Tuesday, May 21, 2019

Trump has started a trade war that he can’t win

The edited version first posted on Asia Times.

Anyone with a decent education and a dollop of sophistication knows: Nobody wins in a trade war. Specifically, there is no way Donald Trump can win the war he initiated with China.

He thinks tariffs levied on imports from China is “free” money going into the US Treasury. Even his closest advisers know that’s delusional thinking and wrong.

Tariffs are paid by the importer and to the best of his/her ability passes on the added tax to the ultimate buyer. In the case of daily use items, it’s the consumer that adsorbs the increased cost. The exporter of consumer goods from China also loses because at the higher effective price, less is sold.

Same goes the other way. Tariffs imposed by China on imports from the US limit the amount American exporter can sell to China. For instance, China was going to be a huge market for natural gas from Texas. With the added tariff, LNG from the US was priced out of the market.

In theory, tariffs imposed on goods from China would be more painful to China because China sells much more to the US than the other way.

However, the two-way trade is not zero sum. China is not as dependent on buying from the US the US needs to buy from China.

China can buy from alternate sources, e.g., lobsters from Canada instead of from Maine, soybeans from Brazil instead of Iowa, wine from France instead of California.

On the other hand, goods imported from China are usually at the lowest prices. By slapping import duties on these goods, the net effect is to raise the cost for the American consumer, and the cost of living goes up for the Americans. 

Free money

Furthermore, around half of the imports from China are made by American companies in China. Thus, the American company will be paying the tariff for importing their own products. So much for Trump’s free money.

In any event, both parties to the tariff war will feel the pain. It will simply be a matter of which party can withstand the pain better. So far Wall Street has not reacted strongly to the prospect of increasing tariffs, but it’s a matter of time.

Of course, there are more imports from China that Trump has yet to impose a tariff, but the Trump administration has already indicated that they have much more than trade in mind. Trump wants to stop China in every which way.

The Trump team seems to think that they can impose their will and insist that China needs to desist from stealing American intellectual property and codify their agreement in writing. 

No nation would dignify a response to such an insulting request. Did America pledge in writing not to steal industrial technology from England, or Japan from the US, or South Korea from Japan?

In Silicon Valley, companies infringe and steal from each other. It’s up to the owner to safeguard and protect its IP from theft and go after the offender as a matter of mano a mano. It has never been a matter of one nation accusing another.

Yet, in the heated trade war negotiations, the American side accuses China of practicing IP theft as a matter of national sponsorship. The presumption is that Chinese companies steal according to a national policy.

Huawei has IP that the US covets

Overlooked in all this, is that soon if not already China will own IP that American companies will wish to pilfer. High speed mobile communications readily come to mind.

It’s hard to know if anyone is looking to steal Huawei’s advance 5G technology, but the Trump approach is to suppress and deny Huawei market access. Trump may deter American companies from buying Huawei but it’s not working elsewhere.

Other than vigorously badmouthing Huawei, American emissaries such as Pompeo, Bolton et al can’t offer any hard evidence that Huawei equipment represents security risk. They simply insist that others should not buy from Huawei because the Whitehouse said so. 

What’s obvious is that Huawei offers technological advances here and now that no others can. Washington can’t even put a finger on which aspects of the Huawei package are based on stolen IP.

The rest of the world is ignoring Washington and buying Huawei because of its superior technology at an irresistibly low price. Soon the telecommunications world will be divided into the haves with Huawei technology and the pitiful few countries with slow internet speeds clinging to Uncle Sam’s trousers.

Common economic interests

Same situation is evolving geopolitically. Pompeohas been visiting national capitols warning the leaders to stay away from China’s Belt and Road Initiative, BRI. Why? Because he accuses China of practicing predatory financing when China offers to finance the infrastructures for third world countries.

Yet at the just concluded Belt and Road Forum in Beijing last month, attended by 37 heads of state and 130 some countries represented, the reaction couldn’t be more positive, a clear refutation of what Trump’s China team has been saying.

These countries love the idea that China is willing to help them build crucial infrastructure projects. Infrastructure, they know, is necessary for economic growth. Infrastructure as part of China’s trade corridor from Asia to Europe means member states sitting on the corridor will get rich from global trade.

Along with the 130+ countries with shared economic interest with China, there is also the Asian Infrastructure Investment Bank. AIIB was independently established to finance infrastructure projects in Asia.

AIIB has 70 members with 27 more waiting in line to join. Apart from some participants in the BRI, major shareholders include every major European country. Only ones conspicuous by their absence are Japan and the US—not taking part in AIIB was Obama’s missed opportunity.

While the US rings the world with military bases and asserts its leadership by projecting its might, China promotes economic collaboration with countries around the world. 

The two strategic paths need not converge leading to conflict, but if conflict breaks out, countries standing by the US would be based on fear and intimidation. Those standing by China are bound by common economic interests. As the world turns, increasing numbers will quit the former for the latter.

Shared military assets

Russia has become an important partner to China because of intertwined and complementary economic interests. The two countries are also key players in the Shanghai Cooperation Organization, established more than two decades ago. SCO includes Central Asia countries, Pakistan and India and soon to include Iran.

Aside from economic and cultural cooperation, the alliance also holds joint military exercises to combat terrorism and ensure stability. In the event of US military intervention, SCO will stand with China. The organization represents half of the world’s population and 80% of the Euro-Asia landmass.

While it’s been said in Washington circles that Bolton and Pompeo hanker for effecting regime change in Iran, Trump is not totally without common sense. Even though waging a proxy war on Iran with American lives would please his client states, Israel and Saudi Arabia, as well his super wealthy support base as home, he knows Iran is no mere Iraq.

Furthermore, as reported in Asia Times, Russia and China are on the same page in their foreign policy and stand firmly behind Iran. Enough to give any of the hot-blooded hawks in the Whitehouse pause. Even pundit Pat Buchananthinks war on Iran would be the end of Trump presidency.

Not just Iran, Russia and China’s position on Cuba, North Korea, Syria, Afghanistan and Venezuela is very different from the US, and in some cases even diametrically opposed to Washington. If Pompeo and Bolton believe they can dictate terms to these hotspots without the support of China or Russia, they are hallucinating.

A fork in the road

Thus, if Iran is unlikely to trigger a calamitous war, Trump can turn his full attention to resolving the China challenge, a dilemma sitting at the fork of the road. He can back off as he has in the past and seek a non zero-sum approach that would enable both sides to win. Or he can double down and impose tariffs on $300 billions of Chinese imports currently entering the US duty free.

If Trump decides to raise the stakes of the trade war, China will not be able to retaliate in kind since China imports much less than the US imports from China. But they have other ways to raise the stakes.

China can stop exporting rare earth minerals and compounds to the US.  Rare earths are essential to a host of industries including electronics and defense. Without access to rare earths, American industries would grind to a halt and it would take years to develop alternate supplies from known deposits within the US.

China can also greatly diminish their support for the US national debt by buying fewer treasury bills. China currently holds around $1 trillion of American IOUs. If China were to stop buying or even divesting some of the treasuries from their holding, it would shake the confidence in the dollar and create instability in the US financial market.

China has become the largest and most profitable car market for American auto makers. Profits earned from China often make up the major part of the company’s total earnings. Another retaliation in the trade war is to close the market to American companies.

Another strike with surgical precision is for Macau government to suggest to the media that the renewal of the gaming licenses in Macau for the three American operators is in doubt. Las Vegas Sands is the largest of the three and a little over 60% of its revenue and profit come from Macau.

Sheldon Adelson is the majority owner of LVS and a heavy financial contributor to Trump’s presidency. Any hint that LVS is in trouble in Macau would be a direct hit to Adelson’s net worth and sure to put a crimp on his enthusiasm for Trump’s China policy.

Retaliation would ensure both sides lose

From the inception of this trade war, Trump and his team assert that the war “was easy to win.” What I have listed above are just some of the tools China can use to ensure a lose-lose outcome. Any of the retaliatory moves would destabilize the global economy and severely erode Trump’s core supporters. 

The outcome would be a classic LOSE-LOSE and debatable as to who would lose more.

As a senior official at the State Department recently declared, the war between the US and China is between “civilizations.” Knowing that China is coming from a different culture and background, the Trump Administration should know better.

Up to now Trump’s China team has been projecting American values and thinking on to the Chinese. Just because “we lie, we cheat, we steal,” doesn’t mean China will act the same way.

Unlike the US, China does not interfere with the internal affairs of another state, does not wish to dominate and occupy someone else’s territory and does not impose their way of government on anyone else. 

If the US could stop waging an unwinnable trade war and stop demanding that China must be more like the US, it would be possible for the two sides to come to an understanding. They can reach an amicable win-win resolution wherein each party can feel that they have won.

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