Outside the Beltway

Trump Escalates His Ill-Advised Trade War

As he had threatened, President Trump has imposed new tariffs on Chinese goods, making a bad situation even worse.

Doug Mataconis · Friday, May 10, 2019 · 15 comments

As President Trump had threatened at the beginning of the week, a new round of tariffs against Chinese-made goods kicked in overnight, with expected Chinese response:

President Trump doubled down on his trade war with China on Friday morning, hours after raising tariffs on $200 billion worth of the country’s imports, as he tried to pressure Beijing to agree to America’s trade terms.

In a series of early morning tweets, the president said tariffs on Chinese goods will help the United States and warned China that he would continue to tax their products if they didn’t reach a deal. His comments, which come as the two countries prepare to meet again on Friday, suggest Mr. Trump is willing to prolong his trade war for the foreseeable future.

“Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch!” Mr. Trump added, adding that the Chinese “should not renegotiate deals with the U.S. at the last minute.”

The toughened stance has thrust the world’s two largest economies back into a trade war that just one week ago had seemed on the cusp of ending. Talk between the United States and China fell apart over the weekend, as the United States balked at what it said was China’s attempts to renege on parts of an emerging trade agreement.

In addition to raising tariffs to 25 percent on $200 billion worth of Chinese goods, Mr. Trump said his administration is preparing to tax nearly all of China’s imports. China has threatened to retaliate with its own “countermeasures” which include ending purchases of American farm goods and erecting other non-tariff barriers for companies trying to access the Chinese market.

The two sides will meet again on Friday, but it remains to be seen whether they can salvage a trade agreement. The president said Friday that talks with China continued “in a very congenial manner” but that “there is absolutely no need to rush.”

Mr. Trump continued to insist that his tough approach to China would benefit the United States economy, in part by encouraging more companies to produce goods in America.

(….)

The United States and China had been nearing a trade deal that would lift tariffs, open the Chinese market to American companies and strengthen China’s intellectual property protections. But discussions fell apart last weekend, when China called for substantial changes to the negotiating text that both countries had been using as a blueprint for a sweeping trade pact.

Businesses large and small to braced for fallout, as tariffs on an additional $200 billion of Chinese goods went into effect at 12:01 a.m. Friday morning. The tariffs will apply only to goods that have left China after that time, effectively giving several weeks’ extension for products that are already on ships on the water.

China, not surprisingly, is promising an aggressive response to the new round of tariffs, although Beijing is being cautious with its rhetoric as negotiations continue even amid the new round of tariffs:

BEIJING — When the United States ratcheted up trade tensions with Beijing on Friday, the news was greeted with weariness and foreboding among the people in China who will pay the immediate price: owners of factories big and small.

Brook Chen runs a plant in Shanghai that makes suitcases for brands including Samsonite. More than four-fifths of his orders come from the United States.

The trade war, now nearly a year old, has already squeezed Mr. Chen’s bottom line. American customers insisted that he lower his prices so they wouldn’t have to raise theirs. When he contemplates moving production out of China — to Southeast Asia, for instance — he worries about losing access to China’s vast supply chain and capable work force.

“This is totally a lose-lose situation,” Mr. Chen said. “We lose profits and have to shut down. American importers cannot find effective alternatives that can deliver products with the same quality.”

The Chinese government issued a muted response on Friday after President Trump raised tariffs on $200 billion worth of Chinese goods. China’s Ministry of Commerce vowed to retaliate, although it did not say how or when. Still, global financial markets — which have been hit by trade tensions in recent days — rose in hopes of an eventual deal.
China’s heavily controlled news media have been walking a careful line, calling for defiance but not more dramatic action, such as a boycott of American products.

Before Friday’s tariff increase, multiple state media outlets had published a cryptic, anonymously written article with the headline, “If You Want to Talk, We Can Talk. If You Want to Fight, We’ll Fight.” The article presented China as a calm, neutral presence upon which American policies had, very regrettably, exerted pressure.

Chinese people are polite by nature, the article said, yet unafraid of confrontation. “We are prepared to fight back,” it said.

The question for Chinese leaders is how long the higher tariffs will last. China has ways to keep its economy humming, at least in the near term. Negotiators also have time to reach a deal, as the Trump administration effectively delayed the tariff increase by saying they only applied to goods that leave China on Friday or later. Oceangoing goods, in other words, won’t get hit by the 25 percent levy until they arrive at American ports over the next few weeks.

Still, China’s economy has shown it isn’t invulnerable. Some factories are already suffering.

“You can definitely feel the anxiety,” said Lu Mengxi, the founder of a winery in northwestern China that sells both domestically and abroad, including in the United States.

What began last year as an investigation into China’s practices toward American companies operating within its borders has turned into a sprawling conflict that has weighed on financial markets and economic activity across the globe.

While analysts widely believe the two countries will eventually reach a deal to avert a trade dispute that could seriously hurt the world economy, the appetite for further conflict seems unabated on both sides.

(…)

The state news media have worked to reassure the country’s consumers.

In a headline published on Friday before the tariffs rose, the People’s Daily newspaper, which is the Communist Party’s mouthpiece, declared that Chinese trade “has positive momentum and strong driving power.”

Some companies with business on both sides of the Pacific are trying to stay positive, too. Née Lau, the owner of Amourvino Winery in Napa, Calif., said the tariffs China imposed last year had hurt his profits. Still, Mr. Lau said he would rather not raise prices, even if it meant earning less for now. Holding onto his overseas dealers and clients, he said, is more important to the long-term health of his business.

“The United States and China will definitely come to some kind of agreement. It’s just a matter of time,” Mr. Lau said. “It’s impossible for a war between two superpowers to go on forever.”

Here are President Trump’s tweets on the newly imposed tariffs:

Trump’s rhetoric, of course, is not supported by reality, by the results we’ve seen to date from the tariffs he’s already imposed, or by economists on both sides of the ideological aisle who agree that increased tariffs are bad for the economy and do not help either save jobs or save businesses. For example, after President Trump raised tariffs on aluminum and steel last year, the price for those products, including from domestic sources unaffected by the tariffs, increased, causing problems for industries that rely on those raw materials to make their products such as the makers of automobiles and large appliances. When China retaliated by imposing tariffs on American goods their retaliation was primarily focused on the agricultural industry, something that made American pork farmers increasingly nervous about their overseas business. In Iowa, it was reported that Chinese retaliation for the tariffs cost soybean farmers $624 million this year alone, with the prospect of larger losses if the retaliation continues or if Chinese companies that buy American soybeans start entering into contracts with growers in places such as Australia and India, which compete with American farmers for the lucrative Chinese market. Additionally, we have also seen that the tariffs have had a negative impact on other American businesses, and has even led an iconic American brand like Harley-Davidson to announce that they are moving some production overseas in response to the retaliatory tariffs imposed by the European Union.  Finally, there is increasing evidence that the trade war has actually opened economic doors for China because it has forced them to look in places other than the United States for things like agricultural imports. If that continues to happen, then the impact on the American economy from the President’s trade war could become more permanent than many realize.

Not surprisingly, today’s developments are having the expected effect on world stock markets in general and Wall Street in particular, as the major stock indexes continue the downward trend that started at the beginning of the week. In some respects, that response has been somewhat more muted than in the past, at least so far, in part due to the fact that people seem to be either believing or hoping that Washington and Beijing will resolve this matter quickly and reach a broader trade deal. If that doesn’t happen, or if there are signs that the situation is actually getting worse then it’s likely that this will be reflected in world markets and in the returns that investors, including retirement investors who primary invest via mutual funds, see in their quarterly statements.

As I’ve noted in the past, the arguments that these tariffs help either American industry or the American economy are nonsense. In the end, higher tariffs end up being paid by American consumers, by American businesses that depend on international trade such as the agriculture industry, and by the businesses that rely on the products that are subject to the tariffs. President Trump’s arguments to the contrary notwithstanding, there is no economic benefit at all to tariffs and a heck of a lot of negative. Despite that, the Trump Administration appears committed to this ill-advised, self-destructive policy.