Does the U.S. Have the Ingredients to Win a Trade War?

By Marshall Auerback, a market analyst and commentator. Produced by the

Contrary to what President Trump thinks, trade wars are neither good, nor easy to win. But ultimately, as in any war, there are winners and losers. In that respect, the U.S. president is probably right in his implicit assumption that the U.S., not China, is likely to come out ahead in its steadily intensifying trade conflict with Beijing—at least in the short term, until China can wean itself off its export-led mercantilist growth model. This is not to say that there will not be collateral damage in the U.S., although it is interesting to note that even as the conflict has intensified, the Dow Jones index has continued to hit new historic highs, while China’s Shanghai SE Composite Index is down more than 17 percent year to date. So clearly there are some implicit bets being placed on the outcome of this particular conflict in favor of the U.S. Are these bets rational?

The roots of this conflict and, indeed, much of the basis for Trump’s presidency lie in trade—or, more precisely, the outcomes of trade, globalization and the unimpeded offshoring of American manufacturing.

, these phenomena in aggregate have created the effect of a “synthetic” open borders immigration policy, as American manufacturers have relocated to low-cost (especially with regard to labor) jurisdictions in China under the assumption that pre-existing free trade arrangements would safeguard the ease of shipping these cheaper goods back to the U.S.

The nexus has imparted deflation in two ways:

1. The threat of offshoring (or the actual implementation of it) has moderated demands for higher pay to workers in the U.S., and

2. The importation of cheaper Chinese goods has also kept prices lower, thereby nipping incipient inflationary pressures in the bud.

Trump’s goal is to disrupt this “Chimerica” nexus and induce bringing supply chains back to the U.S. However, one potentially adverse outcome is that this policy may be inflationary, by creating short-term bottlenecks as the flow of cheap Chinese imports is disrupted. Furthermore, a tariff, like a devaluation, is expansionary as it diverts demand from foreign to home producers, thereby further contributing to potential inflation.

For Trump, this might be a reasonable trade-off. But if the president is successful in securing these objectives, he might well find himself winning a trade battle with China, but losing the inflationary war.

Unlike the Great Depression, this is an economy currently running much closer to full capacity and hence, is more at risk of rising inflation, which could erode any real wage gains for the workers that the policy is ostensibly designed to help. Furthermore, Trump’s growth objectives could be undermined by the U.S. Federal Reserve as it continues to hike rates to offset the rise in incipient inflationary pressures. Given the fact that private debt levels among households remain relatively high, an increased interest burden could well abort the economic recovery.

One of the supporting factors for the markets’ comparatively benign view of U.S. prospects relative to those of China is the period of the Great Depression and its impact on U.S. economic growth. History shows that creditor nations end up as the biggest losers in a trade war. By the time of the Great Depression, the U.S. was the world’s largest creditor nation (the China of its time), and exports represented 7 percent of GDP by 1929. The infamous Smoot-Hawley tariff, introduced in June 1930,

Without minimizing the impact of a 2 percent decline in GDP directly attributable to the decline in U.S. exports, on the face of it, the imposition of Smoot-Hawley does not appear to provide much support to the view that protectionism per se caused the Great Depression. Especially when one considers that from 1929 to 1933, real national income fell by almost 40 percent, unemployment rose to 25 percent, and real Gross Domestic Product collapsed by 30 percent. On the other hand,

Two percent of GNP does not sound like a big change, but if it’s concentrated in one-fifth to one-third of the states, it’s very large indeed. The tariff dramatically lowered U.S. exports, from $7 billion in 1929 to $2.4 billion in 1932, and a large portion of U.S. exports were agricultural; therefore, it cannot be assumed that the microeconomic inefficiencies were evenly distributed…

Agriculture was not the only export sector destroyed by the tariff. The worldwide retaliation against U.S. minerals greatly depressed income in mining states and can be partially blamed for the collapse of the Wingfield chain of banks (about one-third of the banks in Nevada, with 65 percent of all deposits and 75 percent of commercial loans). U.S. iron and steel exports decreased 85.5 percent by 1932 due to retaliation by Canada. The cumulative decrease in those exports below their pre-tariff levels totaled $369 million. Is it any wonder that Pittsburgh saw 11 of its largest banks, with $67 million in deposits, close in September 1931? How about U.S.-made automobiles? European retaliation raised tariffs so high that U.S. exports declined from $541 million per year to $97 million by 1933, an 82 percent drop! Thus there was a cumulative export decline of $1.57 billion from the pre-tariff volume to 1933. Is it any wonder that the Detroit banking system (tied to the auto industry) was in complete collapse by early 1933?

As one of the world’s leading creditor nations today, this history is germane to China, even though its current account sur as a percentage of GDP was . But its exports to the U.S. last year totaled $507bn and the total net trade sur with Washington was $375bn. So from a simple arithmetical angle, the U.S. has much further scope to impose tariffs on Chinese goods than vice versa. True, , Beijing is not devoid of countermeasures:

It can encourage domestic Chinese companies to make millions of copies of Windows-based computers, without paying a penny to Microsoft. It can do the same with iPhones and Apple. In fact, it can encourage Chinese companies to export these unauthorized copies all over the world, destroying Microsoft’s and Apple’s markets in third countries.

It can do the same with fertilizers and pesticides, making Monsanto and other chemical giants unhappy. And, it can do this with Pfizer and Merck’s drugs, flooding the world with low-cost generic drugs. Even a short period of generic availability may do permanent damage to these companies’ markets.

Those are not insignificant countermeasures, but unlike the time of Smoot-Hawley, the economic backdrop in the U.S. remains comparatively benign. Fiscal stimulus remains relatively robust (even though much of the benefits of the recent tax cuts is being directed to the wealthiest consumers with the highest savings propensities), and unemployment remains fairly low by historic standards (even if unduly flattered by lower worker participation rates).

Being a net importer, the U.S. is therefore not nearly as dependent on exports to sustain growth as China is. So the market participants’ relative assessments of U.S. prospects relative to China are not irrational. This would also explain why the U.S. stock market has remained so resilient in the face of this intensifying trade battle between Trump and China.

What about the U.S. bond market? What is invariably discussed in the context of this mounting trade war is China’s huge stock of U.S. Treasuries. is that China will dump these Treasuries en masse, and thereby create a huge financial discontinuity in the U.S. economy as its actions crater the bond market. There are numerous inconsistencies in this argument.

First, China will continue to receive U.S. dollars (with which it has historically bought treasuries) so long as it exports to the U.S. market. Restrict its exports, and it has correspondingly fewer dollars with which to purchase said Treasuries.

It is true that China can dump its existing stockpile of Treasuries. But what does that actually mean? Recall that these instruments are recorded as electronic entries at the Bank of China’s foreign custody account held at the NY Fed. So here’s how the sale would work: the Federal Reserve would debit the Bank of China’s securities account (the central bank equivalent of a “savings account” where the Treasuries are held), and will simultaneously credit its reserve account (aka the “checking account”). All of this is done electronically, via computer keystrokes—just as you or I would do when we transfer funds from our savings account into our checking account—which means that China’s Treasury holdings are now converted to a large stock of dollars held in the central banking equivalent of a checking account.

China may well choose to sell those dollars and, say, immediately convert them into other currencies, such as the euro. This could potentially elevate the euro relative to the RMB (all other things being equal), leaving Europe to face an additional import onslaught from Chinese goods. It’s hard to believe that the EU (still suffering from much higher levels of unemployment than the U.S. and far less prone to unconditionally accepting free trade dogma) would not follow the U.S. lead and restrict their domestic market to Chinese exports in response (as it has done in the past).

Furthermore, no less a figure than Nobel Laureate Paul Krugman “if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy up those bonds. It’s true that such actions could possibly depress the value of the dollar. But that would be good for America!” Not only good for America (by making its goods more competitive relative to foreign competitors), but also for emerging economies, whose economic health is somewhat dependent on the ready access to dollar liquidity (and any potential reduction in the external value of the U.S. dollar eases the funding pressure for nations such as Turkey, which have huge amounts of U.S.-denominated debt).

Bigger picture: bonds may well fall for reasons of inflation (which erode the real value of the interest payments), but this has little to do with any potential buyers’ strike by China (or widespread sales of its pre-existing stock of Treasury holdings). It certainly would not create a deflationary tsunami. The important fact here is that it will be the actions of the U.S. Federal Reserve, not China (or the so-called ”), which will ultimately set the level of American interest rates. (See for more explanation.)

All of these scenarios highlight a broader problem created by Beijing’s decision to emulate its Asian counterparts by embracing an export-driven growth model, despite having a domestic market of almost 1.5 billion people. Export-driven growth strategies have two fundamental flaws: One is that they turn the exporting country into a “” in which the exporting nation becomes dependent on the “kindness of strangers” to buy its goods. A foreign government can unilaterally choose to restrict the flow of said goods (as Trump is seeking to do against China right now via tariffs) or simply diminish the country’s capacity to buy by embracing fiscal austerity, which curbs the capacity of its citizenry to purchase imports, no matter how cheap. An unemployed or marginally employed worker (who has latent purchasing power) has less capacity to buy such goods from China.

Another problem is that export-driven strategies lead to a global “race to the bottom” as far as wages go, insofar as the exporting nation is under constant pressure to retain global market competitiveness, and generally does so by squeezing labor costs. Everybody works just as hard (if not harder). But there is less purchasing power on the part of the workers to consume the fruits of their own labor. As trade competition intensifies globally, eventually this creates an adverse back loop, as all workers get paid less in order to remain globally competitive (but also have less money to buy foreign goods). Maximizing current consumption means purchasing the lowest-priced goods at any particular level of quality, but this becomes self-defeating when pursuing a mercantilist trade policy. Ultimately, it endangers the country’s growth prospects both externally (via trade shocks) and domestically (via wage deflation to sustain the export market share).

Even one of the early advocates of export-led growth, the late former German Chancellor Helmut Schmidt, reflected in a 2010 interview with Handelsblatton the shortcomings of this model in the Monthly Bulletin of the ():

Handelsblatt: I remember you saying many times, if the Germans keep the D-Mark we will make ourselves unpopular with the rest of the world; our banks and our currency would be the Number 1, all the other countries would be against us and that was why we should have the euro to embed us in a larger European undertaking. It’s all rather ironic, because people are saying that Germany has profited a great deal from the euro because the D-Mark has been kept down and this helps German exports …

Schmidt: I ask myself whether this profit really is a profit? I wonder whether running perpetual current account sures really amounts to a profit. In the long run it is not a profit.

Handelsblatt :Because in the long run these assets will have to be written down because people won’t pay them back …

Schmidt: Yes—it means that you sell goods and what you get back is just paper money and later on it will be devalued and you will have to write it off. So you are withholding from your own nation goods that otherwise they would like to consume.

In essence, China gets a raw deal because it exports the fruits of its economic output to the U.S., rather than consuming it at home. In return it gets paper, whose real value could be eroded by inflation, as Schmidt noted.

Even though less flexible, command economies tend to be more resilient than free market economies because the state faces fewer impediments to curbing the free market’s “boom-bust” cycle, but at a cost of economic dynamism and preserving state white elephants. How do they overcome this drag? Traditionally, Beijing has done this by buttressing its big, inefficient state-owned enterprises, simultaneously creating new trade relations from which it can increase the resultant exports (). Judging from the way Beijing has allowed its managed currency, the RMB, to fall against the U.S. dollar (the decline roughly corresponding to the size of the tariffs imposed by Washington), Beijing is finding it hard to break from its export model, although its “Made in China 2025” plan represents an explicit program of import substitution.

Any trade shock brought about by U.S. protectionism will intensify the strains on an economy already weighed down by a historically unprecedented . As the export channel is cut down, China will accelerate policies that shift the emphasis to consuming its output domestically. This could prove disruptive in the short term, but when 1.5 billion people are consuming the fruits of their own labor, rather than exporting it to other countries, the comparatively benign period of disinflation could be well be over.

Imagine a China aggressively competing for scarce foodstuffs, minerals, or energy. Globalization produced a deflationary cycle. Trump undoing that via tariffs may help him win a trade battle against China, but lose an inflationary war, as bond yields rise to reflect the new reality and abort America’s economic recovery in the process. In the end, therefore, Trump’s “trade victory” may well prove pyrrhic.

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45 comments

  1. Troutwaxer

    In the end, therefore, Trump’s “trade victory” may

    …and it just stops. I think you missed the rest of the sentence when you copied and pasted, so I can’t read the conclusion of your article.

    I read well until that point however.

    1. The Rev Kev

      The last sentence reads from the original “In the end, therefore, Trump’s “trade victory” may well prove pyrrhic.” so only two words. No biggie.

  2. jonst

    I don’t think Trump thinks trade wars are “easy to win”. I think he says that because he is posturing. I think this is a war, another one, that the Elite don’t wish to engage in because they are making money via investing in China. And the Elite, whether it is the wise thing, or the foolish thing, are ready to push the fly over country types under the bus.

    1. John k

      Are ready to…
      They’ve been under that bus for decades. Finally deciding waiting for dems to fix it is a loser.

      1. rd

        The dems have a fundamental quandary. Many of their hearts lie in one place, but the campaign contributions and speaking fees lie elsewhere.

  3. Troutwaxer

    I’m not against a trade war, exactly. I’ve been reading about problems with our balance of trade since I was a teenager. But all wars need to be well-planned, and as usual, Trump is shooting from the hip. Where is the plan/money to make sure that U.S. industries and companies don’t go bankrupt? We all know that 12 billion, assuming it gets approved, isn’t going to cut the mustard.

    1. Larry

      I agree with you Troutwaxer. Lambert has raised the notion of the US lacking a cohesive industrial and agricultural policy would be necessary to truly disentangle ourselves from global trade while minimizing economic harm to the citizenry. And of course, Trump is the Twitter president. All reaction and very little planning with regards to broad policy. So farmers across the grain belt will be harmed. Auto workers will have less hours or be laid off as parts/cars no longer arrive from China. Sure, some will benefit from the chaos, but overall there will be much pain. And it’s not clear that the pain will be leveraged for reasonable purposes.

  4. John k

    Pretty good article.
    But he glosses over the participation rate, which ignores millions of wanna be workers.
    And doesn’t mention at all that working four hour/wk means you’re employed, where this should mean you are 90% unemployed.
    Yes, wages would rise as globalism recedes, and this could lead fed to raise rates. But just as the fed ignored asset inflation since GFC, they now should now ignore wage inflation until wages return to long term share of gdp. A pres and sectreas can, acting together, apply enormous pressure on fed.
    Yes, profits will fall as wages rise, and more so if China ignores copyrights. But this would make China a pariah among developed countries, most of whom enjoy one form or another of patent income.
    Regardless, equities look far too high, and a falling market would likely itself bring on recession… and lower rates.

  5. Kurt Sperry

    The last sentence, , should read, “In the end, therefore, Trump’s “trade victory” may well prove [p]yrrhic.”

  6. JTMcPhee

    What’s with the assumption in the article, not challenged by anyone, that ‘inflation is to be avoided at all costs,’ and ‘all these policies will lead to inflation and must be stopped now’? Paraphrasing, of course, but what kind of analyst is Auerbach, what “school” does he swim with, and is this just another pitch for more globalism and protecting the “investors” who hold bonds (and are always working to socialize the risks of loss and get the rest of us to believe they have some “divine right” to be spared from “exposure to risk?”

    And to my lights, a big dose of autarky ought really, if you love your children, to be seen as a very good thing. Despite the globalist hatred of the notion. Supply chains and other vulnerabilities (climate, water, food insecurity, cyberfail, war, etc.) being what they are?

    1. John Wright

      Good point, if one is a debtor, one wants an inflation adjusted wage AND high inflation to clear out one’s debt.

      A lot of non-wealthy Americans would embrace high inflation if it arrived with inflated wages allowing them to pay off their debts with inflated dollars.

      As one not-so illustrious US President said, “bring it on”.

    2. human

      Reflecting on Trump policy, this is about mid-term electioneering and market goosing. Any long term effects may or may not be dealt with as seen fit or as ability allows. As others have noted, stated goals are pie-in-the-sky and simply not probable and impossible in the current climate.

      As with anything “Trump,” it is all distraction.

    3. clarky90

      When I first started laboring in NZ, (1970), I was earning $1 nz per hour. It was more than enough to live on, comfortably, and save money. Food, rent, houses, public transport, electricity, phone calls were all “cheap as chips”. Things like buying a car, clothes, TVs, stereos, records ….. all the consumer goods, were very expensive.

      In 14 months, I saved enough money to buy a little house, free-hold (outright, with no mortgage) . I was working long long, shift-work hours, on the Rail Road. I was young and it was fun. (now a days, I am a renter- my marriage floundered)

      Today in NZ, it is all widdershin (dark monetary magik), the inverse. A house that could be bought for $6,000 in 1970, is now $600,000. Electricity is expensive. Food is expensive. Public transport is expensive, many people/families are homeless…BUT crap consumer goods are now “cheap as chips”.- the inverse of 50 years ago. We have Two Dollar Shops everywhere.

      I assume that Marshall is not a deplorable? He owns a house(s)? A clever person, can effortlessly make clever arguments, justifying any clever “economic necessity”. Or cleverly attack POTUS Trump for any clever reason.

      Even little kids can make clever, logical arguments. I “need” to stay up, eat this, do this, have this….I can not do such and such, because…..

      I am pro trade wars, and anti bloody-bullet-bomb wars.

  7. Duck1

    “Imagine a China aggressively competing for scarce foodstuffs, minerals or energy.” Gee, the economists have got around to imaging this?
    yikes

    1. Edward E

      I don’t know, wonder if anyone imagines the soybean car that Henry Ford invented? A hemp car (with other farm products) that ran on hemp fuel. He wanted to build that to save the farmers in the depression. Nearly indestructible
      Don’t know where I found this, little easier on my ‘noggin that.
      The US Will Lose Its Trade War with China by Anatole Kaletsky

      1. Richard Kline

        A much more cogent analysis of China’s options and the real potentials for American import relocation over the mid-term, I agree, than that of Auerback. If this goes on long enough for low end production to be moved out of China at all. Tariffs on the rest will simply be passed through to US demand for the time being.

        Me, I share Kaletsky’s view that Trump will simply retreat and lie about it when real pain in the retail and agricultural sectors begins to propagate by next Spring. Most of this is a charade for the midterms anyway. The idea that any of this is about ‘bringing production back on-shore’ doesn’t walk, could not be accomplished by tariffs (as opposed to domestic subsidies), and is never remotely going to happen at more than trivial scale regardless.

        When and as China decides to stimulate its domestic consumption as a function of import substitution that process will be accomplished entirely on a Chinese time frame. That is a political essential for the government there, that they not be bullied, and they have the means to insulate themselves and their planning on that sufficiently. These tariffs are simply too small to have enough impact to force them to a different course; perhaps not quite as ‘modest’ as in Kaletsky’s assessment, but simply too small and too narrow in pressure. We see again the US over-weighting its estimation of its own importance, and even more of its own leverage, in all this.

        1. PlutoniumKun

          There is evidence of real confusion in Chinese economic policy – they find Trump very hard to read and they simply aren’t used to their trade policy being challenged this way. So it can’t be assumed the Chinese will – at least in the short term – respond in the right way.

          Another factor is that there is already an enormous amount of off-shoring ongoing from China to other Asian nations, especially Vietnam and Indonesia. In many sectors China is no longer a low cost manufacturing centre. So this might just accelerate a very different process than Trump imagines – jobs flowing from China to third countries, not back to the US.

          But I do think that the Chinese will eventually see this as an opportunity. Its always been the ‘plan’ to switch from an export led growth model to a more balanced one. The problem has always been that this is easier to say than do. Most domestic growth in China is based on infrastructural (mal)investment rather than genuine consumer led growth. Michael Pettis has written quite a lot on both the necessity for a changed model, and the extreme difficulty involved in actually doing it. But Trumps action might be good for China in the long term if it gives more power to the internal reformers to stand up to the might of the lobbyists for the export industries and the domestic ‘cover everything in concrete’ industry.

          1. ObjectiveFunction

            “Another factor is that there is already an enormous amount of off-shoring ongoing from China to other Asian nations, especially Vietnam and Indonesia.”

            This! (except, for Indonesia read Malaysia. Indo presently combines the worst of two worlds: an intrusive bureaucratic sector and pervasive corruption at all levels. It remains a dependensia resource economy).

            Until November 2016 Deplorables and Millenials were dazed and confused at how fast Corporate America displaced almost the entire non-MIC industrial base to China within 5 years of the WWW making a global supply chain cheap and easy. Dude, where’s my economy?)

            The same dynamic will now work against China with even greater speed, as that ‘giant sucking sound’ relocates huge elements of their manufacturing base to whoever offers a hospitable business climate, decent infra a pliant and tech savvy workforce (including skilled migrant Chinese and Indians!). It will be like water running through Beijing’s fingers; the harder they try to squeeze the faster it will flow.

            1. Richard Kline

              Except unlike the US China is pursuing an explicit industrial policy to grow and retain high-end production, and on a very large scale by world-historical standards. And unlike the US farming out low value production to a large country such as China which might (and has) come to exert actual leverage, China is re-shoring the low value sector to small neighboring national economies which will have little leverage against China, and be heavily dependent upon Chinese money and expertise. Chinese re-shoring is like the US exporting production to Mexico, in effect. Except it isn’t even production FOR CHINA on the whole but for Chinese-facilitated world market export. That is, China will have mediated itself in low value production without being itself dependent upon the final product. Nice trick, if you can do it—and they are, and now Trump is only helping them indirectly. What’s he going to do, slap tariffs on all of Southeast Asia, and push those states closer to China in consequence?

              The end game is where you find out how able the players were . . . . It is difficult to avoid noticing that Trump doesn’t do end games, and when he is compelled to do so he’s come out the patzer loser thus far.

              1. JTMcPhee

                Hey, the Blob has several arrows in the quiver. Tariffs are one, SANCTIONS is a biggie until it’s not, and there’s always a little regime change or cyberwar or using the Space Force to slice up the furriner’s infrastructure with Lazer Beams and stuff… Or we could send in the Gunboats — I see there’s been an addition of three vessels to the “pre-sunk Littoral Combat Vessels…_

          2. Richard Kline

            Yes, PK, agreed on all counts. Though there is a further factor, too.

            “Another factor is that there is already an enormous amount of off-shoring ongoing from China to other Asian nations, especially Vietnam and Indonesia.” Absolutely, though I agree with Objective that Malaysia has been a major recipient of Chinese re-shoring. I didn’t take the time to go this way, so it’s great to have it brought into the discussion, an issue really lacking in Auerback’s framing of the issues. Chinese re-shoring is a major factor in why China can readily withstand Trump’s tariffs. The sectors where tariffs would have most lead to business closure and job loss in China, and so pressure on the government, have a) already been deliberately shrinking in China to this point, and b) are ones that the government rightly wants to farm out to its own dependent players. So Trump’s tariffs, if sustained for any length of time, are a direct incentive to Chinese oligarchs and bureau-archs to accelerate relocation of the low end stuff. Where is the pressure actually pinching China, then? The higher value-added areas like making smart devices would have hurt the Chinese economy and their intentions of growing high-end production significantly more if hit with punitive tariffs—except that much of this production was given exemptions by Trump’s team as political favors to US producers!

            The exemption of high value-added production from tariffs thus far is a neon sign that Trump isn’t remotely serious about using tariffs for anything other than vote buying because it is the one sector where pressure might have brought Chinese near-term concessions. Just as Trump thumped on about tariffs on Canada, Mexico, and Europe, he dopplered down on that real fast after domestic producer pressure and cosmetic non-concessions from heads of government in those cases. Meanwhile, Trump’s agricultural base is going to take a hammering from Chinese counter-tariffs, as well as low wage American workers in the retail sector—but they have no moneyed advocates to go pressure him, so he is evidently quite willing to throw them under the millstone. That combination of outcomes does not support a ‘Trump cares about jobs and the working class’ narrative, to me. Exemptions for the corporate mega-rich while sectors of the working class are used as a blast shield for the oligarchy: that’s this guy, alright.

            Production shifting to least-cost regions of from higher cost ones is a long-term vector which has been seen in every ‘developed’ economy over the last 500 years. It takes state-supported industrial policy and very focused training and investment decisions to retain even a portion of high-value production in developed national economies, as in Germany, and as tried with somewhat less success in Sweden and Finland of the last generation. From Italy losing production to Northern Europe by the 1500s to the present, and production in China moving further and further south prior to the lat Qing Dynasty, the process is strongly demonstrated. Lower cost work goes, and it is extremely difficult to retain it in regions of prior participation. Yes, yes, “nefarious American corporocrats moved . . . ,” and sure they did. Many if of good intentions (one in 100), would have in the end simply sold out of their industries regardless, faced with low-cost production brought on line to the world economy. This is a much larger issue than approached in Auerback’s post, and yes analytic conclusion on this doesnt’ have a consensus or an answer. Since the onset of Rust Belt job loss and attendant progressive discussion of an American industrial policy in the early 1980s, this issue has been raised time and again without any comprehensive solution, let alone a program. Tariffs cannot force jobs back onshore; this will not happen. So to me, the first conclusion is that an unconstructive punitive tariff regime has other purposes, is a function of simple hostility or incompetence, or all three.

            Regarding Chinese current response to Trump generally and his tariffs specifically, yes, we both read the same observers suggesting that the Chinese not only don’t know what to make of him but are divided internally at the top with how to respond generally to such a direct challenge. Some of this is real. China has been careful to steer just clear of direct economic conflicts which would compel the government there to take hard positions due to their domestic public opinion. Trump is forcing them back against that opinion, and to me they don’t want to abandon their long term tactics and kick back to hard or too long. So they are looking for a way to position themselves, and playing rope-a-dope for the short-term as part of that. There are much bigger historical issues in play here too than a simple scuffle over trade terms. Anyone on that side of the ocean has a long enough memory to understand exactly how FDR’s trade sanctions on Japan pushed Japan into war with us. China will do a great deal to avoid being cornered into a hard response, in my view, especially when still at a political, military, and to a degree economic position of disadvantage. But no one really knows how long or far this is going to continue, so the impulse to speak softly and wait him out has to be potent. Thus far, once could characterize Chinese response on the tariff issue, in my view, as measured, cautious, and low key, while doing everything to avoid opportunities for Trump to force them into making hard responses. Their canceling more than one of the non-negotiation actual surrender meetings which Trump has tried to schedule the Chinese into before the midterm elections speak as much to avoidance of being pushed into a corner as to ‘confusion.’

            There is a further issue with Chinese response, and one of considerable consequence in the soft pedal and confusion we tend to be seeing presently from the top in China, is this: this quasi-year long period, already begun, is one where exactly such less-coherence-than-recently outcomes are more likely on the basis of large scale structural oscillations in play there. I cannot adequately explain this issue here and now, though it is a factor I have studied at length, and in which I have confidence. I may perhaps speak to this type of issue in later October. The point I would stress for a present takeaway is, one should NOT take Chinese puzzlement of the moment as an agented activity of policy reassessment. It is a circumstantial window of briefly lesser coherence which will end from June-Dec of 2019 for firmer policy, of whatever determination. The function is exogenous to the context itself, and will pass into something else.

          3. hemeantwell

            But Trumps action might be good for China in the long term if it gives more power to the internal reformers to stand up to the might of the lobbyists for the export industries and the domestic ‘cover everything in concrete’ industry

            Agreed. From the standpoint of Chinese domestic politics, Trump provides political cover for a shift that would be difficult in any event.

  8. jo6pac

    I’m think the author is wrong and I’m only arm chair person. Edward E the losers will be us little people in China may be and for sure us in the new Amerika.

    1. Edward E

      Do you have an opinion of Brandon Smith at alt-market? I tend to think a lot of this is like herding cats with a big Kabuki Theatre show. It can be a better world, for awhile, eventually everything gets corrupted again.

  9. timbers

    What stands out to me, is that trade tariffs are the one thing that violates the neoliberal Establishment Consensus that Trump is allowed to actually enact as policy. Trump hasn’t been allowed to stop our endless wars or improve relations with Russia, or prosecute Hiilary or the rampant criminality in the CIA, FBI, DOJ, or prosecute Obama, but he has been allowed to impose tariffs. Why? Because he exempted Apple? I’m interested in knowing theories about this.

    1. Brooklin Bridge

      is allowed to (a very good question) —or— has gotten away with so far? (a possible answer)

      Trump’s tariffs may just be a soft spot he has stumbled upon in big business’ control (or in this case, lack of it) over the US presidency. He obviously has no control what so ever over our military and precious little -of a lasting nature- over foreign policy (kind of like trying to direct a giant truck with firecrackers). It is surprising that the tariffs, such as they are, have gone on this long without noticeable push back from big business and Wall St. It may be that he has ideological friends in powerful places that are willing to sacrifice some measure of profit for, ‘the cause,’ not to mention Trump’s other give-aways such as the giant corporate tax breaks.
      .

  10. rd

    I think the US can win a trade war in a comparable way that Britain and France “won” World War I. It may not be worth it.

    However, I think Citizens United means it won’t get that far. A real trade war would be a body blow to the US-based international corporations and their wealthy shareholders. They will put endless amounts of money into the system to combat implementation of a real trade war. Trump is worried about the “Deep State”. Just wait until he runs into “Deep Business”.

  11. VietnamVet

    As usual, the little people are ignored. When wages are at best stagnant, the increased prices at Dollar Store due to tariffs can only be paid for with more debt. Sooner or later, the accumulating private debt becomes unmanageable. Right now, there are weekly shootings by people running amok. The oligarchs are so concentrated on grabbing more wealth, that they ignore the red flags that are waving; increased mortality, decreased fertility, middle-aged children living with parents, loss of faith in the media and government. All that is needed to provoke unrest is an Increase in food prices and a population with nothing left to lose. Suddenly flight capital havens aren’t that safe anymore.

  12. chris heinz

    Our clueless child president clearly expects that “POTUS Apprentice – Trade Wars” will get great ratings and he will have great fun throwing sticks and stones into the world’s economic machine. Plus maybe some new people to insult! Ratings through the roof!

  13. The Rev Kev

    A problem here is that Trump will only be President until only 2020 or 2024 at latest. After that he is outta there and won’t give a rats what happens after he leaves. Won’t stop him from tweeting the thoughts of Chairman Trump though in private life.
    The Chinese appear to be dealing with this trade war for at least the next thirty years in their planning as they know what the true aims of this trade war as pushed by Trump advisor Peter Navarro-

    1-Displace China from the heart of global supply chains.
    2-Force companies to source elsewhere all the components necessary for manufacturing.
    3-Force multinational corporations to stop doing business in China.

    In other words put China in a hurt locker and throw away the key. Thus for China it is a matter of national survival and there is nothing to be gained by conceding to Trump. Trump would only see that as a sign of weakness and would double down. The Chinese might go for some lateral thinking and strike at American interests elsewhere as they have a range of options open to them. Whatever happens next, it ain’t gunna be pretty.

  14. ewmayer

    Here, let me help Mr. Auerback a bit with his phrasing:

    1. The threat of offshoring (or the actual implementation of it) has moderated demands for higher pay to workers crushed wages for the bottom 90% in the U.S., and

    2. The importation of cheaper Chinese goods has also kept prices lower, thereby nipping incipient inflationary pressures in the bud, so workers who have lost 50-100% of their wages to offshoring can now buy poor-quality stuff cheaply from China, making their impoverishment a bit less dire.

    It’s been said that the ‘smashing success’ which is the Fed’s now-nearly-decade-long asset-price-reflation program can be summed up in terms of the 90%’s experience of it as “massive inflation in stuff you can’t live without (e.g. rent, healthcare) and low inflation in stuff you really don’t need (latest flatscreen TV model, throwaway fast-fashion crap), so perhaps the inflation Mr. Auerback fears in the second category will not be so bad as it sounds on the surface. My Silicon Valley apartment rent – by far my greatest expense – doubled since 2010, so how much worse can a trade war with China hit me in the pocket than that did?

    And lastly:

    “Unlike the Great Depression, this is an economy currently running much closer to full capacity and hence, is more at risk of rising inflation…”

    Uh, the employment-population-ratio numbers put the lie to that “near full capacity” claim. Things are only near full cpacity in terms of the artificial metrics government economists like to use, which are similarly bogus as their consumer-price inflation measures. Your healthcare and rent outlays doubled in 10 years? Well, that new laptop you bought has 10x the processing power than a 10-year-old one, so the latter hedonic-adjustments deflation cancels out the former actual-prices inflation. Younjust don’t know how good you have it, pal!

    Yes, Trump is going about this trade business in a crude, haphazard and in many ways possibly counterproductive manner. But 2 points:

    1. The US working classes and manufacturing indusry were not destroyed in a day, and it would be foolish to expect reversal of any significant part of the trends reslting from those at-least-4-decades-long neoliberal policy choices to be swift or painless, and

    2. There were 2 presidential candidates with a prayer of winning in 2016. Only one of them said anything remotely credible about the above reshoring effort, and he won and is at least trying to do *something* about it, even if it is a clumsy something. There is alas no candidate FDR 2.0 in the offing anywhere, so our recent choice was between a clumsy something or nothing at all. Yes, it sucks.

    1. Newton Finn

      Thank you, ewmayer, for adding in some bits of hard reality to “correct” a convoluted analysis that I simply couldn’t follow. God how we need that FDR 2.0 to talk sense to us, the little people caught in the vise-grip of global plutocracy, and then to effective action on our behalf.

    2. a different chris

      my Silicon Valley apartment rent – by far my greatest expense – doubled since 2010, so how much worse can a trade war with China hit me in the pocket than that did?

      Lordy make T-shirts out of that and we’ll all wear them to every Democratic Party meeting. Focus their minds for once.

      The whole comment is excellent, maybe print it in its entirety on the back..

  15. drumlin woodchuckles

    The ideal eventual goal and achievement should be America producing for America and China producing for China, and no trade between either country in either direction.

    We don’t need a “Trade War”. We need a War On Trade.

  16. ewmayer

    And as if on cue, this just out from Wolf Richter:

    : The primary culprit of the ballooning US trade deficit is being purposefully obscured: Corporate America

  17. jfleni

    All this nonsense about the chinamen copying Windows and selling it for nothing is just tooth fairy fantasy, because Linux
    exists and works very well. Why copy what is already free and
    excellent?

    Looks like Billy-boy is caught in a trap of his own or similar design!

    1. drumlin woodchuckles

      Is the whole Linux galaxy of programs and stuff useful to people like me who don’t understand programming or programmology or coding or codingology? Who don’t view maintaining, caring for and ing their own little private zoo of computer programs and stuff as some kind of fun and rewarding hobby?

      Because I remember reading/hearing years ago that Linux and all the little linuxes were meant for computer-fans and digital hobbyists who enjoy that sort of thing. Is Linux any different today?

      Because if it isn’t, then if and when I ever buy a computer and programs it will be some kind of install-and-use which requires zero understanding of digitology on my part. Am I the only person of that sort in the whole wide world?

  18. Berial

    I would like to explore the thinking of a world where big pharma and other huge companies that have made their fortunes by offshoring, end up finding out how bad an idea that was if China decides to ignore IP laws and starts selling their crap as China brand.

    Any good reading about that possibility?
    (Seems almost impossible to imagine but it’s really not if China is willing to pull that trigger.)

    1. NotTimothyGeithner

      Individual share holders and corporate execs hope to get out prior to any problem if they thought about it. One might suggest this is a responsibility of government to rein in this behavior and direct to a longer view of prosperity, and even arguably why we have governments, long term planning. Does Jaimie Dimon care about (where ever he works) as long as they’ve paid him everything he can get? His name isn’t on the building.

      What did Obama hope to accomplish with TPP? The answer was to block China from basically doing just that. He had to make deals with the devils so to speak, but China has been the target of U.S. fp for a while. I even heard a Tim Kaine reelection ad where he warns us we are falling behind China (in a sneering voice) in R&D.

      My guess is Trump buys into the same reasoning as Obama about a rising China and the hoped for competitive advantage of the U.S. which was supposed to be defense, tech, and finance at least according to the free trade nuts in the 90’s. Trump is less measured and attacked TPP, so he can’t simply resurrect it. My guess is the specter of China and an ally such as Russia entering markets are a threat to U.S. corporations.

  19. drumlin woodchuckles

    And if China does that, it would serve the Traitor Corporations who invested in China exactly right. And if China decides to expropriate and CommuNationalize every Traitor Corporation owned property in China, that would serve the Traitor Corporations exactly right too.

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