Relatively quiet on the president’s trade policies so far, US businesses could soon react strongly if China flexes its full muscle power in its trade war with America, writes John Whelan.
The latest stunt used by President Donald Trump to disrupt international trade by his wild comments on Brexit, during his visit to London over the weekend, highlights the dangers of giving him free reign to visit any country.
But of more immediate worry to all businesses trading internationally is the Trump administration’s attempts to sort out its trade imbalance with China, which was released last week and threatens to add a 10% duty on about $200bn (€171bn) of imports from China, on top of the 25% charge on $50bn of goods it implemented in early July.
The move looks like a straight take from Donald Trump’s 1987 best seller The Art of the Deal, which has 10 key steps to completing a successful deal.
The first of these is ‘Think Big’ and he certainly has done this by launching the biggest trade war in economic history. The second is ‘Protect The Downside and the Upside Will Take Care of Itself’.
Here, he may come unstuck as a property deal carries very little resemblance to the wide ranging trading activity of the two largest economies in the world.
He may think he is protecting his downside with tariffs on Chinese imports, but in the process, he is likely to heavily damage the many US multinational corporations who have major manufacturing facilities in China, which they use as a base for exporting across the globe including back to the US itself.
To date, China has followed a policy of “strategic composure” in dealing with Trump’s ‘America First’ ethos. However, in its response to the announcement of new tariffs, China’s Ministry of Commerce said: “China is shocked by US behaviour. In order to safeguard the core interests of the country and the people, China will have to fight back as usual.”
Following the US announcement, the Bank of England forecast that a 10 percentage point rise in tariffs between the US and all of its trading partners, could knock 2.5% off US economic output and 1% off global economic output. Mr Trump’s caustic comments on Theresa May’s Brexit white paper, during his visit to Britain over the weekend, will have added to the unease with relying on the US to replace any lost trade with the EU.
The Trump administration’ release last week covered a wide-ranging list of Chinese goods it proposes to be hit with tariffs, but an initial review indicates that food products will be affected particularly hard.
The list includes numerous fruit, vegetable and seafood items but also rice, pasta, flour, as well as prepared food including marmalade, jam, peanut butter and soy sauce.
In a tit-for-tat response, agricultural products are likely to be on the front line of Chinese retaliation as they were in their reaction to the US steel and aluminium tariff, hitting US soybeans with a 25% tariff on importation into China, which is the largest global market for US producers.
Agriculture is one of the few sectors in America that runs a trade surplus with China; so much for Mr Trump’s upside looking after itself.
US pork exports could be another easy target, as there has been a boost in China’s sow herd in recent years, making them more self-sufficient. But as with soybeans, there are other markets — such as Brazil — which can fill in where the US suppliers get blocked, and in the case of Ireland, pork exports to China have been growing and could benefit from any increase on import tariffs on US pork.
One of the Trump administration’s trade war targets was to shield the intellectual property of American companies, a key concern in Silicon Valley.
But US tech companies are also vulnerable to retaliation; especially companies such as Apple and Intel, both of whom have extensive manufacturing operations in China. Again, Ireland may gain as a result of further escalation of the trade war, with increased use of the Apple and Intel manufacturing facilities here.
Another possibility is that China emulates the EU’s retaliatory tactics, and restricts imports of US goods with political connections to President Trump and his party, such as Harley-Davidson motorcycles — whose maker is based in House speaker Paul Ryan’s home state of Wisconsin, and jeans from San Francisco-based Levi Strauss & Co, headquartered in House minority leader Nancy Pelosi’s district.
The trade war with China so far has not impacted on the US stock market, nor has the US economy been affected to any great extent. But China may feel it is time to pull out its heavy guns.
China President Xi Jinping gave Boeing a $38bn order during a 2015 plant visit in Seattle, but most of these have not been delivered yet. This could be cancelled and future aircraft orders could easily be placed with Airbus in France, cutting Boeing off from the largest and fastest growing global market for aircraft.
President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!— Donald J. Trump (@realDonaldTrump) May 13, 2018
Overlooked in all the Trump administration rhetoric about trade imbalance is the dominance of US services corporations, who run trade surpluses with most countries, including China where they have a $38bn services trade surplus.
Some of the leading services exports from the US to China include computer software, travel, education and intellectual property, according to the US trade representative’s office.
China could restrict the number of students who go to US universities, hurting their funding at a time when an aging population has resulted in declining enrolment at many American schools.
China has a lot of policy choices in its tool box and has its own ‘Art of the Deal’ philosophy; namely, that of Confucius’ stated strategy of gaining mastery by striking only after the enemy has struck.
They have not been fully unleashed yet. The next move in their trade war with the US could be devastating for US businesses, which have been mainly mute in response to the Trump trade negotiating tactics to date.
US business has benefited from the massive corporation tax reduction introduced by the Trump administration last year, but sales have to be made if there is going to be any profit to tax.
Although the new tariffs on goods — such as agricultural and consumer goods — will not come into effect for at least a couple of months, the escalation of the range and value of goods to be hit send the signal that the US does not
intend to end its unfair trade policies any time soon.
This will strengthen the resolve by Chinese authorities and those in Europe, as well as in Japan, Canada and Mexico, to take a hard stance and retaliate with force. Trying to predict just how much damage will be done to
global trade, as the world’s major economies enter into a protracted fight with the US, is difficult given the unpredictability of President Trump.
Ireland is particularly vulnerable because of its heavy reliance on trade and investment with the US.
However, perhaps salivation may come in the US mid-term elections in November, by which time the economic impact of President Trump’s trade wars could become clearer to his supporters and a loss of a Republican majority may bring sanity back into international relations.