Potential effect of our trade war with China

As of 7/15/2018, Trump may ask for a forest and settle for a tree and it would end the trade war. This article describes what China would react to the full-fledged trade war. Even if there is no trade war, China would react as follows.

·         China will not meet the demand of the US and cannot counter react effectively.

The gap of trade deficit is huge. Part of the trade deficit is due to including the component costs (such as the iPhone), not counting the service deficit (Chinese tourism and Chinese attending colleges here) and profits of our companies in China. China’s estimate of trade deficit is 60% less than ours.

·         China will match US tariff dollar by dollar until it is impossible as in 2017 our export to China is $130 billion worth of goods and the import is $505 billion worth of goods.

·         China would fall into a recession. I guess it would be brief and mild. Her GDP would fall to 5% which is still good for most developed countries.

China’s economy depends on her export to the US. It will turn to other partners such as the participants in the “One Belt, One Road” projects, outsource the manufacturing to other countries that have little tariff impact and concentrate more on her huge internal market.

·         It would be a blow to China’s scheme in cutting internal debt. China would be forced to cut her interest rate.

·         China will speed up research and investment on core technologies such as manufacturing of chips. The middle class will suffer except those who involve in core technologies.

·         From the ZTE experience, China should weigh more on US supply on core technologies such as chips than tariffs.

Once China masters these technologies in 10 or so years, China can really stand up and say no to us. Today we have about 65% of our science Ph.D. graduates are foreigners with a good percent from China.

China recently ban Micron’s memory chip. The world’s fastest computer is made of CPU chips by China after US banning US CPU chips to China. The world may under estimate China’s core technologies. In addition, it is not impossible to buy from other suppliers.

·         China will continue to attract Chinese who have technical skills to return to the motherland. China will also attract top scientists from the world. It is easier than before when research funds in US have been reduced.

·         China would have closer partnership with many countries while we would be more isolated.

·         China will withdraw gradually or at least will not buy more of our Treasuries. It would raise our interest rate and it would have adverse effect on our stock market and the bond market. I noted ‘gradually’ as it would devaluate China’s holdings of our debts.

·         China will devalue yuan. When it is down by 10% (more likely just 2%), the tariffs would be insignificant. It would make her products cheaper and tourists will flood to China.

·         Profits from many corporations will suffer such as Boeing, GM, Ford and companies that supply chips and/or components to China. The stock owners of these stocks will suffer.

Chinese will buy fewer of our goods due to patriotism.

·         US will gain some jobs, but not as much as expected. Many even predicted we will have net job loss. Some jobs will be replaced by robots and some will be lost due to the trade war. Most manufacturing jobs cannot compete with low-wage countries such as Mexico.

·         Some of our products depending on imported commodities will cost more to make and hence less competitive. More corporations will move their manufacturing to other countries to minimize the effect of tariffs. Tesla announced opening a plant in China.

·         Some Chinese imports will be replaced by other low-wage countries. In this case, we gain nothing but our consumers will pay more. It happened before when we banned Chinese tires that were replaced by lower-quality tires at higher costs from other countries.

·         Even with the tariffs, some Chinese imports are still competitive to US and/or other low-wage countries. Hence the tariff is a kind of tax added to our consumers.

·         The farmers especially the soybean farmers will voice their discontent against Trump. Trump would not last for another term with the opposition from farmers, Hispanic voters, ObamaCare recipients…

·         China has not used her most powerful chip: rare earth elements.

Trade war is a loss-loss scenario. In the long run, it would be good for China but bad for the US. In the short run, the reverse would be true.

Even without a trade war, the damages have been done. China will focus on long term such as core technologies. China will reduce the holding (about $1 trillion) US treasury bonds. The yuan has started to depreciate. We become more isolated from our best partners Mexico, Canada and EU.

I hope the trade war will not materialize and we settle down with cutting at least half of the deficit. But, from whose estimate?