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China’s Trump Card in the Trade War

After years of talks, threats, and tweets, we are finally here. As of last Friday, we’re officially in a trade war with the People’s Republic of China. President Trump announced that talks had fallen through, accused Chairman Xi of China of backing out of a done deal, and imposed a 15% increase on $200 Billion worth of Chinese imports to the United States. Yesterday, China responded with an increase of its already high tariffs on an additional $60 Billion worth of American imports starting June 1.

I don’t need to remind you that ever since Donald Trump came down that shiny escalator in the summer of 2015, he’s been beating his chest and bragging about how a real businessman is finally back in charge, a new age of international economic policy has dawned, and the USA is no longer everybody’s economic sugar daddy.

Thus far, he’s largely been successful in doing so. America has in fact been taken advantage of in many trade situations in recent years. We have been granting other nations access to our vast markets by allowing them to send us their exported goods with little to no tax, while they in turn slap American farmers and manufacturers with abusive tariffs in order to raise revenue and protect their own local industries from American competition. President Trump has evened the playing field in many cases predominately by using threats of tariff increases against Canada, Mexico, and the EU. Specifically, Trump loves to brag about his victory in the great Canadian Milk War of 2018.

Now though, Trump is finally taking on the 800 lb. Gorilla. Those smaller victories have all been nice, but from the very beginning, The Don had his sights set on China, and now its war.

I’m not going to waste your time or mine on whether tariffs are good or bad or outdated or classic. I’m also not going to waste energy on prognosticating about the total estimated cost of tariffs if they stay in place, or hypothesize about what tariffs will or won’t do to the stock market. Why? Because I don’t think either President Trump or Chairman Xi are actually serious about any sort of long term tariff increases.

Like it or not, the USA is the world’s biggest and richest market, and China is the world’s biggest and cheapest exporter. We may not like it, but we’re stuck with each other long term. If one of us crashes, the other starves. For better or worse, this is a lover’s dispute.

So why are we quarreling? There are plenty of reasons, but believe it or not, despite all the publicity, China’s tariffs on American goods aren’t really the main focus here. The biggest problem that America faces when dealing with China is their theft of American Intellectual Property. China does nothing to punish individuals who steal American IP, and in fact funds and encourages it.

They’ve even got a knock-off Disney World.

The deal that fell through last week reportedly did so because the Chinese Government only wanted to promise not to steal IP anymore, but President Trump wanted them to actually enact laws against theft of IP. They wouldn’t do it, and that’s how we got to where we are.

Trump had no choice but to hit China with tariffs, and now China is hitting back. Odds are, Trump and Xi will both continue to up the ante in this colossal game of poker until one side folds.

The problem with this game of chicken is that the higher tariffs go, prices will continue to rise for consumers in both America and China, American farmers who export to china will suffer, and Chinese manufacturers will take a major hit. Obviously, this hurts middle class ordinary people in both countries. We’re the ones losing jobs, and we’re the ones paying higher prices.

So who is going to blink first?

Trump has a record-breaking economy at his back right now. Things are good in America, no matter what the haters say. Jobs are at record levels, wages are up, the stock market is at nosebleed levels, and unemployment is almost non-existent. That said, he’s got an election in 18 months, and everyone knows that the American voter votes on his or her wallet. If Trump can win this negotiation and force China to take real measures to prevent IP theft, he waltzes to a second term. If he doesn’t though–if China continues to hold out and prices of basic necessities of life in the US start to skyrocket while farmers can’t sell their crops and cattle, President Trump’s re-election odds will be slim to none. And he knows it.

Xi on the other hand, already has a struggling economy. And that’s an understatement. The Chinese stock market is currently trading approximately 45% lower than it did at the beginning of 2016. Obviously not good. But here’s the rub. Xi isn’t going anywhere any time soon. He’s the most powerful head of the Chinese Communist Party since Mao himself, and it isn’t close. Theoretically the Chinese economy could completely tank, every single worker could lose their job, and short of an armed revolution or party coup, Chairman Xi would still be boss. He doesn’t have an election to worry about… ever. And that’s his Ace in the hole. Xi knows he can wait Trump out. Yeah, it may further destroy his own country, but hey, it’s not like a Communist has never starved a few of his own people to death or anything. (See Also the Great Leap Forward).

What will ultimately happen obviously remains to be seen here, but if President Trump actually manages to pull off any kind of positive deal that doesn’t derail the booming economy, it will be nothing short of a miracle. 

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