Monday, September 30, 2019

Quora: Will Trump end the tariffs on China?

Robert Walker answered

Did Trump outsmart China by unexpectedly doubling down on tariffs on Chinese goods imported to the USA? Are we seeing the beginning of the end of China’s economic and geopolitical rise?

The answer to both questions is NO.

All of Trump's tariffs so far have done very little to slow down the flow of Chinese goods to the US, it just means American consumers are going to pay more for the things they buy. The tariffs were expected to cost the average American family about $1,000. By doubling down Trump has just raised their costs even more. The current reality is that China is the only supplier of many goods to the US. For any Chinese goods that can be replaced by others it will take a long time to re-jigger all the supply lines.

Even if Trump’s tariffs caused all of the demand for Chinese goods to disappear, it wouldn’t hurt China all that much. Trade with the US accounts for about 10% of China’s exports, which sounds like a lot of business to lose, but in the big picture China’s business with the US accounts for less than 3% of China’s GDP, which is an amount China can live without if it had to hunker down for a while.

On the other hand, there is very little China buys from the US that they can’t get elsewhere. Look at soy and pork as good examples so far. Therefore Chinese tariffs on incoming American goods could hurt the US a great deal. In any case, Chinese tariffs on incoming American goods are just window dressing anyways. The Chinese government DOES have the power to order Chinese companies to stop buying American goods, and have already used that power very effectively.

If Trump had left the rest of the world alone and focused ONLY on China he might have had some real leverage and a whole world of allies because many other countries have the same beefs with China that the US has, including technology transfer, intellectual property rights and trade deficits. Instead, Trump has started trade wars with almost each and every one of America’s long-term friends and allies, including Canada, Britain, Germany, France, Japan, South Korea, Australia, New Zealand, etc. Most of them have already signed new trade agreements with each other and with other countries to bypass Trump’s adversarial USA. America will have no support against China from its traditional allies. Not only that, these trade wars are sending China lots of extra business, more than making up for any lost trade with the US.

China is an ancient society that thinks and plans for the long term, not just the next quarter’s results or the next election. They have long term plans to become the preeminent country on earth, including being the #1 economic power. At the beginning of this trade war they were willing to make a deal to get it over with, but Trump’s flip-flops and volatility have made them dig in their heels. They may still be willing to make a deal because they realize that Trump is under incredible pressure from within the US and from the rest of the world to end this trade war before he causes a worldwide recession, and China can take advantage of this. Like everyone else, China doesn’t want a worldwide recession because it would hurt them more than any loss of US trade.

In terms of China’s economic and geopolitical rise, China and the European Union (EU) have been working to come up with alternatives to the US dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) system that controls most of the world’s major financial transactions. Through SWIFT the US has been able to monitor, block and impound international transactions it doesn’t like. The rest of the world is tired of America’s bullying unilateral actions in defiance of other countries wishes, but Trump’s unilateral sanctions of Iran and any country that trades with Iran (which includes the entire European Union, China and Russia, all signatories to the Iran Nuclear Deal that Trump pulled the US out of) has supercharged efforts to come up with an alternative to SWIFT. 

This alternative will likely be in place before year end. At first it will only be handling a very limited number of transactions such as those with Iran, but over time it will likely be used globally for most major financial transactions that don’t directly involve the US. This will greatly benefit China and Europe, but will result in the US losing control of the world’s finances. The Chinese yuan and the Euro will become alternate world currencies to the US dollar. And the more Trump and the US fight against a replacement to SWIFT, the faster it is likely to be in place.

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