Donald Trump launched a trade war –on purpose– by attaching large American import tariffs on steel and aluminum. These tariffs might have worked a decade or two ago, when both Republican and Democratic administrations were happy to watch American manufacturing gallop out of the country to cheaper producers, but these days, there aren’t many American steel mills and aluminum plants to protect.
Still, based on Trump’s limited understanding of the economy and global trade, the tariffs make sense because American producers have been harmed by noncompetitive government subsides and subsequent dumping. Lost on Trump is that his own companies used cheaper, imported Chinese steel in most of his buildings.
Trade Wars Have Casualties
Trump’s oft cited target for unfair trade practices is China, although the steel and aluminum tariffs are hardly surgical strikes against the Chinese, impacting numerous other countries as well, including America’s trade, strategic, and global allies. Nonetheless, as far as Trump understands the economy these industries represent real, American manufacturing lost to “cheating” foreign competitors.
When presented with the possibility of retaliation, Trump and his flunkies suggest that America can win any trade war.
This is 100% true. No country can defeat America in a trade war IF the country is committed to seeing it through. While some pundits like to parse things as China having the upper hand due to things like its U.S. debt holdings, the reality is that China’s entire economy hinges upon healthy exports to the United States.
Sure, other countries take in a fair share of Chinese imports, but nowhere near the level required to prop up China’s massive economy. If there were a way to shut off Chinese imports to the U.S. tomorrow, the entire Chinese economy would collapse in a devastating crash. The whole rest of the world cannot make up for American consumerism.
However, just because you can win a war, does not mean that there will be no casualties. China launched a retaliatory trade war strike by imposing tariffs on a matching $3 billion of U.S. goods that are imported into China.
How To Win a Trade War With China
Here is where things get muddy. There are far fewer exports to China than there are imports from China. So, yes, the U.S. can definitely win a trade war. Eventually, China would have tariffs on all American imports, and the U.S. would have numerous other targets to continue to hit.
The catch is that while these tariffs sound really good on paper. “Protecting U.S. industry!” The reality is that it is American consumers and businesses that pay for the tariffs on Chinese goods. China doesn’t pay for the increased tariffs is simply loses (potentially) business.
Here is a good way to think of it.
Let’s suppose that the average Walmart lamp is made in China. It costs Walmart $9 in bulk to import. They mark it up, and charge $14 and pocket $5 in profit for every unit sold.
Now, let’s suppose that Trump imposes a tariff equal to $1 per Chinese lamp imported. Then, either Walmart eats the dollar and profits drop by $1 per lamp, or it passes the cost on to consumers and now the same lamp costs $15. (The reality would likely be somewhere in between.)
In this example, the idea is that the Chinese lamp would become less competitive due to the higher price. This ostensibly helps American companies. However, America doesn’t really make many lamps, so who this really helps is maybe Vietnam, where they make a similar lamp that they could sell to Walmart for $9.25 with no tariff.
If everything went according to economics only (it doesn’t), then China would feel the burn of losing out on lamp sales and come begging for mercy. However, in reality, Americans would also suffer from higher lamp prices (or lower company profits). The gain, in this example, goes not to Americans (who actually lose here), but to Vietnam.
Still, the idea is that China would eventually have come to the table to get the tariff removed.
In the meantime, China might impose a tariff on U.S. weasels. While this won’t hurt the U.S. economy overall, it would definitely harm U.S. weasel companies when the Chinese turn to Vietnamese weasels. Entire industries could suffer massive layoffs, or even drive companies out of business.
Can U.S. REALLY Win a Trade War With China?
All of this adds up to an unpleasant reality.
In order to actually WIN a trade war with China, the U.S. has to be willing to take the necessary hits. In other words, the U.S. has to be okay with the losses certain industries will suffer.
Again, in the big picture, the U.S. can win this game very easily, but unlike China’s government, which has a firm control on not only the media, but the economy, and population as well, American losing their jobs because of a decision out of Washington D.C. get very angry, very loud, and very well covered in the press.
If there is one thing the American public doesn’t like, it’s American casualties. It won’t take many out of work U.S. workers before the tide of public opinion starts to turn against the trade war idea.
So, winning a trade war is really more a battle of wills.
China’s government controlled state, versus America’s will to defeat the Chinese in a trade war.
If you think the U.S. has a chance to win this after all, you haven’t been paying attention. The American public will never allow it to go long enough to win.