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No Free Lunch

A looming new war

/ 12:08 AM January 24, 2017

There’s a new war brewing, but it’s not of the military kind (although it’s conceivable it can lead to that, too). There seems to be wide expectation that if President Donald Trump makes good on his campaign promises—and there’s little so far to suggest he wouldn’t—then we may see a trade war ensue between the United States and China. Trump has threatened to impose “punitive tariffs” of up to 45 percent on imports from China, among others. The figure supposedly approximates the extent of the alleged manipulation by the Chinese to undervalue their currency, argued to have given Chinese exports undue advantage overseas, especially in the huge US market.

Trump’s concern is understandable, even as to economists and business analysts, his intended approach to address the issue is not. I was recently in the US East Coast, and it’s no exaggeration to say that every other item I picked up in the shops bore the tag “Made in China,” or occasionally, “Contents made in USA, packaging made in China.” And these included so-called “all-American” items like New York Yankees baseball caps, Disneyland souvenirs, and Statue of Liberty replicas. In a supreme irony, much of the Trump caps, shirts and other souvenirs bearing his “Make America great again” slogan that thousands of his supporters snapped up during his inauguration turned out to be made in—where else—China. While there were also some of these seen that were US-made, they were reportedly much costlier than the foreign-made versions. And this drives home one important reason why Trump’s declared “America first” policy may yet prove harmful to Americans themselves.

Why is the threat to impose substantial US tariffs on imports from China (and Mexico) worrying a lot of people? It’s a foregone conclusion that this would provoke retaliation. Already, China is reported to be readying measures that would hit American giants Apple, Boeing, General Motors and even Starbucks severely. Boeing, for example, estimates that it stands to lose revenues of up to $1 trillion through 2035 if China shifts to Airbus and other aircraft suppliers. The Eurasia Group, which advises investors on political risk, believes that China would “retaliate immediately and proportionally” even to selective tariff hikes to inflict “substantial but not overwhelming pain on US firms,” aimed to deter Trump from taking broader and more destabilizing steps. Anticipated to be prime hostages are “iconic American consumer goods” and various companies in agriculture, aviation, financial services, tourism and technology.

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Also expected from China as a response to Trump making good on his threats is for China’s central bank, which holds the biggest part of America’s foreign debt, to sell down its holdings of US treasury bills, making the value of these securities fall. This would depress the global economy, and the United States, still the largest economy in the world, would be the biggest casualty. Meanwhile, its own punitive trade measures will lead to even higher input costs and higher prices for American goods, as already seen with the US-made Trump inaugural souvenirs. Higher inflation would prompt the Federal Reserve to further tighten money supply and squeeze the US economy, exacerbating the consumption slowdown that price hikes would directly induce. All told, analysts believe that America will bear the brunt of a trade war that President Trump would launch, although his own advisers apparently see otherwise. In the end, it would be a judgment call in a high-stakes game that risks exacting greater pain on the very Americans Trump professes to help—along with those of us in much smaller economies caught in the crossfire. As the saying goes, when the elephants fight, the ants get trampled.

Will Trump indeed take the first step? He is an astute businessman himself, and he would know what he’s in for. If it’s any indication, I happen to own a blazer with the label “Donald J. Trump Collection” that I picked up from a bargain basement years ago. Underneath the label, an impressive little medallion bearing his name hanging by a tiny chain on its collar, there is a tag that says “Made in China.”

cielito.habito@gmail.com

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TAGS: business, China, Donald Trump, economy, opinion, Policy, Trump
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