Patrick Watson says businesses that depend on imports or exports can't plan ahead against the backdrop of a trade war which is why Trump's trade war won't work

Donald Trump by Jacky Carpenter.

By Patrick Watson*

Free trade is amazingly popular for something that doesn’t actually exist. Even Americans who can’t define free trade tell pollsters they love it.

The opposite is true as well. Import tariffs certainly do exist, and most people don’t like them at all, according to many surveys.

President Trump does like tariffs, and he has the power to impose them. He has done so on steel, aluminum, and a variety of other imported goods. Other countries have retaliated with tariffs on US goods. People are starting to feel the impact.

The president’s supporters argue tariffs are just a negotiating tool, and Trump will remove them as soon as China and other offenders change their ways.

Maybe that will work. The problem is that Americans are getting hurt now, and their numbers are growing. This weekend’s agreement to revise NAFTA should provide a little relief, but at some point people’s pain may outweigh their patience.

Where is that point? Maybe closer than we think, but no one really knows. The uncertainty itself is a big problem.


Photo: Getty Images

Soybean suffering

Like I said, trade policy is not a popular or well-understood topic among Americans, and even less so among younger Americans.

Until now… maybe.

Last Saturday at the Texas Tribune Festival in Austin, an offhand comment from Senator Amy Klobuchar (D-Minnesota) made my ears perk up.

She was talking about her visits to high schools around her state and the questions students ask her. Lately, they seem to have a growing interest in soybean tariffs, said the senator.

Minnesota is the nation’s third-largest soybean-producing state, so it’s a fair guess some of those students come from farming families. Any of us can look at data and see that China’s retaliatory tariffs are having an impact, but these students seem to know it first-hand.

Now, combine that anecdotal evidence with some recent survey data.

  • In Illinois (another big soybean producer), an August NBC/Marist poll found only 23% of adults thought tariffs would help the economy and protect jobs. Some 42% thought the opposite, i.e. the tariffs would drag on the economy. 
  • In Pennsylvania, a poll of registered voters had similar results: 28% thought the Trump tariffs would help, 46% thought they would hurt.
  • Here in Texas, the balance was a little closer but still skeptical: 33% positive on tariffs, 40% negative.  

Of course, polls can be wrong. The respondents can be wrong too. Maybe the tariffs will work after all.

But here’s the problem: A policy being effective isn’t the same as it being politically sustainable. We live in a democracy. Unhappy voters can pressure their representatives to change course before the policy has time to work.

So the key question is, how long will Americans—particularly those in key Trump-leaning states—tolerate the economic pain tariffs are already inflicting?


Photo: Getty Images

Pain tolerance

To further complicate matters, the pain is only just beginning. A new 10% tariff just took effect on a much wider list of Chinese goods last month, and it will go up in January if China’s government doesn’t bend. Maybe it will.

Meanwhile, consumer prices will jump for those goods and others derived from them. They may rise faster than wages, which are not rising at all once you consider inflation.

Chinese factory workers are suffering too, of course. Is their pain tolerance higher or lower than that of US consumers? I’ll bet we find out.

This standoff could drag on for years, or it could end next week. How is a business that depends on imports or exports supposed to plan ahead?

Answer: It can’t… which is why I think the policy won’t work.

Here’s the Trump administration’s theory. Import tariffs will raise the artificially low prices of Chinese goods and enable US companies to produce those products domestically. This, they believe, will create jobs and make America great again.

Unfortunately, shifting production from China to the US isn’t like flipping a switch. Businesses need to build facilities, hire and train workers, reorganize the supply chain, and so on. It takes time and, more important, money.

Why make that kind of multi-year investment when the tariffs that make it feasible might come down any time?

Business owners know this. More important, Xi Jinping knows it.


Photo: Getty Images

Long stalemate

The most likely outcome of this trade war, in my view, is a long stalemate as each government waits for the other one to break, and businesses try to plan for the unknown.

That means the US will see price inflation long before it sees outsourced manufacturing return from abroad. Inflation plus higher interest rates will further strengthen the US dollar. This will make our exports more expensive and encourage other countries to find alternative suppliers.

In other words, US trade policy is unlikely to achieve the desired goals, but it will certainly inflict pain on Americans. The big unknown is how much pain we can take before the political process forces a change.

That’s not an economic question anyone can answer. But it’s an important one.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by interest.co.nz with permission.

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19 Comments

Taking the Soybean one, if it doesn't want to cut back or grow its own presumably China will buy from elsewhere which if global supply and demand are well balanced, then it will just mean a global shuffling of sales. And in the meantime I believe Trump is providing compensation to Soybean growers.

And China will source soy-beans from another supplier / country

https://www.scmp.com/news/china/diplomacy-defence/article/2159654/china-...

All the farmers have to do is just undercut the cost of American soy-beans in China to make a sale. They don't have to be the most efficient producers - just cheaper than the American farmers in China. Meanwhile American farmers are being subsidised / compensated by the US administration which most likely will just be added to the US Federal debt. Win for foreign producers / win for US Federal debt holders ( I think) and farmers but a loss overall to the USA.

The big picture background for the trade war between the US and China unfolds to:

1. the US changed its view of China from a strategic competitor to a strategic adversary, which were agreed by both Democrats and Republicans.

2. the US mighty built primarily on technology superiority is felt challenged by the China's Manufacture 2025 strategy.

3. the US geopolitical influence is felt undermined in the EU, Africa, Asia, South America by the China's BRI.

Given the above background, it very natural for the US be nervous on maintaining its global dominant position and possessing the exclusive right of American exceptionalism. Consequently, using whatever resources to hinder China's development will be the dominant theme of any US government in power.

So, in the next decades to 2035, you will witness the greatest strategic maneuvers in the entire past of the human history by the two greatest nations and civilizations in the entire past of the human history. Fortunately, both nations are fully aware that a war, especially nuclear war, is absolutely out of options. The only options left are "wars" on trade, economic, foreign policy, technology, human rights and so on.

As for NZ and many other medium to small sized nations, it will be, at least in long term, a good result simply because we will move to a world no longer characterized by a monopoly but a duopoly.

PS: I am not a 五毛党 or paid by anyone to write comments here. I read and watch from both western and eastern medias to have a fuller picture NOT lopsided opinions. I do believe that NZ needs voices like mine.

"" the two greatest nations and civilizations in the entire past of the human history"" - well do you judge by quality or quantity or size? If quantity the China is a front-runner along with Egypt and Persia and size brings in Ghengis Khan but for quality maybe China, Britain, Greece and Rome? The USA would be fairly high measured by extent of influence and cultural and technological innovation but not in the top two measured against the entire past of human history.

I change the sentence above to reflect what I really meant. But thanks for pointing this out.

This comments seems fairer than your previous ones and a lot less emotional.

You probably do not speak/read/write Chinese, have never been to China, get all your news from western media (BBC, CNN etc) and form your views on China and the current world affairs based on one-sided "facts".

But that is fine.

我也没有侮辱你什么的好不好!我已经在南京住了五年了,并且也已经开店快5年了,我老婆是中国人,而且我也经常刷微博的

You just got put in your place 五毛党, now go back and hide in the shadows please.

Nice one..

Or, much more likely, the trade war is simply a result of the US finally evening things up. Which is what they actually said.
It's funny how people still talk about it being Trump who started the war.
If you look at the new deal made with Mexico and Canada (USMCA), this was about reversing the practice of US firms shifting their production out of the US by using cheap labour, then selling the products back into the US (without any tax having been paid along the way), selling to the same consumers who were buying the products in the first place, with the exception of no workers having any money.

This is the Battle of Bighorns, global style. This doesn't have a happy ending I'm afraid, more of an explosive ending. These two dominant cultures are both similar and different at the same time. One has choice, the other commands, but they are both big traders on the world stage. China needs to export to evolve, America is quite happy sloshing around in its own juices, but is an innovator. Who has the biggest wallet? Well, they both print money like it's going out of fashion, so my pick, as above, is that before they both devalue themselves out of contention there'll be a war. And I hope I'm wrong, but one of the best places for them to have this fight is away from their national shorelines - like the South China Sea, for example. A bit close to home for my liking.

Going to put my money on the US here in a play against poor Chinese demographics, the end of the command economy (move to neo-liberalism to stop the revolution) and the extensive debt leaving China as the next Japan to lose a couple of decades growth. Debt's are a great leveller in recession particularly if you only have 3% of world trade done in your home nations currency and I can't see China in the short term replacing it's ageing workforce with immigrants....... Immigration to China is just not an option for anyone who values their freedom.

Nic, These countries have a lot of history and a lot of it is ugly. I would think if Japan starts rearming especially missiles or god forbid Nukes, China will be forced to enter an arms race. History will be playing a big part of any decision making.

How you send you only child off to fight a high tech war with lots of casualties, when the only thing they have done for sport is play computer games is another story.

China has an announced strategy to shift exports/imports away from the USA and into other countries. When they make a strategic shift, they go for it 100%. So it will be interesting to see how they start doubling down on diplomacy.

If Trump gets elected for another term then people will be more wary about dealing with the USA and it will boost China's diplomacy

Chinese govt has been inserting spy chips in computer hardware sold to the world:

https://www.bloomberg.com/news/features/2018-10-04/the-big-hack-how-chin...

Chinese have just destroyed their IT export industry. Without a global market they will struggle to maintain computer tech leadership.

No solutions suggested to the fundamental one of unacceptable practices on both sides but Chinas claim to the S China Sea and IP theft is unlikely to find support Globally. A sensible rapprochement without loss of face requires both sides to compromise on issues the other side are sensitive to and I have not seen what China sees as a sensitive issue other than its military capability versus the US which assumes a fear the US will somehow dominate China.

Do you guys remember when the narrative was that Red China could cripple the US economically because they own all their debt? It's now been downgraded to a 'stalemate' lol.

Nice try trying to become a superpower China, but it's Pax Americana for the forseeable future. Maybe India can have a go in 2050.

Trump always said he would put America first, thats what he is trying to do. Brazil doesn't have enough soy to satisfy Chinese demand, they will be forced to negotiate.
The USA and the EU are Chinas biggest trading partners, China needs the US consumer way more than the US needs China. The EU has bigger problems.