It came as no surprise. President Donald Trump had made it clear during the election campaign that he would use tariffs as a cudgel to punish China for what he insists are its unfair trade practices. He has made good on his threat.

The US first imposed tariffs on US$50 billion of imports from China. China responded tit-for-tat. The US upped the ante with tariffs on an additional $200 billion due to take effect tomorrow. China says it will respond with tariffs on a further US$60 billion of American goods. The US has warned that if that happens, it will hit the remaining US$267 billion of Chinese imports. China is running out of “tits” since there would be only US$20 billion of imported American goods left on which tariffs could be imposed. It would then have to find other ways of punishing American businesses operating in China and the game would become even more nasty.

Trump’s return to the ways of the past

Trump’s approach is unorthodox. Since the General Agreement on Tariffs and Trade (GATT) came into being in 1948, countries have used the tariff weapon only as a last resort when all efforts at resolving disputes through negotiation have failed. The elaborate dispute settlement mechanism of the World Trade Organization (WTO) was set up precisely to avoid tariff wars. But Trump has showed disdain for the WTO, threatening only last month that the US would withdraw from it unless it “shapes up”.

The average time it takes to resolve a dispute at the WTO is 2½ years and longer if the decision is appealed. Trump is impatient of that approach. He is assured of only four years in office so he is in a hurry. He feels that his predecessors have been too timid to confront China. For him, also, flexing muscles Rambo-style is part of the art of making a good deal.

The high-profile meeting between Trump and China’s president, Xi Jinping, at Mar-a-Lago in April of last year agreed on a “100-day Action Plan” that yielded little. It was unrealistic for anyone to think that solutions to the thorny trade issues between the two countries — market access, intellectual property, currency management, distortions due to the dominance of state enterprises, among many others — could even begin to take shape, let alone be concluded in so short a time.

The China problem is real

Whatever one may think of Trump’s management style, his undiplomatic posturing or his America-first exclusiveness in foreign policy, his insistence on a level playing field with China is not without merit. China is now the world’s largest exporter of goods, totalling US$2.3 trillion in 2017. Trump’s assertion that China imposes unreasonable tariffs on imported American products is not true when the basket of imported goods is examined. China’s weighted tariff on imported American goods is 5.4 per cent compared with US weighted tariff of 3.0 per cent on imports from China. The problems lie elsewhere.

China is far from being an open, market-driven economy. State-owned enterprises account for more than 30 per cent of its production and receive direct and indirect subsidies and other commercial benefits that allow them to compete advantageously with global competitors. China restricts foreign access to its financial markets and other critical segments of the economy.

The US maintains that China deliberately suppresses the value of its currency in order to make imports more expensive and exports more profitable. It has accused China of “stealing” US technology by acquiring high-tech companies in the US and requiring US companies operating in China to relocate or establish research and development facilities there and to include Chinese shareholders, thereby allowing them access to existing and emerging technology. China, it is said, has not made sufficient effort to curb the counterfeiting of US name-brand products that are then exported to countries all over the world, undercutting US exports.

It was these thorny issues that kept China out of the WTO for seven years until it had demonstrated a commitment to a programme of reforms aimed at removing these restrictions and opening up its economy. The US claims that the reform programme has slowed and that China has devised innovative ways to evade WTO requirements.

Effects of the trade war

It is difficult to predict how this trade war will play out. Trade wars are usually injurious to all the combatants. They restrict trade and therefore harm the investments and jobs that go into making the traded goods. Higher tariffs increase prices to the consumers and, if the coverage is significant, lead to inflation and higher interest rates which, in turn, hurt wages, investments and jobs. So far, the impact on the US economy has been minimal. The lag time has not yet passed and the tariffs initially imposed were largely on industrial inputs, the impact of which gets diluted by the time the finished product is priced. Stock market prices have not yet displayed any alarm. Now that consumer goods are being thrown into the mix, the impact is likely to be more clearly felt since this will be fully reflected in retail prices.

Also, the impact will be more pronounced in certain sectors. China’s retaliatory tariffs on soy beans and pork products, for example, have hurt American farmers especially in states that voted heavily for Trump, prompting him to accuse China of “meddling in US elections”. He has provided US$6.3 billion to compensate these farmers but it is unlikely that this can be sustained in a protracted trade war, given the burgeoning fiscal deficit that has climbed from US$585 billion to US$833 billion (end of September projection) since Trump assumed office and is expected to exceed US$1 trillion by next year.

Although it has few tariff options left, China is not without cards to play. It currently holds US$1.3 trillion of US Government bonds, making it America’s largest single creditor. This is a nuclear weapon. Trump laments the fact that this was acquired with the dollars that China has earned from its huge trade surplus with America, cumulatively US$4.5 trillion over the last 30 years. If China were to start dumping some of these bonds, it would have a negative impact not just on the US economy but on the international financial markets.

Because of the uncertainties surrounding Trump’s economic direction, other investors may be reluctant to take up these bonds at current prices. Like all nuclear options, it would be a dangerous gamble for China because the value of what it retains would fall, but we must never underestimate the resilience and defiance of the Chinese. Unlike the ordinary investor, they think long-term… long, long-term and they are prepared to wait out any foe.

Not to be overlooked is the fact that China’s political system is far better able than the US to withstand protracted economic turmoil. Americans speak and vote with their pocketbooks and there are significant elections every two years. A slowdown in the US economy would be devastating for Trump since it is the main thing he has going for him and would jeopardise any hope of a second term.

US trade deficit not just because of China

The US trade deficit cannot be linked entirely to China. If the US had a zero trade balance with China, it would still face a trade deficit of more than US$460 billion, 70 per cent of which is related to its trade with the European Union, Mexico, Japan, and Canada. This explains Trump’s decision or threat to launch punitive tariffs on all these trading partners that include some of America’s closest allies. He seems to assume that every country with which the US has a trade deficit is a bad player that must be disciplined.

But it is here that the reasoning gets fuzzy. None of these countries can be accused of the kind of unfair trading practices that may be applicable to China. Thus, Trump was forced to defend these tariffs on the grounds of “national security concerns”. As Prime Minister Justin Trudeau asked, how can Canada — America’s contiguous neighbour and closest ally — be a national security concern?

The US needs to ask itself why does it import so much more than it exports and why are its producers unable to match prices not just with China but with most other major exporting countries… in other words, why is it so expensive to produce goods in America. One reason has been the high taxes that its manufacturers have had to bear, an issue that Trump has addressed by reducing the corporate tax rate from 40 per cent to 27 per cent in order to make them more competitive. But before giving that initiative time to produce its results, he has unleashed a tariff war that is bound to undermine that competitiveness since many US manufacturers — the automobile industry being a prime example — rely heavily on components imported from China that will now cost more because of the tariffs.

Trump argues that these tariffs will force US companies that find it cheaper to manufacture abroad to relocate their businesses to the US and hence create more jobs for American workers. It doesn’t necessarily work like that and Trump clearly does not understand the intricate workings of the global supply chains that account for more than a half of the world’s total trade in manufactured goods.

Already, some US companies like Honeywell have announced plans to outsource from other countries like India, Indonesia and the Philippines. Astute businessman though he claims to be, Trump does not appear to understand that capital is the most agile of the factors of production and is not easily cornered or coerced.

Implications for Jamaica

Jamaica is not yet caught in the trampling of this elephant rumble. We import Chinese goods directly from China. However, more than 40 per cent of our imports do come from the US and to the extent that this trade war increases the cost of those imports, particularly machinery and other goods with China-made inputs, we will feel some effects.

However, if good sense does not prevail and the trade war escalates to the point where it destabilises the international markets, leading to higher interest rates and reduced consumer spending, Jamaica will suffer in terms of the fate of our bonds in the international market and its impact on interest rates, the demand for our exports, the cost of our imports and even our remittance flows and tourism arrivals. Let us not forget that trade wars were a major cause of the Great Depression that led to the establishment of the GATT and the multilateral trading and finance system.

Trump’s vision of American exceptionalism is to extricate the US from the international and multilateral architecture, replace it with American bilateralism and redesign the global landscape and its relationships into two components — America and everything else. Jamaica would be hard pressed to find a place in that schematic.