Hosted by China’s President Xi in Beijing last November

Could Trump Be Winning His Trade War Against China?

We Thought If Any Country Had The Stomach To Go Mano-A-Mano With The President It’d Be China, Especially With Its History Of Not Being Conciliatory To The U.S.

And on the surface, that still appears to be true. Trump’s original round of tariffs hasn’t brought China back to the table. So he just gave them a big nudge: ordering his Trade Representative to start preparing to more than double the tariffs planned on an additional $200-billion of Chinese goods. From 10% to 25%. According to the New York Times, the earliest those higher tariffs would be implemented is probably September, meaning Trump’s latest move is a shot across the bow, for now.

At the same time, the Hong Kong-based South China Morning Post reports China’s been badly stung by some major miscalculations it made in the early stages of the trade battle. So much so that the SCMP reports now China’s spending a lot of time and money trying to “understand” Trump. Something the President must love to hear.

The Alibaba-owned newspaper asserts:

  1. China thought Trump was just bluffing.
  2. When it turned out he wasn’t, China thought it could swoop in and form a trade alliance with the EU to do battle against Washington. Turns out the EU wasn’t that interested.

We’ve been wondering to ourselves what explains the EU’s surprisingly Trump-friendly behavior. The best we can come up with is they’re trying to be the adults in the room. And by that we mean for whatever reason they feel compelled to try to keep global trading relationships as normal as possible for as long as possible. They know Trump won’t be President forever. They hope he won’t damage traditional relationships so irreparably they can’t be fixed when someone new comes in. And to achieve that, they’re willing to make some sacrifices.

Which apparently includes a willingness to be mercilessly ridiculed and lampooned by Trump. For instance, at a rally, where Trump entertained the crowd with a fanciful reenactment of a phone call from the EU where — he says — they begged him for a sit-down (complete with funny voices and gestures).

Trump posted this photo of an embrace with EU Commission President Jean-Claude Juncker on his own Twitter feed

Anyway, Trump’s asking a lot more of China than he is the EU. Which makes sense because China’s trade surplus with the U.S. is a lot bigger. The EU is also a lot better at respecting intellectual property. But while Trump keeps talking about “reciprocal” — how he wants trade tariffs to be reciprocal — that’s not really what he’s asking of China. Because China tomorrow could drop a lot of tariffs with the U.S. and the impact on the overall surplus might not be that noticeable. That’s because demand for Chinese goods in the U.S. market is huge, and demand for finished goods from the U.S. in China is small. So Trump isn’t really just asking for reciprocity, he’s asking for some kind of buying program guaranteeing purchases of a certain level of U.S. goods. Looking at it cynically (although we think still accurately): it’s welfare.

China did stock up on a lot of soybeans from the U.S. right before Trump’s first round of tariffs were put into effect, but soybeans don’t last forever. Now, China is looking to places like Brazil to make up for the loss of U.S. supply.

And one big concern about more than doubling proposed tariff levels: at some point it could backfire. A 10% increase on the price of a towel at Walmart for instance, might not be that noticeable. Or it might not even squeeze American consumers at all. Walmart could pressure its Chinese manufacturer into a discount equal to that tariff, the alternative being losing a lucrative contract altogether. Or Walmart could eat the few cents on every dollar and leave the price where it is, assuming the increase will be temporary. A 25% increase however, becomes a lot more difficult to negotiate away or absorb.

Trade wars ultimately are all about patience, and who’s willing to withstand the economic fallout the longest. We’ve heard Trump even in these early days urge patience on the part of Americans. The tipping point usually is when higher prices start taking a big bite out of the wallets of consumers.