefit from tariffs on foreign producers of aluminum, but it's not that simple. Alcoa's input costs have risen because it utilizes a significant amount of primary aluminum from Canada, which it smelts to produce its own aluminum. The CEO of Alcoa has eloquently argued that not only do tariffs hurt profitability, they distort the market and make it less efficient "by incentivizing the restart of aged, inefficient capacity" in the United States.
Prices rise
A company may pass the cost of tariffs to its customers (as Apple, for example, has suggested it would do) and consumers pay more for the same item. This means that, all else being equal, they have less money left to spend on other goods or services.
Demand declines
A company may pass the cost of tariffs to its customers, but demand decreases because consumers cut back their purchases. We have already begun seeing "demand destruction" in an industry that was one of the first to experience the imposition of tariffs at the start of 2018: washing machines. The same thing could happen to other items, including other "big ticket" purchases such as cars, if tariffs are applied to them.
Tariffs have other negative effects. They undermine business confidence by increasing policy uncertainty. Tariffs can create inefficiency and lower productivity.
The United States has legitimate issues with China — valid concerns about access to markets and intellectual property violations. However, it should pursue them with the World Trade Organization, not through tariffs. Using tariffs only opens it up to retaliation from China. And China has a large arsenal of weapons, beyond tariffs, that it can use against the United States. Following are just a few of these potential weapons.
The bottom line is that, given President Xi's status as president for life, China can play a long game. President Trump has a reelection campaign to worry about in less than two years. I assume that Xi will attempt to ride out the current conflict without making any significant concessions and that the United States, once its economy is damaged enough, is likely to ultimately capitulate.
https://www.cnn.com/2019/01/03/perspectives/us-china-trade-war/index.html
By Kristina Hooper for CNN Business Perspectives
Updated 10:22 AM ET, Thu January 3, 2019
Over the last several decades, lower tariffs and relaxed trade barriers strengthened global supply chains and fueled a major increase in global trade.
In fact, the average rate of tariffs on imports by World Trade Organization members declined from slightly more than 12.74% in 1996 to 8.8% in 2016. Global trade went from $5 trillion in 1996 to $19 trillion in 2013.
We are now moving backward. In its efforts to achieve what it believes to be fair trade, the United States has started trade disputes with several different economies.
Its conflict with China is by far the most intense, resulting in a series of additional tariffs. Some people believe that because America is the net buyer and China is the net seller in their trade relationship, China will lose the trade war and ultimately surrender. I believe that's wrong.
Tariffs will hurt both countries. Many tariffed products can't easily be substituted, so they will continue to be purchased — just at higher prices. When a tariff is applied to a particular good, one of three things can happen.
Profits suffer
In some industries, companies will be unwilling or unable to pass the cost onto its customers. This means the company's profits are reduced. For public companies, this of course hurts earnings — and therefore could also impact stock prices.
At first blush, for instance, one would assume that Alcoa, a US company, would benefit from tariffs on foreign producers of aluminum, but it's not that simple. Alcoa's input costs have risen because it utilizes a significant amount of primary aluminum from Canada, which it smelts to produce its own aluminum. The CEO of Alcoa has eloquently argued that not only do tariffs hurt profitability, they distort the market and make it less efficient "by incentivizing the restart of aged, inefficient capacity" in the United States.
Prices rise
A company may pass the cost of tariffs to its customers (as Apple, for example, has suggested it would do) and consumers pay more for the same item. This means that, all else being equal, they have less money left to spend on other goods or services.
Demand declines
A company may pass the cost of tariffs to its customers, but demand decreases because consumers cut back their purchases. We have already begun seeing "demand destruction" in an industry that was one of the first to experience the imposition of tariffs at the start of 2018: washing machines. The same thing could happen to other items, including other "big ticket" purchases such as cars, if tariffs are applied to them.
Tariffs have other negative effects. They undermine business confidence by increasing policy uncertainty. Tariffs can create inefficiency and lower productivity.
The United States has legitimate issues with China — valid concerns about access to markets and intellectual property violations. However, it should pursue them with the World Trade Organization, not through tariffs. Using tariffs only opens it up to retaliation from China. And China has a large arsenal of weapons, beyond tariffs, that it can use against the United States. Following are just a few of these potential weapons.
- Counter the drop in foreign purchases of Chinese goods through increased domestic spending (which China is currently doing). The US executive branch cannot execute similar stimulus without a spending bill approved by Congress.
- Depreciate the yuan to lower the price of Chinese goods to American buyers in order to counter the impact of tariffs.
- Stop the purchase of treasuries and/or sell existing holdings of treasuries, at a time when the US government is issuing more debt and the Federal Reserve is normalizing its balance sheet by selling US debt. The net effect would be an increase in borrowing costs for the US government, all else being equal.
- Create closer trading relationships with other countries to isolate and exclude the United States (for example, China cut auto tariffs for US allies).
- Encourage North Korea to antagonize the United States, given that improved relations with North Korea has been an important goal of President Donald Trump's.
- Execute a regulatory crackdown on American companies (environmental or anti-monopoly investigations, for example).
- Place an embargo on the sale of rare earth metals to American companies and the US government (this is a necessary material for many smart phones and US missile defense systems).
The bottom line is that, given President Xi's status as president for life, China can play a long game. President Trump has a reelection campaign to worry about in less than two years. I assume that Xi will attempt to ride out the current conflict without making any significant concessions and that the United States, once its economy is damaged enough, is likely to ultimately capitulate.
https://www.cnn.com/2019/01/03/perspectives/us-china-trade-war/index.html
