True to his campaign promise, President Donald Trump has forged new international business agreements that will finally give domestic employers financial incentives to open factories and create jobs in America.
The United States’ financial relationship with China is fairly recent. In fact, not everyone cheered the opening of diplomatic and trade relationships with China by President Richard Nixon in 1972. However, his week-long official state visit to the People’s Republic of China (PRC) did restore peaceful dialog between the U.S. and China after 25 years of non-communication. This was the first time a U.S. president set foot on PRC soil.
Nixon and Chinese leader Mao Zedong decided to abandon being bitter enemies. They agreed to re-establish diplomatic relations and focus on common interests rather than political ideology.
Trade deals struck after Nixon’s parlay have resulted in commerce between the two countries totaling over $500 billion a year. In July 2018, Bloomberg reported the staggering imbalance favors China:
“The trade surplus with the U.S. stood at $28.97 billion, the highest in any month in data back to 1999. Exports climbed to $42.62 billion, also a high, the customs administration said on Friday.”
Put another way, The Balance explains why a U.S. trade deficit with China might be viewed as anti-American:
“The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.”
Lobbing another volley in the China trade war on March 8, Trump proposed that the Chinese reduce the $375 billion U.S. trade deficit by $100 billion. They were agreeable.
Then, citing national security as justification, the president invoked a special power granted by Congress in 1962 that let him bypass Congress, the only legislative body with the authority to impose tariffs. Trump’s aggressive action was based on a Commerce Department report that imported metals threaten domestic arms production, Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum.
Aerospace Industry Council members who make satellites, planes, ships, and bombs forecasted dire consequences — they believed excessive tariffs targeting China would backfire, raising costs in U.S. military budgets.
The $375 billion annual deficit in China’s favor for both imports and exports will, no doubt, be eased by Trump’s current trade tightening tariffs. However, it will take years to completely level this lumpy economic playing field.
The China trade imbalance is complicated by the fact that Americans have become used to purchasing cheap Chinese goods and won’t necessarily buy superior quality domestic products if they cost more. What can China do about foreign consumer choices?
What kinds of good are we talking about? The U.S. gets computers ($77 billion), cell phones ($70 billion) and apparel and footwear ($54 billion) from China. In return, China imports commercial aircraft ($16 billion), soybeans ($12 billion), and cars ($10 billion).
Ironically, exploitative Chinese manufacturers buy raw materials from the U.S. and keep the cost to sell finished products back to U.S. consumers by paying slave wages to sweatshop employees.
However, ethics do not typically drive a trade war: the flow of money and political perception do.
In the short run, taxes on foreign marketing can boost a flagging economic sector – like automobile manufacturing – and bring industry back into the country, creating more jobs.
But further down the road, limiting international commerce historically results in economic depression and fewer jobs due to increased production costs.
A sufficiently punitive trade war can lead to a battlefield conflict:
“The last major trade war occurred with the 1930 Smoot-Hawley Tariff. It increased 900 import tariffs by an average of 40 to 48 percent. Its purpose was to support U.S. farmers who had been ravaged by the Dust Bowl. But it also raised food prices for Americans who were already suffering from the Great Depression. Other countries retaliated with their own tariffs. It forced global trade down by 65 percent, worsened the depression, and contributed to the start of World War II.”
This year, on January 22, 2018, Chinese solar panels and washing machines were subject to U.S. tariffs and import quotas. Trump soon announced additional tariffs on other Chinese goods.
China responded in kind, escalating the trade war in a predictable fashion. This is where the situation stands today.
A Tweet from US Trade Representative Robert Lighthizer said the financial restrictions are designed to “urge China to stop its unfair practices, open its markets, and engage in true market competition.”
Remember too that Trump’s advisors are not new to the art of the deal. Trump has offered to consider exempting countries from certain tariffs. Take the case of South Korea. On March 26, just over two weeks after the initial tariff announcement, Trump authorized a steel exemption to the nation that is the third largest foreign supplier of steel to the U.S.
South Korea showed its appreciation by approving amendments to the 2012 bilateral trade agreement. Instead of expiring a 25 percent pickup truck tariff in 2021, the U.S. will extend the tax for another 20 years. South Korea will double the number of U.S. cars it imports.
We have to give President Trump an ‘A’ for effort. He has gotten the world’s attention, even if most countries disapprove of the new U.S. trade tariffs. It will be interesting to see what happens next – unless that happens to be the next World War.