Monday, November 19, 2018

Trump’s trade tariffs, a ‘fool’s errand’ that won’t work and will backfire

Trump did not have to resort to tariffs. All he needed to do was make it very clear to Chinese leaders that there had to be significant changes made to the trade relationship...

Image Credit: Signs of The Times

Someone should have told Trump that the one thing he must never even consider doing is to start an economic war with China. Unfortunately, that’s what this president, an economic lightweight, recently did.

This is not yet a trade war but it could easily evolve into one. In such a war does China have the weaponry to fight back against the U.S. tariffs that Trump initiated?. You bet it does, more than one might think. So let’s talk about some of this weaponry.

China has a very large, growing economy powered by a huge manufacturing sector, the largest in the world, one that the U.S. once operated until American companies decided that they could generate much greater profits by replacing American workers with those in China. So they transferred the bulk of their manufacturing to China.

It’s difficult to determine what the average hourly wage of Chinese workers is because wages across this huge country vary so very much. By reviewing the typical wages in the largest manufacturing sectors such as Beijing, we find that they are somewhere between $2.20 and $3.60 per hour. They have been increasing in recent years.

Compare that to the $7.25 per hour minimum wage in the U.S and the fact that wages for jobs in what’s left of the U.S. manufacturing sector are much higher. Also, we will soon be seeing U.S. companies following Amazon’s recent move to adopt a minimum wage of $15.00 per hour.

So how in the world does Trump think U.S. companies are going to be able to compete with Chinese manufacturers?

On July 31 of this year, Trump said that U.S. Steel was opening six new steel mills but that company has not verified it. It has shown no intention of doing so at this time. Why would it spend many billions on new mills when it knows it cannot compete with China in the production of steel?

Will these Trump tariffs hurt China and adversely affect its economy? Without question, they will to a certain extent and it’s a dilemma for that country. But, as we know, the Chinese have so much economic power that they can absorb a lot of hits to their economy if need be and then bounce back.

Why are these tariffs going to backfire? They are actually a tax on Chinese products coming into America and are going to hurt many American companies and consumers. Are consumers going to stop buying much higher priced Chinese products such as cell phones, TV’s, computers, and other electronic products that the U.S. no longer makes? No, but they certainly will cut back their purchases.

Prices on a myriad of imported products are rapidly increasing. Prices of steel, used on a multitude of products, are skyrocketing. Auto industry analysts are reporting that we could see the prices of autos increase by $8,000. When you buy a washer or dryer in the near future you will pay a lot more.

Harley Davidson is moving some of its production to Europe, and other U.S. companies are contemplating doing the same.

China is retaliating against U.S. tariffs by slapping their own tariffs on American imports, and farmers in this country are seeing Brazil, Canada, Argentina, and Russia shipping more and more soybeans, corn, and wheat to China. The relationships farmers have built with China are rapidly eroding.

China could retaliate in other ways. For example, it could devalue its currency to make their exports less expensive.That would create turmoil in the financial sectors and also negate these tariffs somewhat.

If China gets to the point of no return would it actually consider selling off some of its holdings of U.S. securities? This would be a last resort for it but when it’s economy takes a massive hit because of the tariffs anything can happen. And such a move would prove to be disastrous for the U.S.

Why exactly? So far this year, the federal government has paid more than $455.6 billion in interest on its national debt. It paid $458.5 billion in interest on the debt last fiscal year. When the figures for August 2018 interest payments are calculated, the government will have spent more on interest in fiscal year 2018 than all of fiscal year 2017.

China’s current holdings of these securities are is $1.17 trillion That’s 19 percent of the $6.3 trillion that foreign nation own in treasury bills, notes, and bonds. Obviously, the U.S. government is highly dependent on the input of this money to help in paying off this massive interest burden.

While I don’t think that it would actually go to that extreme China could threaten to do it as a bluff to scare the U.S. government so it backs off the tariffs. Trump and company might not want to call this bluff because of its great need to have China continue to buy these securities.

Yes, this would have to be a last resort for China as buying U.S. securities offers the safest haven for its foreign reserves. In effect, this means that China is loaning money to America to help in buying Chinese products. Therefore, it’s good for both countries.

Putting an end to this tariff confrontation would be beneficial for both of these nations. China will continue to have access to a huge market for its products, and the US benefits from the low prices of Chinese goods.

As this situation continues to deteriorate the stock market will continue to react in a negative manner sending stock values down and this will have an adverse effect on Americans.

None of this had to happen. Trump did not have to resort to tariffs. All he needed to do was make it very clear to Chinese leaders that there had to be significant changes made to the trade relationship because of its great importance to both countries. And that America would not take no for an answer. That would not have been easy but he didn’t even pursue it.

It’s called using negotiation to work out problems, nations working together to solve them; something that Trump does not know how to do. So all we need to do is to just wait a while and watch as the backfire on tariffs takes place.

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