The current appetite in the Trump administration for an all-out trade war with China shows no sign of abating. The President has suggested that tariffs might be applied to all Chinese imports to the USA which would affect half a trillion Dollars in trade between the world’s first and second largest economies.
The position being taken by the President seems overly simplistic. The idea that flipping the direction of international trade from ever lower tariffs and barriers to trade with the imposition of significant import taxes is being posseted by Mr Trump as a mechanism to rebalance US trade deficits on goods. He assumes that by increasing the cost of such imports, the exporting nations will buckle to his demands and agree to new “free trade” agreements – viewed, obviously, from his perspective. However, the duties are paid by US businesses and consumers, not (in this case) China. The strategy supposes that businesses and consumers will switch to US produced alternatives, but these may not be available or may be significantly more expensive (even with tariffs) than the imported goods. Whilst tariffs will reduce demand for (certain) Chinese goods in the US market, America is not the only nation that China exports to. If the trade war looks to be a lengthy one, China and other nations will surely seek other markets to replace the shortfall in the USA. As the tariffs bite (on US businesses and consumers), internal pressure will mount on Mr Trump to think again.
The threat to extend the range of tariffs was made in an interview with CNBC. In the interview, he was unconcerned that the trade dispute could hit the US Stock markets: "Well, if it does, it does. Look, I'm not doing this for politics. I'm doing this to do this right thing for our country.”
He reiterated his view that the Fed (which is independent) should refrain from further interest rate normalisation in a Tweet: The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?
For good measure, he also suggested that the US Dollar’s strength resulted from unfair currency manipulations on the part of the EU and China.