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Trade wars, like their nuclear counterparts, are essentially unwinnable. Once one side pulls the trigger the other side is left with no other option but to retaliate and mutually assured devastation ensues.
And yet despite this, the world’s two biggest economies have now been engaged in a trade war for more than a year and there are no signs of it slowing down. In fact, with President Trump imposing new tariffs earlier this month and China retaliating by banning its state-owned companies from buying US agricultural goods, this trade war is actually heating up just as its impact is starting to drag down the economies of both countries.
So how did we get here? There are many reasons why the Trump Administration pursued this trade war but it all mostly boils down to grievances over Intellectual Property (IP) theft, lack of fair access to Chinese markets and accusations of currency manipulation. Now the currency manipulation part is somewhat contentious and in fact, the International Monetary Fund (IMF) disagrees with the US on this charge. But pretty much everyone outside of China agrees that China should be doing a whole lot more within its borders to protect the IP of foreign companies and that it should also be making a much bigger effort at opening up its economy to foreign companies.
There is overall bipartisan agreement that President Trump is correct in trying to do something about these discrepancies in market practices, however, there is disagreement over whether tariffs are the best means to apply pressure on China. The problem with tariffs is that they are a tax on goods coming into the US and importers usually pass on this tax to consumers by increasing the prices on the goods sold in America, which means that in the end, tariffs end up being a tax on the consumer.
President Trump and his advisers are aware of this “invisible tax” on consumers but they persist with it in the hope that the increasing price of Chinese goods will lead American consumers to switch to alternative (hopefully American made) products which would then hurt the Chinese economy. Of course, the Chinese can, and indeed already have, retaliated with tariffs on American products which are slowly but surely hurting the American economy, especially farmers in the Midwest.
In essence, the world’s foremost superpowers are now in a cowboy Western-style economic standoff waiting to see who will blink first and offer significant concessions in order to reverse the tariffs and end the trade war.
So far no one has blinked which means that in all probability, tariffs will continue to escalate and the economies of both countries will get progressively worse over time until a resolution is found. And herein lies the problem for President Trump, because he is facing re-election next year with his favorable numbers mired in the low 40s while China is a one-party state whose leaders have no such concerns.
The economy has been the one consistent bright spot for a Trump Administration that has been otherwise mired in seemingly never-ending controversies and so any noticeable downturn in economic growth could be fatal for Trump’s re-election hopes.
Trump badly needs a “win” or at least some progress to show to voters in the fall of 2020, especially if the economy slows down like some experts expect it will. Goldman Sachs has already revised down its U.S. GDP expectations for 2019, while Bank of America has raised its expectations of a 2020 US recession to one in three. China’s economy is also expected to grow much slower than in recent years but again, Chinese leaders, with no elections to worry about, are under no immediate pressure to strike a deal and can at least temporarily ride this out until November 4th, 2020.
Trade wars are unwinnable but elections are. In the end, Trump will have to win the 2020 election in order to get the concessions he wants.