The Trade War

This Is Literally the Only Piece You Need to Read About Trump’s Trade War

Deconstructing the trade war, from front to back.
May 23, 2019
Featured Image
LONG BEACH, CA - SEPTEMBER 18: Shipping containers stand stacked at the Port of Long Beach, the nation's second-busiest container port, on September 18, 2018 in Long Beach, California. China will impose an additional $60 billion in tariffs on U.S. imports in retaliation to $200 billion in tariffs on Chinese imports set by U.S. President Donald Trump. (Photo by Mario Tama/Getty Images)

Prior to escalating the trade war with China through a new round of tariffs, the Trump administration’s reports from inside the U.S.-China trade negotiations had been, for about six months, reasonably bullish. And so, starting in mid-December, the Trump administration delayed the January 1 line-in-the sand effective date of a threatened increased tariff rate on Chinese imports. The idea was that a deal would be signed by Trump and Xi meeting at Mar-a-Lago in March.

That meeting never happened. Even so, for the next two months the proposed tariff hikes were slow-rolled as the administration repeated that progress was steady, a deal was in the offing, and that the U.S. tariffs already imposed on China were working. Then, on May 6, two months after a promised deal, President Trump pulled the trigger on a rate hike to 25 percent—a huge increase over the 10 percent already levied on about $200 billion worth of Chinese imports.

At this point, the administration’s assertion about the effectiveness of the Trump tariff scheme remains a highly unprovable proposition.

There is no deal in hand. Moreover, through 2018, China stopped importing U.S. goods at a higher rate than the U.S. stopped importing Chinese goods. While the 2019 Q1 trade deficit with China was down from Q1 in 2018, it is nonetheless almost spot-on with the five year average between 2014 and 2018. In short: There has been no real change.

There’s more. China’s Q1 2019 trade surplus with the U.S. would have actually grown were it not for some unusually large purchases of U.S. pork due to unrelated circumstances, despite—not because of—the U.S. tariffs.

China started March 2019 with its biggest weekly purchase of pork in two years and ended the month with its biggest purchase in six years to make up for a domestic shortfall caused by an outbreak of African swine fever—a black swan event that has major repercussions for the global pork markets. The epidemic threatens to destroy a quarter to a third of the world’s largest swine herd in the world’s largest pork consuming nation. Those shipments were subject to a 62 percent tariff, mostly because there is a global shortage of pork to fill the gap in China, where the commodity is so important that the government maintains a strategic reserve to help control consumer inflation.

Nonetheless, according to President Trump, tariffs are the key to starting America’s economic engine. “If you looked at the first quarter, which is always historically the worst quarter, we were at 3.2 percent [GDP growth],” he said.

This led the president to conclude that “a lot of that was the tariffs we’re taking in from China, so we’re in a good position.”

It’s true that the GDP results were above market expectations. And it’s true that the change in net exports was, in fact, the driving factor—based on fewer imports into the United States. But that is only part of the story. With imports from China down, overall, imports of consumer and intermediate “other goods” actually increased in February. Our bilateral trade deficit with Japan, for example, increased.

What is concerning, however, is the reason behind the net drop in overall imports was a substantial decline in the receipt of industrial supplies and materials. Think steel and aluminum, and the tariffs on them. Of course, that category of imports helps drive mid- and long-term economic growth through expanded domestic industrial production.

It’s no coincidence that the GDP report showed weak industrial investment numbers. Investment in equipment grew only 0.2 percent.

Investment in structures, which includes factories, dropped 0.8 percent.

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Indeed, that’s where Trump’s “America First” trade agenda is off point at its core.

It views trade deficits as a sign that American is “losing” economically. This view is wrong, just as the notion that trade surpluses are a sign of “winning” is wrong.

If this worldview was correct, then two of the top economies in the world would be Italy and Venezuela, who run consistent trade surpluses.

No, when it comes to trade and economic growth, what matters is the volume and value of two-way trade. For context, two-way trade in goods between the United States and China is about $659 billion. Which is almost the size of Switzerland’s GDP.


We’ve had punitive tariffs on China for almost a year-and-a-half now, and still there’s been no deal.

Starting in January 2018, the U.S. slapped duties on imported Chinese dishwashers and solar panels. Next, Trump ordered so-called Section 232 national security tariffs on steel and aluminum (on China and the whole world). He then added a tranche of 25 percent tariffs on two baskets of goods totaling $16 billion and $34 billion respectively ($50 billion total). Then finally in May 2018—one year ago—a 10 percent tariff was imposed on $200 billion of Chinese imports.

That last tranche was scheduled to see the rate hiked to 25 percent on January 1, 2019, (as noted above) but that increase was pushed back twice, and on March 5, was left in limbo with the USTR officially declaring that the duties would not go into effect “until further notice”—again owing to reported progress on the bilateral talks.

The “notice” ultimately came on May 6 and the higher tariffs of 25 percent were implemented on May 10.

Meanwhile, China announced it will retaliate again on June 1 with a list of 5,140 items to be hit with tariffs ranging from 5 percent to 25 percent. These are in addition to the retaliatory tariffs triggered over the last 18 months, including on U.S. soybeans (imposed in March) and pork (imposed in April and increased in July). The impact of those tariffs has been devastating on American agriculture, which is the country’s leading trade surplus industry. Last year, USDA authorized $12 billion in trade mitigation relief funds, and with this new round of tariffs President Trump is promising another aid package of around $15 billion or more.


Dumping this kind of money into the market in serial deposits has unintended economic consequences. Market signals are obscured, and the effects can ripple through the normal channels of commerce, affecting everything from planting decisions to the timing of grain marketing. At best, these payments are band-aids, not a cure.

The general rule of thumb is that every $1 in agricultural exports generates $1.27 in the larger U.S. economy, through jobs and commercial activity associated with merchandising, transporting, and processing basic commodities. That infrastructure—which is the competitive advantage of the United States—is facing lean times as well. Farmers don’t do well when their customers are broke.

Trump’s tweets suggest a large percentage of the new money will be spent on diverting U.S. commodities through global food aid donations. That could seriously undermine global commodity markets. In the end, U.S. farmers would not be much better off, although trade law attorneys around the world would be sure to enjoy a windfall with all the cases filed against the United States in the World Trade Organization.


Throughout this trade dispute, America’s four main negotiating objectives have been very clear. Two goals are intended to fix serious systemic and structural problems where China is a bad actor: protecting intellectual property and putting an end to coercive tech transfers. The two other pillars range from specious (i.e. an end to perceived currency manipulation) to misguided (a reduction in China’s bilateral trade surplus with America).

To date, it has been less clear what the Chinese want themselves—other than to preserve all of the above. But Trump’s latest move on increased tariff rates has resulted in a crystal clear statement from the Chinese. In response to the latest hike, China has listed three objectives: Remove all extra tariffs; set targets for Chinese purchases of goods in line with real demand; and ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations.

What those demands mean in terms of ongoing talks is worth considering.

First, China’s call for ending tariffs is a tall order. Consider the tariffs placed on Canada and Mexico—the same Section 232 tariffs on steel and aluminum to protect U.S. national security that apply to China. (That’s right, the national security threat posed to America by . . . Canada.) Those duties were imposed to bring our North American neighbors to the negotiating table to update the NAFTA trade agreement, fulfilling a campaign pledge of Trump’s.

Even though a new deal, rebranded as the U.S-Mexico-Canada Agreement (USMCA), was finalized last fall and signed on December 1 2018, it took until May 17, and the latest escalation with China to remove those tariffs as promised. It also took the urging of the Senate Finance Committee Chairman Chuck Grassley, who said Congress wouldn’t approve the USMCA deal until the administration rescinded the tariffs so that Mexico and Canada would remove their retaliatory tariffs in turn. For context, Mexico—which maintains zero tariffs on almost all U.S. ag products—buys more pork from the U.S. than any nation has ever purchased from another.

The Trump tariff strategy was thought to be a “carrot and stick” play, but instead has been used solely as a stick. For example, with the USMCA done and dusted—but not yet implemented—the U.S. just imposed anti-dumping duties on Mexican tomatoes. That is despite an agreement already in place since 2013 whereby Mexican tomatoes cannot be sold in the U.S. at less than a minimum floor price.

Rather than renegotiate that floor price under an existing pact, the administration imposed new duties.

In short, given the example of maintaining and increasing tariffs on Mexico—even after a trade plan has been negotiated—it seems unlikely that President Trump will remove the current tariffs on China prior to a deal being completed. And China is now signaling they won’t sign a deal until the tariffs are removed. Which should have been predictable, since Beijing was able to observe how Trump treated Mexico.

Second is setting “realistic” target goals for purchases. The details of the talks have been pretty opaque to date, other than general discussions about currency manipulation and some informed speculation about which commodities would be included in an at-one-time anticipated $30 billion purchase commitment by China (which had reportedly been on the table early this year). Increasing energy commodities were also part of China’s tentative initial offer.

From China’s initial perspective, bigger imports from those two sectors (much of which they’ll have to import from somewhere anyway) were meant to address the U.S. demand that the overall dollar volume of the two way trade balance be brought down. But, what did the administration expect the tariffs would do? If the goal was to bring China’s economy to its knees, as the president is claiming his plan has done, then the assumption that there could be huge, immediate gain in China’s buying of U.S. goods and commodities defies logic.

Third there’s preserving the “dignity” and “balance.” This is a rather vaguely worded goal, however, at the core of this demand is a mutual objective: China and the U.S. both seek to maintain sovereignty over their own policy structures. President Trump is absolutely right to seek commitment to protect the intellectual property rights of American companies overseas. That is a fundamental issue.

China, however, can be expected to balk on U.S. demands that it change its monetary policy. Apparently, the U.S. Federal Reserve is not the only central bank Trump is seeking to micro-manage. More to the point, however, adding specific commitments on monetary policy into trade agreements is a slippery slope, at best. Imagine if the shoe were on the other foot, and Europe, for example, made demands of the U.S. Federal Reserve.

As for agriculture policy, the U.S. has also called for China to reduce their government controlled stocks of commodities—specifically corn, wheat, and rice. Again, China sees this as impinging on its sovereignty. Of course, it is going to be complex negotiation. The largest U.S. ag export to China has been soybeans, the one commodity for which China does not maintain a strict self-sufficiency policy, in part because of the unintended production consequences of subsidizing and stockpiling those other crops.

However, that may be changing, because of the effects of the trade war. American soybean exports to China dropped about 60 percent or more in the last crop year. As a result, China announced in March that it will begin subsidizing soybean production and move to cut corn acres this year.

President Trump says that China backed out of a “great deal,” and reportedly China did seek to drop about a third of an approximately 150 page draft plan. President Xi’s cold feet about finalizing a trade agreement came, not surprisingly, after the March convening of the National People’s Congress (NPC) in Beijing. No doubt Xi is under political pressure not to cave to American demands—thus the boilerplate language about “dignity and balance.” So the whole process is back to the drawing board and in Washington and Beijing, further plans are being made for mitigation to buoy the world’s two largest economies through the consequences of their extended trade war.


What seems obvious now is that Xi has a tactical advantage over Trump in the short run.

With a command economy, there are many levers at Xi’s disposal to get China through a temporary trade war—options that a U.S. president just doesn’t have. For example, China has made clear that it will be pursuing more fiscal stimulus policies. China’s economy contracted somewhat in 2018, but that arguably was due to planned fiscal tightening as much as the Trump tariffs. Which means that there is no reason to believe that if tightening had an impact last year, then a stimulus plan won’t this year.

And if the tariffs did trigger last year’s tightening, then it would appear that China was planning for a longer run than was the United States. China has plenty of room to maneuver; its budget account deficit is about 3 percent of GDP. In the U.S., the deficit will come in at an estimated 5.1 percent of GDP this year.

China will also be making more credit available to their private sector and will be pursuing stimulus through public spending projects similar to another of Trump’s campaign promises (his vaunted infrastructure package, which is always just over the horizon). The key political difference here is that Xi doesn’t need to negotiate with a hostile legislature in order to enact his plan. The key economic difference is that China has a massive population undergoing a significant urban migration—meaning that new roads, hospitals, and other infrastructure is likely to have a bigger impact on longer term economic growth than does the addition of marginal infrastructure improvement in America. You don’t get much economic utility from a “bridge to nowhere” once the construction phase is completed.

Think about China’s advantage this way:

The baseline GDP formula for the United States factors private personal consumption at about 70 percent of economic growth and gross government consumption and expenditures and gross investment at about 19 percent.

In China, the GDP formula is somewhat similar—except that personal consumption includes the consumption of government provided services (medical, housing, recreational, and “cultural”), as well as the change in inventories held by state owned enterprises. China maintains financial reserves for just such things, albeit at the overall net expense and detriment to its citizenry. (The pork reserve is one such example.) All of which means that if China wants an immediate bump in GDP, it can create it in short order.

The bottom line is this: There are, and have been for a long time, bad actions by China on trade and a dire need for structural reform. Achieving these reforms with a country so large is hard enough. But in this case, it’s made more difficult but the China’s unique culture.

President George W. Bush addressed this challenge by bringing China into the WTO in order to force compliance with global trading rules. But that didn’t work. Two-way trade grew significantly, but so did China’s manipulation and disregard of WTO rules it didn’t like (including coercion on tech) and ad hoc non-tariff barriers on U.S. ag commodities—including over the decades, beef, chicken, pork, corn, wheat, ethanol, and more.

President Obama focused on diplomacy and engagement (such as a bilateral investment treaty and the U.S.-China Economic and Strategic Dialogue) and through indirect leverage (including the Trans Pacific Partnership, a multi-nation trade pact among countries in the Americas and Asia intended to be a counterbalance to China’s economic influence in Asia). That approach didn’t work either. And to compound the problem, Trump pulled out of the TPP. Which has put U.S. exports to Japan at a tariff rate disadvantage as tariffs drop from other TPP countries, including Canada, Chile, Australia, and Mexico.

All of which suggests that the next logical step in attempting to deal with China should have been a “get tough” stance. Which is what President Trump has undertaken.

The problem is that the Trump approach appears to be limited to the tactic of tariffs. This is a shortcoming in its own right—but all the more so when dealing with a sophisticated and strategically-minded adversary. As Senator Rob Portman—a former U.S. Trade Representative—has noted, tariffs should not be an end game.

Yet here we are, weeks away from 100 percent of the bilateral trade between America and China being under mutual punative tariffs. (That is, assuming President Trump makes good on his threat to add the remaining $300-ish billion of imports to those being currently tariffed at 25 percent.)

Ironically, the president seems giddy at the potential federal revenue that tariffs could generate, which can be doled out into the economy. It is almost as if he is—unwittingly or not—pursuing a plan to mimic the Chinese command economy structure.

Dave Juday

Dave Juday is a commodity market analyst and the principal of the Juday Group.