Trumping a deal with China

Australia, given its free trade agreement with China and exemptions from US Tariffs, is well place to weather any ensuing storm over trade in the unlikely event it becomes a full scale trade war.    
One might ask the question how come such intended actions happen so quickly.

Well, under section 301 of the Trades Act; the provision allows presidents to impose tariffs on imports considered injurious (as in restrictive) to US commerce. Previously the tariff was imposed on washing machines, steel and aluminium. More recently it is extended to include IT, aerospace and machinery. The total of $50 billion effected sounds a lot, but in an economy the size of the USA it’s not much. Excuse my rusty mental arithmetic but I think it’s about 2%. However, the President recently ratcheted up the ambient claims to $150 billion.

The Presidents aim is to restore a more equal trade balance between the two nations, but I think he is working on several false notions to appease those angry over loss of jobs in the rust bucket seats that swept him to power.

From an economic point of view one could argue the US is in the late stages of economic recovery (albeit there is a lot more poorly paid jobs) with record low unemployment not seen in many decades. Inevitably, during such cycles, it is natural enough for there to be increased demand met from imports. The fact is the worsening trade deficit is a consequence of firms needing to source cheaper imports from abroad and from China. It is true you could increase tariffs to such an extent that you force a structural change but this would have dire consequences such as massively driving up costs which would stifle investment and lead to a severe recession. 

The notion that  China’s trade surplus has been at the expense of poorer outcomes for the US is false, since an economy benefits from trade and having a deficit is not necessarily a bad thing.  

From China’s first moves to adopt a more market driven model, one might argue mostly this has been beneficial to its trading partners and particularly to the US tech sector.   

Asian surpluses have been re invested into US treasuries, underpinning lower interest rates and covering over consumption with massive government deficits. The buying of Treasury notes by China, when frozen credit markets (GFC) threatened to take the US deep into recession, averted a very deep recession. The buying restored liquidity during those challenging times. The US tech sector is also very reliant on low cost inputs from Asia. Tariffs, if they stay in place, will drive industry to migration. Loss of jobs is principally due to technology replacing the old traditional blue collar workers. But a lot more can potentially be lost from the imposition of tariffs.

According to recent polls many Americans concur with the president’s rants in general and endorse the standard approach to discredit rational debate, to be met with a response it’s just “fake news”.  In a recent poll more than three in four among American respondents, or 77%, said they believed major traditional television and newspaper media outlets report “fake news”.

But as an aside the US economy looks now to be in better shape, particularly as a consequence of going from a large scale importer of oil to become the biggest net exporter of oil in the globe within the next 4 years, due to fracking. That does not of course cover any remediation cost that may become necessary to ground water supplies that fracking may cause, assuming that is indeed possible. In the short term however it’s added to Governors state coffers where it has taken the pressure of ballooning deficits.

There is also the likelihood of a large scale capital flow back into the US as a consequence of the recent corporate tax cut as multinationals return most of the $3.5 trillion held offshore or in US Treasuries. This will only serve to strengthen the US dollar and drive up imports, which will be cheaper than local production inputs.  

The real case against China. 

Intellectual property belonging to the US has allegedly been stolen on a massive scale in breach of US laws. Restrictions by China on foreign investment prevent investment yet China can invest in the US.

There can be no question China has been restrictive and its lack of openness to foreign investors which has irked multinationals and others seeking reciprocal trade. However, China has recently stated that in an “orderly” fashion they intend to open up all of their markets to foreign investment in what is a major change in policy.

Conclusion & Sealing a deal  
Having said all of that there are grounds to be mildly optimistic a conciliatory deal can be negotiated. China might, for instance, say they are ramping up measures to crack done on intellectual property theft and opening their economy for more trade, with some exclusivity to the US to pamper to the ego of Trump. You begin to see possible ingredients for a deal. Trump would look as if he has gained a major victory and could boast he is a king deal maker.  China could continue to do what it always intended to do and its leaders would not lose face with the party officials.  

That is the purely speculative deal I envisage might get over the line but don’t hold your breath.