The current 2018 White House administration has been imposing tariffs on China like a tourist in Las Vegas playing a hand of poker, who fails to appreciate that even with a pair of aces, there’s a long way from the opening bet to the final round. The initial consequence of U.S. imposed tariffs may seem appealing at first glance; charging more for imports does realize revenue to the government. The long term results of tariffs, however, as the effects of tariffs cycle through the economy, are adverse in several regards. Tariffs obviously raise the cost of imports for goods and material, increase prices to consumers and slow economic growth. Only industries covered by the tariffs benefit, while the rest of Americans pay for the programs that subsidize the tariffs. Multinational corporations, unlike U.S. based companies and individual Americans, have options to avoid the impacts of tariffs, such as by relocating operations globally so as to minimize impacts. Tariffs also cause layoffs in the workforce, as local employers contract in size as the economy slows due to rising costs for imported goods and materials.
A mutual question for both America and China to answer may be to what extreme is either side willing to go before reaching terms for a trade agreement. Americans are the biggest consumer of exports from China, while China holds almost as much U.S. debt as the 32% held by U.S. investors. America and China could benefit from cooperation, or cause substantial economic damage to both countries. The length to which America and China would go to harm the opposition before attempting to reach an agreement is uncharted. Questions for the White House administration to answer include whether a target goal in tariffs exists, where do the tariffs on China end, and how will the White House Administration support the U.S. economy in response to the negative impacts of the tariffs.
Lowering imports into America will not necessarily result in a corresponding raising of U.S. exports. Consider what happens if the rest of the world, including China’s economy, have no interest or capacity for more U.S. exports. Even if U.S. exports maintain a steady rate of growth, the world’s capacity to absorb U.S. exports is limited, regardless of U.S. tariffs on imports. Finding a reasonable level for tariffs, if any, accordingly, is delicate. A country with a steady rate of exports but low imports, which is where the White House appears to be heading America, reflects a textbook declining economy. Given that the U.S. Administration cannot expect China to match the U.S. in trade, China has a practical limit to negotiations on U.S. trade.
An increase in import costs for goods and materials will undoubtedly increase U.S. debt. America, however, already holds the greatest amount of debt of any country in the world, at $21.5 trillion as of 2018. Some will callously proclaim, what’s a little more U.S. debt to the American economy, American’s will continue to out pace the world in consumption for the foreseeable future, by just amassing more debt. China, interestingly to note, has amounted a total debt well above 250% of China’s gross domestic product (GDP), while the U.S. debt is about 105% of U.S. GDP. Although China has been charged with currency manipulation of China’s yuan, the U.S. Treasury, unfortunately, has also maintained initiatives to weaken the U.S. dollar to just above where investors would walk away, in order to stimulate the world’s interest to purchase more U.S. debt through U.S. Treasury bonds. With China holding more than 5.5 % of U.S. debt, the largest holder of U.S. debt, the U.S. Treasury may not want to test whether the U.S. dollar can be further weakened with additional rate adjustments.
The U.S. dollar, weakened to a point, may cause U.S. exports to be appetizing to China. China, ironically, has maintained U.S. debt in the form of U.S. Treasury bonds for years, as a part of a strategy to assist America to buy China’s imports. However, China may find a further weakened U.S. dollar, more specifically, the U.S. Treasury bond rate adjusted in response to a weakened U.S. dollar, unappealing for investment. If China plays an all in strategy, dumping U.S. debt, in response to continued American tariffs, the U.S. economy might spiral into another recession, or at best hit a major bump. Whether China will walk away from U.S. Treasury bonds, accordingly, although remote due to the possible self inflicted harm to China that might result, is a real concern for the U.S. economy.
Anticipating the storm that accompanies trade wars, U.S. trade groups that stand to gain in the short term may do well to look toward long term actions that benefit all Americans. U.S. trade groups may lobby to limit tariffs to avoid further harm to the American economy. American consumers, as well, may actively push for legislative representatives to support limited tariffs on China imports to avoid the hardship certain to be suffered by all Americans.