In the event of markets having been in an extreme decline as the result of the steel and aluminium trade duties and the sixty billion of duties introduced on commodities from China, which should have been no real surprise, with Trump being clear from the start of his election campaign that the trade imbalances needs to addressed to suit the interests of the Americans. Can US triumph a trade war with China and other trading allies?
Trump supporters will be rejoicing the current move, but will the support sustain in the months ahead is something we will have to wait and watch. While Trump does have a point, it’s a risky path that he has undertaken.
There are several implications to using the perils of a trade war to accelerate the rebalancing of trade terms with America’s key trading allies and when considering the fact that the trade terms have developed over many decades, ripping off the Band-Aid that has, not only provided support to the American economy, but also the world economy, is not going to come without pain.
American consumers and manufacturers are at maximum risk.
A steep increase in the cost of imported goods from China would likely severe decline in local consumption and companies relying on importing key components from china will face hardships. U.S manufactured goods are not able to compete and to be honest, even with duties, goods from China in the end, may be the preferred option. A material cut-back in local consumption, something that the U.S economy leans heavily upon, is certainly to the disadvantage of the economy and the voter.
On the other hand, China is a key market for many American MNCs, including the likes of Apple, Microsoft, Boeing, IBM and General Motors, to name but a few. China is more than competent of hitting American manufacturers where it hurts; eventually slamming the U.S economy and the U.S Dollar.
However, the US, still, has an advantage over China to win the trade. America is the number-one consumer in the world and China would not be happy to lose its biggest client.
China’s reserved response last week was mostly leaning to be in the hopes of a solution to trade indifferences that has led to Trump delivering on a campaign promise. The subdued response certainly suggests that China is looking to steer clear of a trade war, while still demonstrating an unwillingness to sit by and be bullied by America.
There are ultimately many ways that China can trample President Trump and the Republicans. A hold back on soybean and other agricultural imports would result in Trump’s major support lifeline from the mid-West be crippled, a move that would hit the Trump’s ratings and prospects for a second term.
Another way to retaliate could be through a sell off of its current Treasury holdings and decreased participation in auctions, a move that comes at a time when America is in serious need of foreign investment. Local appetite for U.S Treasuries by itself would just not cover it. China’s holdings of America’s debt surged by a reported $126.5 billion last year, by far the largest increase in 7-years.
The drawback to such a move would be a substantial decline in the value of China’s foreign reserves, though the government can afford to devalue the Yuan, a move that would certainly irk the U.S President even further. Once again, China will have an upper hand.
Granted that America may be able to win the current battle; but winning the war will be an altogether different ball-game, with a full-blown trade war likely to only result in losers, with no winners.
Can the President’s move really make an impact on the present U.S trade deficit?
Well, only if trading allies lay low; accept the tariffs without any retaliation. However, as the markets saw last week, no major global economy is going to sit back, especially China. The only question that remains, is whether the President will really go through on a trade war and how aggressively China and the rest of world respond.
Recessions and a Global Depression have been caused from previous trade wars. While Trump spent much of the early part of the year bragging about the record highs in the Dow, the S&P500, and the NASDAQ, the boasting has stopped and it could soon be the American consumer who will pay the cost.