Could Both Sides Win The Trade War?

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Posted: May 20, 2019 12:41 PM
Could Both Sides Win The Trade War?

Source: AP Photo/Andrew Harnik

Stories abound regarding who will win Trump's trade war with China. Trump? China? Neither? Both?

Steven Moore, a Trump Fed nominee who backed out, says Trump Will Win the Trade War with China.

“I think by the end of this year I think China is going to relent. I think they underestimated Trump. I think that we’re going to get a trade deal with China that ends some of these abusive trade practices that the Chinese impose on us ,” Moore said Sunday during an interview with John Catsimatidis on his AM 970 radio show.

Calling it the “epic battle of our times” and a new Cold War, Moore said China is stealing technology from American companies and engaging in unfair trade practices in an attempt to unseat the U.S. as the world’s greatest economy.

Win the Battle, Lose the War

CBS News says Trump Could Win the Trade Battle with China but Lose the War.

If China is feeling the effects of the trade war, however, so is the U.S. The latest round of U.S. tariffs and Chinese countermeasures have rattled financial markets, while everyone from farmers and small business owners to Fortune 100 CEOs have urged Mr. Trump to settle the conflict.

David Jacobson, a professor of global business strategy at SMU Cox School of Business and visiting professor at Tsinghua University in Beijing, said Mr. Trump and U.S. trade negotiators are underestimating China's willingness to suffer a dose of economic pain so long as it preserves the nation's long-term objective of becoming a global leader in technology, energy and other key sectors.

In the short-term, a bigger obstacle to a trade deal may be Mr. Trump's in-your-face negotiating style. Americans might be used by now to his Twitter taunts and steamroller exercises of presidential power, but China's leadership and people are not.

"He says things that are politically targeted toward his base that are particularly offensive to the Chinese," Jacobson said. "The Chinese are totally respectful of hardball negotiating, but they don't like to be humiliated."

Long Game

Jacobson -- who has spent years living and teaching in China -- also emphasizes that Beijing is playing a long political game, rather than one at least partly tied to election cycles. While Mr. Trump is already in campaign mode for the 2020 election, Xi is likely to remain patient.

"We're in for a very long conflict," Jacobson warned. "This is really about the Cold War--it's not so much about trade."

He thinks that whatever concessions China makes on trade will be calculated to let Mr. Trump declare victory -- a win he may urgently need in what is expected to be a hotly contested political race -- while not giving much ground on issues of intellectual property, protecting technology rights and market access.

China Already Lost

Chris Whalen says China Has Already Lost the Trade War

The truth is that China really has very few options to retaliate against the trade sanctions imposed by the Trump administration. Outside of the traditional approach of a currency devaluation, there does not seem to be any way for it to make up for lost exports to the United States. Yet a devaluation of the yuan would also bring with it the danger of a debt crisis affecting heavily indebted public and private borrowers in China.

“China needs the U.S. surplus more than the U.S. needs China’s trade and finances,” notes Spanish author and economist Daniel Lacalle. “And that is why the trade war will not happen. Because China has already lost it. China cannot win a trade war with high debt, capital controls and U.S. exports’ dependence. A massive Yuan devaluation and domino defaults would cripple the economy.”

Economic War - Win Win

In a YouTube video, Steve Bannon, former White House chief strategist, says China has been running an "economic war with the industrial democracies for 20 years."

"The Chinese business model cannot continue. ... We have all the cards. ... Wall Street needs to cut of the capital to China. ... Trump is looking at the long term. ... There is no chance Donald Trump backs down. This is not going to take place overnight. It will take a long time. ... Trump could have blinked, but he didn't. ... He's not going to back down."

Lose Lose

Trade wars are a lose-lose proposition. Here's the most recent example:

French fries, sweet cherries and Chinese tariffs: Washington state exporters brace for next phase in trade war.

The pain will be widespread. Washington is the nation’s third-largest exporter of food and other agricultural goods: In 2017, the last year before various trade disputes broke out, nearly a third of the state’s agriculture output, worth nearly $7 billion, was sold abroad.

Already, tariffs imposed by China, Mexico and other unhappy trading partners have cost Washington state producers many tens of millions of dollars in lost exports of everything from cherries and salmon to wheat, apples and potatoes.

Barring a last-minute breakthrough in trade talks between the United States and China, those losses will increase when China’s latest series of tariff increases goes into effect next month.

But the consequences for Washington’s agricultural sector will go beyond the immediate pain of lost sales.

Lost and Gone Forever

Farmers are going bankrupt in record numbers.

Moreover, once foreign buyers switch sources, they don't easily switch back.

"One reason is cost: Shifting to new sources typically requires importers to make big investments in building new supply chains and marketing programs — investments they’d probably have to write off if they came back to buying American."

No One Wins

I agree with Whalen 100% on his statement "The truth is that China really has very few options to retaliate against the trade sanctions imposed by the Trump administration."

But is that winning, or losing more? Perhaps less retaliation means losing less!

Why?

The bigger the tariffs, the more businesses and consumers lose. That logic applies to China as well as the US, whether it's soybeans, cherries, aircraft, or steel.

Trade War Is Happening

Lacalle also agrees with Whalen's China has no options logic, explaining his statement: "That is why the trade war will not happen."

But a trade war is happening!

No reasonable person can deny that. We can however, debate how long it will last.

Who Has More Resolve?

Trump has an election to worry about. China doesn't.

Also note the scorecard to date.

To help secure USMCA, Trump's NAFTA replacement, Trump just cancelled tariffs on Canadian and Mexican steel. The final result, after years of bluster, USMCA = NAFTA.

I suggest, Trump, Fearing Trade Wars on Multiple Fronts, Delays Auto Tariffs for 180 Days.

Resolve?

Trump also just postponed tariffs on on the EU.

Resolve?

Trump backed down on the wall.

Resolve?

Speaking of resolve, please note Republican Senator Grassley Warns "Trump’s Tariffs End or His Trade Deal Dies"

Win-Win Proposition

Bannon's win-win proposal is interesting. But win-win is in relation to a deal.

Deals are inherently win-win. Both sides must believe they have gained, or they do not enter the deal.

This takes us back to the long game.

Jacobson thinks that whatever concessions China makes on trade will be calculated to let Mr. Trump declare victory while not giving much ground on issues of intellectual property, protecting technology rights and market access.

That is essentially my view and has been from the start, but that does not totally negate the positions of Whalen, Lacalle, and Bannon.

Loose Ends

China may seemingly give in on some finer points. But those were points China was ready to concede or do anyway out of necessity.

On this point, both Bannon and Lacalle are correct.

  • Bannon says the "Chinese business model cannot continue."
  • Lacalle explains why: "high debt, capital controls and U.S. exports’ dependence.”

I agree with Lacalle and suggest the Chinese model isn't sustainable no matter what Trump does.

The facts of the matter are: The yuan will not soon displace the US dollar and China Nowhere Close to Becoming a Global Financial Center for Many Reasons.

Conclusion

Trump won't "win" a trade war. Neither will China. Nobody wins them.

If anything, Trump's belligerence and poor negotiating style will prolong a lose-lose situation.