It may be a forgone conclusion that President-elect Donald Trump wages and wins an international trade war that restores America’s manufacturing sector. Yes, the jobs that were lost to China through terrible trade deals may be returning in the coming years. Why? Because, in this game of international high stakes poker, countries like China don’t hold all the cards.
There’s been much bravado coming out of Beijing since Trump won by a landslide in the Electoral College. China’s national propaganda paper, Global Times, began issuing threats just days after Trump’s victory. To further flex its muscles, China even flew nuclear-capable bombers over Taiwan after Trump took a congratulatory call from Taiwan President Tsai Ing-wen. But then , bullies often make a lot of noise in the face of genuine strength and resolve.
Why China Will Fold Its Hand
During the last 10 years, the annual trade deficit with China has increased by more than $54 billion. In 2016, the U.S. exported just $92 billion to China while importing $380 billion in goods, creating an astonishing $288 billion deficit. On its face, that seems like the U.S. would be in a tight spot if those cheap goods stopped rolling in.
On the contrary, America remains China’s second largest customer and the Asian giant derives 41.2 percent of its GDP from trade. The U.S. economy is far less reliant on trade.
Couple their trade-needy economy with the fact the average person in China has a standard of living below $15,000 and Beijing doesn’t exactly have a full house. A trade war could cripple China’s economy and it would be unacceptable to the Chinese people to watch their standard of living decline any further.
Why America ‘Trumps’ China
For Americans, slapping hefty tariffs on Chinese imports would likely create the illusion of inflation. America primarily imports electronics, machinery, and clothing from China, and the cost of those products would go up, at least in the short term. But, by making Chinese imports costly, the free market would adjust and make it more profitable to manufacture the same products in the U.S.
Ironically, much of the $92 billion in U.S. exports to China are primarily raw materials that get manufactured and return as electronics, machinery, and clothing. It doesn’t take a Harvard-educated economist to figure out that strong tariffs could persuade American companies stop exporting raw materials and make goods from start to finish at home. Trump may be counting on this to revitalize the manufacturing base.
This tough American protectionism would double down on 25 percent of China’s total trade — 18 percent of its U.S. exports and 7 percent of its U.S. imports. So, when The Donald lays down the new trade edicts, China will either negotiate a deal that includes releasing American jobs or suffer an economic hit and watch jobs disappear.
Foreign entities need America more than America needs them and the threat of paying more for a smartphone does exactly strike fear into the heartland. The fact of the matter is that the incoming president holds the “Trump” cards.
The Treasuries Bind
The Chinese have reportedly bought about $1.3 trillion or 7 percent of U.S. Treasuries that have funded America’s $19 trillion dollar deficit spending. In some minds, it appears China has an ace up its sleeve. Actually, they don’t. Any rocking of that boat could cause negative effects on both sides.
China buys Treasuries to keep the Dollar stable. If the debt gets called in, Trump could do exactly what he said on the campaign trail — print the money. The result would devalue the Dollar. In the short term, your money would be worth less. How much, no one is certain. Economists generally disagree about what might happen.
But the problem China grapples with is that it is the biggest money-manipulating criminal in the world. They peg the Yuan against the Dollar, which means they set their currency to undercut America’s. Calling in the notes could cause the Dollar to drop and with it, the Yuan. Buoying the American Dollar by purchasing Treasuries put China in a terrible bind. If the American Dollar sneezes, China catches cold.
Owning debt isn’t always a winning hand.
History is on Trump’s Side
The threat of tariffs and American protectionism isn’t a political strategy. President-elect Trump didn’t think it up on the campaign trail. In fact, past Republican presidents have successfully used this strong-arm tactic. The Reagan Administration threatened tariffs and trade quotas against Japan during the 1980s. At first Japan balked, but they came to the bargaining table and American workers benefited. Likewise, President Nixon had successfully employed the threat of American protectionism in 1971 against the currency manipulators of that era. They also folded.
Obama’s crew appeared out of their depth in terms of trade negotiations. But, the Trump Administration’s business savvy cabinet knows this game well. They have the cards to win back the America’s manufacturing base. It’s time to call China’s bluff and see if Trump really is the successful businessman that his supporters claim him to be.