So, What about this Tariff War?

Trump’s biggest gamble so far!

By Dr. Larry Fedewa (August 3, 2018)

The usual chorus of Trump critics are being joined on the current Trump issue du jour, namely, the free trade initiative, by some of the President’s own party. And, to be blunt about it, this is, in many ways, President Trump’s biggest gamble yet.

The Goal

The upside to be achieved is virtually indisputable. The USA has been bankrolling the entire world’s trade with our markets ever since 1948 when we were the only nation left standing after WWII. When it became obvious that the USSR’s Stalin was making a play to pick up Hitler’s mission to conquer all of Europe, it fell to the United States to stop him in what came to be called the Cold War.

The strategy in 1948 was twofold:

1) the threat of the Allied forces (still on the ground after the Nazi surrender) to march all the way to Moscow if necessary, and

2) the rebuilding of the economies of the non-Communist countries so that they could provide for the victims of the war-torn nations of Europe and Asia. 

The first goal was finally reached in 1989 when the Berlin wall came down, but America has continued to bear the lion’s share of the military defense against the USSR, including a succession of “little” wars meant to check the various expansionist ventures of the Communist empires of the USSR and China.

The second goal was reached by the late 1960’s, but the trade agreements which provide access to the United States markets – the largest in the world – and which provided the means for the recovery from World War II, have remained virtually unchanged to this day.

The Problem

There is only one problem with this picture: America can no longer afford this largess! We have a $20 trillion national debt, and we need to keep expanding our economy in every way possible. So, no one who understands the economic realities of 21st century America can argue with the goal of instituting equity in our reciprocal trade with the rest of the world. (Although our socialist friends do not seem to understand our limitations.)

Trump’s Gamble

So, the gamble is not about the goal. The President’s goal of establishing a virtually free trade relationship with all our trading partners is essentially non-controversial. The problems appear in the strategy and in the timing. It is clear that the Trump negotiating strategy is in full bloom in this confrontation. He started the negotiation with a public consideration of an extreme set of actions, in this case significant and targeted tariffs.

With so much at stake, our trading partners were bound to test the President’s resolve on this issue – and they have. To get their attention, the President has threatened, and in some cases already imposed, significant tariffs on selected imports. The effect of these actions varies by country and by product. We are being told that negotiations with our NAFTA partners, especially Mexico, are near solution. The unexpected collaboration of the Mexico’s new president has apparently been a positive impetus for these negotiations. Likewise, the European Union. President Trump has convinced them that he is serious, and they are now initiating talks to eliminate tariffs altogether.

China

But the elephant in the room now is China. China’s stake in this confrontation is enormous. Trade with China became the critical force behind China’s recent emergence as the world’s second largest economy, as American companies flocked to China’s cheap labor. It wasn’t long before the Communist leadership realized that, by monopolizing the manufacturing of so many products, they had acquired tremendous leverage over these Western companies. They used that leverage to make demands which ended in their acquisition of both equity — and more importantly, technology – from the Americans.

The total control the Chinese government over their currency has allowed the yuan to remain inexpensive related to the dollar and therefore to continually undercut American labor costs. To counter-balance this artificially deflated yuan, the Chinese government has invested heavily in American Treasury bonds and other assets. They thus have made their relationship with America profit in both ways – by using the deflated yuan to earn American dollars through trade and then using their dollar reserves to make a profit on their Treasury bonds, which also prop up the yuan. The Chinese have us coming and going!

However, President Trump’s insistence on reciprocating China’s massive tariffs threatens to bring down China’s whole house of cards. They are not going to give up easily. They know that the USA ultimately has the upper hand because we import ten times as much as China does. And, on top of that, China’s economy is finally feeling the effects of its longtime devaluation of the yuan as its national debt keeps rising and province after province is steeped in debt. It’s like a whole country full of Puerto Ricco’s’.

So, the first one to blink loses.

China’s leverage

Unfortunately, the pressure on the President is enormous. America has an election coming up in less than 90 days. The Chinese are targeting increased tariffs principally on agricultural and mining products, which are affecting America’s rural and mining populations, who voted heavily for Donald Trump in 2016. He desperately needs their votes in 2018 to maintain Republican control of the Congress.

These American voters are being torn between their loyalty to the President and their painful loss of profitable exports. Traditionally, pocketbook issues determine votes. The Chinese know that, if the Republicans were to lose the House, the Trump agenda for the rest of this term would be fatally doomed. If they lose the Senate also, the Mueller gang might very well succeed in unearthing enough dirt on Trump to support a partisan impeachment action.

In addition, Chinese cooperation has been critical to the negotiations for the denuclearization of North Korea. They have the option of dialing down that support and ultimately postponing indefinitely the NOKO disarmament – much to the embarrassment of President Trump, an embarrassment which might turn into an electoral defeat come November.

If the Chinese can hold out until after the election, their chances of coordinating with a Democrat Congress to relieve their misery might be vastly enhanced.

One option being explored is substituting Eurozone markets for China’s markets. The $12B emergency fund for American farmers affected by the loss of Chinese markets is an attempt to address this issue, but a permanent loss of a profitable market is not easily overlooked in favor of a temporary supply of cash.

Trump’s high stakes gamble

So, another big gamble for Mr. Trump. The eventual outcome of this test of wills clearly favors the United States, but the key question is whether the Americans can hold to our advantage long enough to win this contest. If we lose now, the chance to regain the advantage may not come again in our generation. The stakes are as high as they can possibly be for the future of President Trump — and the future of America.

© Richfield Press, 2018 (All rights reserved.)

 


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