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Why There Won't Be A Trump Trade War
Fear sells, don't buy it
Tim Vollans
November 15, 2024 ā¢ Estimated Reading Time: 8 minutes
Trumpās back. With even more support than he had the first time aroundā¦
According to the media, weāre all supposed to panic about this or something.
Seriously, Trumpās Trade Warā¢ sounds really scary, so naturally the media runs with it.
Change is always bad and must be feared.
Fear sells.
Youāve probably read that heāll be putting tariffs on everyone, especially China.
Inflation will run rampant again and everything bad that happens will be HIS fault.
Something like that, anyway.
But the Trump Trade War isnāt real.
This is just a starting point for negotiations.
Stay with me, because trade is a tricky subject to cover in brief.
Most end up writing 10,000 words waffling about Adam Smithās Wealth of Nations while the readerās chin bounces off their chest.
Not us. Weāll keep it light.
First things firstā¦
Trade āWarsā are a permanent feature of the global economy.
Yep. Nothing new here.
Tariffs and sanctions are consistently used to address imbalances, even between supposed trade āalliesā.
Hereās one of many examples between the UK & US š
The US has agreed to suspend tariffs on UK goods including single malt whiskies that were imposed in retaliation over subsidies to the aircraft maker Airbus.
Tariffs will also be lifted on UK cheese, cashmere and machinery.
The duties will be suspended for four months while the two sides seek a long-term settlement.
On 1 January, the UK dropped its own tariffs on some US goods, put in place over a related dispute about US subsidies to Boeing.
It is the latest twist in a decades-old trade row that has seen the EU and the US target billions of dollars worth of each other's exports with taxes.
In Trumpās first term, he took on China, targeting them with tariffs and restricting the export of key technologies, including advanced computing chips.
China retaliated with tariffs on US farm produce, such as soybeans, beef, pork, wheat & corn.
Trade flows reconfigured in response.
China now imports more soybeans and corn from Brazil than the US.
And although the US domestic manufacturing sector hasnāt seen much changeā¦
Hudson Bay
Global manufacturers have moved away from China to countries such as Mexico & Vietnam.
This shift away from China is especially notable on tariffed goods š
All of this comes at a time when China no longer enjoys the tailwind of being a bargain basement country to produce in.
Chinese Labour aināt so cheap nowadays.
It takes two to tango
During the election campaign, Trump floated a 60% tariff on all Chinese goods.
The assumption is that a massive trade escalation will ensue.
Escalation presumes that China will be unwilling to give any ground in trade negotiations.
Even though their own economy is far weaker compared to the first Trump administration.
We were flagging Chinaās property market bust as far back as 2019 along with all the knock on effects this would have on local governments not being able to finance themselves.
Five years later, Chinaās property market is STILL in the doldrums, and economic sentiment is dire.
Official figures say that youth unemployment is around 19%, but thereās a good chance the real figure is far higher.
And the recent Chinese āstimulusā blitz is more akin to rearranging the deckchairs on the titanic, rather than anything meaningful for reviving economic growth.
Much more will be required.
"multi-year fiscal expansion would be necessary to counteract various cyclical growth headwinds and address some medium-term structural challenges."
Which is economist-speak for āChinaās still f***edā.
This time around, the Chinese come into trade negotiations from a position of weakness.
And they wonāt be counting on EU support either.
Brussels belatedly realised that Chinaās EV industry was annihilating European automakers and whacked on some tariffs of their own.
The US, on the other hand, is negotiating from a position of strength.
In the words of Scott Bessent, the top candidate for US Treasury Secretaryā¦
Tariffs are also a useful tool for achieving the presidentās foreign policy objectives. Whether it is getting allies to spend more on their own defense, opening foreign markets to U.S. exports, securing cooperation on ending illegal immigration and interdicting fentanyl trafficking, or deterring military aggression, tariffs can play a central role.
Lastly, tariffs can raise significant revenue.
Last year, we imported some $3.1 trillion in goods. We are the largest importer in the world and thus the single most important market for other countriesā exports. Our size gives us market power and the ability to dictate terms ā other countries need us more than we need them. We have but to use that power.
Jean Paul Sartre famously said "When everyone expects something to happen, expect the opposite".
Itās almost universally agreed that Trumpās gambit will be bad for the world.
We think the opposite is far more likely than generally realised.
The media coverage will be incessantly negative, but these changes have been a long time coming.
In the long run, it could be better for everyone. Even China.
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