As part of his campaign for President, Donald Trump offered up some “tough talk” on China.
Specifically, Mr. Trump has advocated for labeling China as a currency manipulator. There is a specific provision U.S. law for what happens to countries labeled as such. Labeling China would trigger those actions.
Is Trump right about China currency manipulator status?
As with many things in the law, there is a difference between the legal definition, and what is the common reality, if you will. China IS a currency manipulator under pretty much any definition you like, except the one that matters. Typically, a country lets the value of its currency fluctuate based upon market demand. China can, and does, ensure that the value of its currency does not vary outside of of parameters it sets. This is what currency manipulation is.
The reason currency manipulation is a problem for America is that usually with a large number of imports, the exporter’s currency will start to increase in value relative to the importer. That makes the exporter’s goods more expensive and the importing country buys less of them. This keeps trade deficits smaller, and on a larger scale, makes the importing country’s own goods and services more competitive.
With the huge trade imbalance between the U.S. and China, China’s currency should be valued much higher against the U.S. dollar. However, China’s government does not allow this to happen. Thus, U.S. industries stay more expensive than similar Chinese goods and services.
This is Mr. Trump’s point. Allowing China do this for decades has meant the wholesale destruction of certain U.S. industries. (The missing data here is that manufacturing often moves on to another country when this happens. It never comes back to the U.S., but that is another matter.)
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However, the legal definition for being placed on the “monitoring list” of currency manipulators list requires that a country meet three different criteria. Currently, no country (not even China) meets all three criteria (although a few, including China, meet two of the three).
Trade War With China
With the currency manipulator label comes consequences. For the most part, these include things like asking the IMF to investigate, but it also allows for things like tariffs or import taxes, and this is where things get volatile.
Mr. Trump once mentioned a 35 percent across the board tariff on imported Chinese goods. In a nutshell, this means that a 35% tax would be added to everything from China. The idea is that with Chinese goods at a higher price, then U.S. goods would be more competitive.
So, companies in America might not bother importing Chinese steel if it comes with a 35% mark up, and would U.S. American steel instead. That sounds pretty good, and is what people want to have happen when they start talking about this.
The catch is that there isn’t always a US good to replace them with. That means some things, like blenders, will just cost more money, with no option (no American option at least). This isn’t helpful and can actually hurt the U.S. economy because consumers have less money to spend on other things. People don’t want this to happen, but they are too busy thinking about reinvigorating dying steel towns.
For every U.S. steel, there is a product that isn’t made in America anymore. Theoretically, if you kept the tariffs in place long enough, that might change as it became more cost effective to make things in America, rather than ship them across the ocean and pay a 35% tax.
That’s the idea anyway.
The other catch is that China doesn’t have to just sit there and take it.
They could, conceivably, add a 35% import tariff on all U.S. goods imported into China.
This back and forth, is a trade war.
Who Would Win a Trade War Between U.S. and China
Here is where things get tricky.
All things being equal, there is no doubt that a trade war would hurt China way more than the U.S. Thanks to already pretty unfair rules and regulations (not always official), very few U.S. companies reap the rewards of China’s large market and population. Mainly, it’s agriculture that benefits from selling excess soybeans and other crops to China.
Even when companies do sell products in China, it is almost always through semi-forced partnerships that ensure that the Chinese company always benefits at least as much as any American company would. This is what happens in the auto industry.
There are some minor exceptions, the iPhone, being one of them, which is why China specifically mentioned it when it’s media “warned” Mr. Trump.
There are some others, but every one of those companies has a real, and profitable, business somewhere else.
China, makes products for the whole world, but America is the biggest consumer market on the planet, so replacing that demand just isn’t possible. And, unlike the American companies and industries that China could target, many Chinese companies have no prospects for staying in business without selling to America. A reduction of just 10% of U.S. demand would likely have a huge, potentially destabilizing, affect across the entire Chinese economy.
However, these are two very different countries. The industries, few though they may be, that are harmed by China’s actions will become very vocal. Politicians, including the President usually, don’t like it when businesses and their workers are vocal. In other words, this whole thing collapses under a bit of discontent, unless the President is willing to take some significant heat for it.
China, of course, doesn’t give a hoot about dissent and companies complaining. Not to mention, China would actually be fighting on their side. In most cases that means China would “win” any trade war by being able to hold out longer than the U.S. no matter how much more damage was being done to China.
The wild card here, is Donald Trump. Mr. Trump has shown some willingness to not care what “the media” or others think about his decisions. Perhaps, if he thought he was fighting the good fight, he would stand up to the handful of industries China could harm with their tariffs. Then again, a politician is a politician, and this might all just be posturing.
Either way, no one has really seen a full-scale trade war in the 21st century with world economies as intertwined as they are. In a very real way, no one knows exactly what would happen if there was a trade war between America and China.
In reality, we probably never will. Mr. Trump likes to tout his bargaining power almost as much as his toughness. Expect the President-Elect to announce “a deal” before any trade war actually gets underway.