At the turn of the New Year, trade war rhetoric led to trade war actions against China.
US President Donald Trump’s first State of the Union address named China as a major economic rival. The US president said that his nation faces “rogue regimes, terrorist groups, and rivals like China and Russia that challenge our interests, our economy, and our values”. After his speech, the US levied tariffs of 30% or more on Chinese steel and aluminum products, solar panels, and washing machines.
Although, as He Ning, a former minister for trade and economic affairs at the Chinese embassy to the US said “China has persistently exercised restraint on the trade to lessen the possibility of a China-US trade war breaking out in 2018,” China has to respond to this. The first answering shot from China is the anti-dumping investigation on sorghum imports from the United States.
Following China’s investigation into U.S. sorghum farmers mostly in Kansas and Texas, news reports indicate that some Chinese buyers canceled corn purchases from the United States and switched to rival supplier Ukraine. Corn is naturally a much larger export than sorghum for American farmers. Further Chinese retaliation may include soybeans, an even larger American export item to China. Last year China imported $13.9 billion worth of American soybeans. If China puts it on the list of dumping investigations it would greatly affect world soybean prices and in turn trigger another round of dangerous tit-for-tat trade sanctions by the US.
Currently the escalating tit for tat includes industrial goods, agricultural products, and intellectual property. The U.S. Congress has reportedly put pressure on AT&T and Verizon to drop plans to sell smart phones made by China’s Huawei in the United States, while American regulators blocked the sale of U.S. money-transfer company MoneyGram to an affiliate of China’s Alibaba. The biggest threat could result from the Section 301 investigation into Chinese intellectual property practices. President Trump himself has foreshadowed drastic action after the investigation is completed, warning of potentially “big damages” against China. “We’re talking about numbers that you haven’t even thought about,” Trump reportedly said in an interview with Reuters.
Both China and US should thus seriously calculate the losses and gains down the road. Though trade war usually ends up in a lose-lose situation from both sides, there is always one side loosing more than the other.
Fundamentally, the US trade deficit can be boiled down to the United States as a whole spending more money than it makes. Then the additional spending must, by definition, go toward foreign goods and services. In the case of China-US trade, to compensate for such a large trade deficit in Chinese goods and services, the US simply pays back by printing USD bank notes, which is known as seignorage. The US has been enjoying this privilege over the last 74 years since Breton Woods established the US Dollar’s dominance. Now in the trade war US must eventually give it up. Therefore the USD seignorage is considered a dead lost for America. Moreover, American middle-class would forever lose the consumption of cheaper goods from China.
A loss for America may not mean a loss for China. Thanks to globalization, China’s exports to the US can be redirected to 60 “One Belt, One Road” countries. In 2017 China already exported ¥4.3 trillion in goods to these countries, much greater than the amount to US. Besides, China has been longing to make a structural adjustment to increase its domestic consumption, currently over 60% of GDP to absorb the export shrinkages. It may not be a big gain for China but it is necessary to help bring China back to a healthier macroeconomic track.
The biggest loss for US lies in US Dollar hegemony. Fighting for more exports, the traditional trade warfare depreciates a country’s own currency in order to boost exports. This is known as currency exchange war. One percentage drop in USD value for instance, will immediately raise by one percent of US export competitiveness. And during Trump’s one year “New Deal” period, the USD index actually dropped from 103 to 88. However, it has not caused US exports to rise yet. Perhaps it needs more depreciation but it is a dangerous slope for the US Dollar as its parity is based solely on virtual value. US Dollar hegemony as a reserve currency has been challenged countless times since the last century but this time it is being challenged by Bitcoin and thousands of digital encryption currencies.
The USD’s loss could be the RMB’s gain. China has already been the world number one exporter and Importer, contributing 14% of world trade, but only 0.8% of world trade has been settled with RMB. There is a great potential for the RMB to replace the USD.
Understanding that China will sooner or later be America’s biggest rival, Donald Trump has decided to start a war with it. However he uses a “Double Dealer” strategy to hypnotize China with festival greetings while opening fire at it. Look at what message he sent amidst ferocious trade war sanctions during Chinese New Year: “I send my warm greetings to those in the United States and around the world celebrating the lunar new year” he said “ Asian Americans have made countless contributions to our national unity and makeup. It is not difficult to notice how deeply they cherish rich heritage and emphasizes the importance of sacred traditions and the familial ties”
As a sophisticated businessman Trump should be good at calculating his gains and losses. He will have to choose between a trade war or safeguarding the US Dollar.