Friday, President Donald Trump issued tariffs on steel and aluminum based on a rarely used trade provision, Section 232 of the Trade Expansion Act of 1962. The law stipulates the President may impose tariffs if they are in the interest of national security. Last month, the US Commerce Department recommended the tariffs saying that relying on trading partners for steel and aluminum could pose a threat to national security in times of war. The tariffs have sparked speculation that a trade war could be emerging.
President Trump signed a 10% tariff on aluminum and a 25% tariff on steel imports, initially exempting Canada and Mexico from the tariffs. The White House announced last week the European Union, Australia, and South Korea will also be exempt from the metal tariffs.
Predicting a Trade War: US vs China
Prescience Partners returned 6.75% for the second quarter, underperforming the S&P 500's 8.55% return but coming out ahead of the Barclay Equity Long/ Short Index's 2.62% return. However, for the first six months of the year, Prescience is up 30.66%, doubling the S&P's 15.25% return and smashing the Barclay Equity Long/ Short Index's 9.27% return. Read More
Before the tariffs were even signed into law, American trading partners were sent into a panic while financial analysts predicted a coming trade war. Seeming to make these worries a reality, last Thursday, President Trump signed a memorandum to levy heavy tariffs against up to $60 billion of imported Chinese goods. The President also recommended the Treasury Department to consider ways to limit Chinese investment in the US. Since last week, financial analysts and political pundits have been debating who would emerge triumphant in a US vs. China trade war.
As corporations, investors, and international trading partners began to panic, the US market saw the instant ramifications of a potential trade war. Between last Thursday and Friday, the DOW dropped 1,149 points. The Asian market also suffered some significant setbacks.
President Trump’s tariffs against China answers to one of his key campaign promises, “America First” economic policies. While on the campaign trail then-Candidate Trump accused China of intellectual property theft and currency manipulation. He routinely blamed China and the trade deficit for shuttered factories, stagnating wages, and increasing unemployment. The tariffs and possible incoming trade war with China are some of the biggest steps in President Trump’s “America First” economic policy so far in his young presidency.
President Trump promised the tariffs against China will be the first of many measures to bridge the enormous trade deficit between the world’s two largest economies. The tariffs focused mainly on the tech sector. China is said to hold the advantage in this economic arena.
Adding fuel to the fire of speculation, Friday, China retaliated by proposing tariffs on $3 billion of US goods. The tariffs would be levied against 128 products imported from the US including wine, fruit, and steel pipes. These products could be facing a 15% tariff, while pork and recycled aluminum would see a 25% duty.
Beijing has said they will impose the tariffs in two stages if officials fail to reach an agreement with Washington.
Many analysts believe China holds the advantage in a potential US vs. China trade war. However, others point out that China grows increasingly dependant on the American market. As Gordon Chang, an expert on the Chinese economy, has pointed out, nearly 89% of China’s merchandise trade surplus in 2017 was due to the American market. Further, China is teetering on the edge of a debt crisis.
The US’ Position
Although China is the second largest economy in the world, the US’ economy is still much larger. In 2017, the US’s economy was worth nearly $7 trillion more than that of their communist rival. While China’s economic growth has slowed, the US’ economy is moving forward at a much faster rate.
But analysts believe a trade war with China could hinder growth. American consumers are used to buying cheap goods made in China. Analysts predict an increase in the cost of goods usually bought inexpensively from China could increase the cost of life in the US.
An economist at Columbia University, Joseph Stiglitz explained the situation at a conference over the weekend in Beijing, “For instance, if the tariffs imposed on Chinese textiles and apparel increase, the cost of living in the U.S. will go up, the Federal Reserve by its mindset will increase interest rates, which will slow the economy and create unemployment.”
The American professor’s comments were published in China under the headline, “China can weather trade tensions better than US, but Chang disagrees saying the size of the American economy and China’s reliance on it give the US the advantage.
Words from China
Former officials in the Chinese government have publicly said the proposed retaliatory tariffs are too weak a measure against the US. Former Finance Minister, Lou Jiwei, said the measures were “too weak” and that he would “probably hit soyabeans first, then hit autos and aeroplanes.” China is the US’ largest market for soybeans and aircrafts, as well as the second largest market for automobiles.
Chinese citizens and former officials have also taken issue with the size of the measure against the US pointing out that the threat of $3 billion in tariffs doesn’t really measure up to the $60 billion imposed by President Trump.
While opinion pieces have sprouted up over the weekend in the US claiming the US has the advantage, the same occurred in China. One editorial in the Global Times reads:
First, Chinese society will be more united than American society in the face of the trade war. Most Chinese will firmly support every countermeasure the Chinese government makes because they know this is essential to safeguarding their interests… The US is already divided on the issue. This opposition will rise when the US suffers more from the trade war.
Despite the nationalism rhetoric, the editorial hits on a visceral weakness in the American political landscape. Since the election of President Trump, little has been done to bridge the growing political divide in the US, while many who didn’t vote for him remain staunch in their criticism of the President who is currently engaged in a PR nightmare and the Mueller investigation.
If a US vs China trade war emerges, will Americans unite behind their president even in the face of rising costs for previously inexpensive goods?