Can China Win A Trade War With The United States?ByRaymond D. Matkowsky
Can China win a trade war with the United States? Can China replace most of the trade they do with the United States? The answer is most likely, yes to the first question. Do they have to replace all of the trade they do with the United States? No, they do not and they might not want to. The United States’ government has completely misread modern day China. Washington seems to think that China is still mired in the 1980s and that the country is still very dependent for the United States to fuel its growth. Nothing is further from the truth. It further believes that businesses facing higher costs will manage to absorbed them or pass them on to consumers without any ill effects. This I believe is counterintuitive to the purpose of the tariffs to begin with. Some businesses may be able to do that, but some may go bankrupt.
U.S. tariffs will inflict pain. But, it will not inflict enough pain to force China to make concessions. Beijing’s economic strategy is to replace its dependence on foreign markets with the growth of domestic alternatives. Its official policy is to limit overseas involvement in its economy. China sees this plan as critical to its national security. Since the Chinese market is so huge, the U.S. will most likely be the biggest loser. If China is successful in developing local alternatives they may lose much less. Regardless, the U.S. government is playing directly into their hands.
Past Trade Wars
There have been four trade wars in the twentieth century. The effects of at least one of these still lingers today.
The first is the Smoot-Hawley Tariff Act in 1930. The tariff was enacted originally to protect the U.S. farm sector. However, President Hoover expanded it to include 20,000 products from various sectors of the economy. This was an action that was not very well thought out. Retaliatory measures resulted in American exports decreasing by 61%. This also resulted in lengthening the Depression of 1930. The entire world suffered and this may have planted the seeds for World War II.
The Chicken Wars occurred in the early 1960s. The unintended consequences of this war still plague the United States Automobile Industry.
The switch to factory farming in the U.S. made chickens very cheap. As the industry started to ship to the European Union, European chicken farmers cried foul. France was the first quickly followed by West Germany to impose a tariff on U.S. chickens. The United States retaliated by imposing a 25% tariff on potato starch, dextrin, brandy, and light trucks. The brandy tariffs hit the French hard. The tariff on light trucks was aimed at the Germans. Unfortunately, in the U.S., you can only apply a tariff on a class of products not a country. Caught in the middle were Japanese car makers. To get around the tax the Japanese started to build factories in the United States.
The chicken wars opened up the U.S. Automobile Industry to new competition. This tariff was to be repealed under the Trans-Pacific Partnership agreement, but the present administration withdrew the United States from the agreement.
In 1985 we had the Pasta War. President Regan raised the tariff on imported pasta to 40% on pasta manufactured without eggs and 25% on pasta manufactured with eggs. This was in response to the EU’s silence toward American complaints about citrus and walnut tariffs. The EU finally responded by raising citrus tariffs further. The dispute was ended in 1987 after pain on both sides.
In 1993 the U.S. and Europe got into the Banana War. In order to restrict the import of bananas to its colonies in Africa and the Caribbean, Europe imposed heavy tariffs on Latin American bananas. Most of Latin American banana farms were owned by United States companies. The U.S. filed eight complaints with the World Trade Organization (WTO). Europe was forced to reduce its tariffs, but it took twenty years and many further complaints to the WTO. In the meantime the United States imposed a 100% tariff on European products ranging from Scottish cashmere to French cheese that was valued at US$520 million and threatened many European jobs.
There were one or more common threads in these four trade wars. The first is the belief that a country can unilaterally apply a tariff without any retaliatory actions by other nations. Second, none of these actions were well thought out with respect to unintended consequences that other businesses and countries are forced into. Third, that trade is solely financial in nature. National pride and goals are of no consequence and need not be considered. Definitely, not true! Finally, consumers on both sides are the ones that pay for the war through more expensive items and job loses.
U.S.-China Tug Of War
The trade war started with the present United States administration placing a 25% tariff on US$34 billion worth of Chinese goods and threatening to place another 25% tariff on US$16 billion worth of more Chinese goods. The present U.S. administration did in fact carry out this threat. This is in addition to tariffs already placed on steel, aluminum, solar energy panels, and washing machines.
The Chinese fought back by placing a tariff mainly on soybeans. This tariff was designed to affect the very people that support the U.S. administration. Soybeans became the center of the dispute.
China’s 2018/2019 soybean consumption is expected to be about 109.2 million metric tons (mmt). This is slightly less than last year since many are switching to different animal feeds. China bought 32.85 mmt from the U.S. last year. The top 10 producers of soybeans plus México, The EU, Russia, and the countries of the South East Asian Alliance produce about 234.51 mmt a year. This figure may be higher next year because in 2017 some crop yields were reduced due to bad weather. Brazil increased its yield 32.2 mmt this year alone. China increased its local yield by 3 mmt in 2017. Plans call for further increases in 2018-19.
China typically buys United States soybeans in the northern hemisphere’s spring/summer growing season and Brazil’s crop beginning October 1st. By this writing, China has already upped their Brazilian orders by 8.2 mmt. There are seven northern hemisphere sources minus the United States. They have a total production of about 44.21 mmt of soybeans. There are five more southern hemisphere producers that can add 182 mmt to that total. There are also 10 countries in Southeast Asia that produce 8.1 mmt together. They consume 7.5 mmt locally so they can supply 0.6 mmt throughout the year. In short, there is more than enough extra capacity to make up for U.S. cancelled purchases by going to various locations at various times of the year.
China’s upped Brazilian soybean orders may not be temporary. There are many reasons to believe that this will become permanent to the detriment of U.S. farmers. It has already been mentioned that Brazil’s increase in 2017 yield nearly matches previous U.S. sourced purchases. Although it would not be desirable for food grade soybeans, under the right temperature-humidity conditions soybean storage over several months is possible.
There are further considerations to be made. The tensions between China, other Southeast Asian nations and the United States are very high over activities in the South China Sea. China’s just purchased military equipment from Russia in spite of sanctions placed on Russia for meddling in the U.S. 2016 elections. China has given a stern rebuke to the United States over these sanctions. However, they know that they cannot take on the U.S. militarily, but they cannot afford to look weak to the United States or in front of other Southeast Asian nations. They also have to consider other nations that they are trying to woo. Giving in on tariffs will make them look weak to other nations.
Further on the national security front, China’s state media has been pushing the theory that there is no point in negotiating with the United States on trade because the tariffs on Chinese goods are part of a broader strategy to contain China as a global power. The tariffs may be seen by the United States as a financial matter. But, China sees it as a national security issue.
On the financial front, China has had a long stated objective of not maximizing growth at any cost but rather to allow its US$12 trillion economy to slowly mature to a “soft landing.” A day after the U.S. administration carried out its threat to increase tariffs; Chinese officials said that they will reject any further trade talks if the new tariffs were applied.
This trade war will not be an “easy win” for the United States. No trade war is ever a win for either side. The question is “Who will inflict more pain?” Unfortunately, it is the consumer that will pay the price not politicians.
Geopolitical Factors Are Disruptive
Where does this leave a small business? In my mind, every business should have a preferred supplier and a backup supplier that gets a small portion of your orders. These suppliers should be chosen with geopolitical considerations. If one supplier is adversely affected by either geographical or political factors, you can protect yourself by having the backup supplier pick up some slack. If you do not have a backup supplier now, it may be a good time to establish such a relationship. But, remember that tariffs are placed on a class of goods not countries. If your suppliers cannot get tariff exemptions, you may have to develop some workarounds. For example, during the Chicken Wars and before the Japanese were able to construct plants in the U.S., they shipped parts to the United States for final assembly. In this way they managed to get around the tariff. Clearly, you must be proactive and not reactive! You cannot control the actions of other people. But, you can protect yourself from the unintended consequences of their actions.
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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