Trade War: Part I
This afternoon, Trump announced an additional $200B in tariffs that will be levied against Chinese goods. It is a shocking move in that such threats have typically been viewed as a kind of political bravado as opposed to real, actionable sanctions. But here we are, ladies and gentlemen. Trump tariffs are here.
What's going on now?
Trump and his administration will spend the next two months hammering out the details of the tariffs. It is expected to be a 10% tariff on $200B worth of goods, but which goods will be affected remains to be seen.
Why did Trump levy these tariffs?
The ultimate purpose of these tariffs is to try to better position the US economy moving forward. I can't say whether this is an effective or appropriate approach, but here are the (oversimplified) mechanics:
- US companies want to do business in China, because it is a massive market. Lots of money to be potentially made.
- However, China has had policy in place that essentially requires all foreign companies to give up their intellectual property and technology in order to conduct business in China (whether via joint venture or other restrictions). Also, some huge tech companies like Facebook, Google, and Dropbox, are completely blocked, because they are deemed potential threats by the government. By imposing such requirements and restrictions, China has been able to chip away at the US comparative advantage in IP and technology.
- By maintaining an enormous trade surplus, China is able to continue (roughly) pegging its currency to the dollar and maintain an artificially low Chinese yuan value. In essence, the US pays for Chinese goods with dollars. Rather than spending or reinvesting this dollar currency, it is kept in reserve. With a shorter dollar supply, the yuan can remain relatively weak. This, in turn, enables China to continue exporting its products for cheap relative to other countries.
- The tariffs are aimed at a) curtailing the monstrous trade deficit and b) forcing China to adjust its policy to be fairer to others.
Won't China retaliate?
Yes. After the initial $34B in tariffs placed on Chinese goods by the US, China responded in kind with its own $34B in tariffs on US exports. However, in 2017 (per the US Census Bureau), US exports to China totaled $129.9B, whereas imports from China totaled $505.5B. In short, this means that China can only put tariffs on around $130B worth of US goods, since that's the total amount they're importing. With the US escalating the total dollar amount of goods being tariffed, China will have to find other ways to respond.
What happens from here?
The repercussions are far reaching in nature. Global markets have been roiled by this "battle" between the world's two largest economies. Once the tariffs are actually implemented, expect many consumer products to become pricier as the cost of the tariffs is passed onto the consumers themselves. Many US businesses will also be impacted, as they rely on intermediate goods from China. Ultimately, I see this as jostling between powerhouses vying for the #1 position in the world economy. The term "trade war" seems a bit overblown, and I don't imagine there will be ramifications that extend beyond economic impact. It is clearly in the best interests of both countries to continue a partnership, but both sides want to be the ones dictating terms.