In an unsuccessful effort to win a Pennsylvania House seat by policies that were more about making noise than making progress, Donald Trump imposed import tariffs on steel and aluminum. The tariffs were imposed over strong warnings from several members of Trump’s cabinet, and Gary Cohn, Trump’s top economic adviser, walked out when Trump ignored that advice in favor of his own “very good brain.” Trump has since been forced to walk back those tariffs on Canada, Mexico, Brazil, and South Korea—the largest steel exporters to the United States, along with several other allied nations. The way Trump has handled this episode is exactly why such tariffs rarely, if ever, result in the creation of significant investment or jobs. They are subject to political whim and pressure. Trump has already backed down from imposing a tariff on almost 90 percent of imported steel.
That leaves his tariffs dangling over the trade of just a few nations—among them China. Less than three percent of US steel and aluminum imports come from China, and almost all of it is specific alloys that are not made in US factories imported to fit the needs of particular projects. But Trump, whose understanding of trade imbalances seems to be even less than superficial, has been looking for a place to take a shot at China. And this was his shot.
Now China is shooting back.
China has implemented retaliatory tariffs of up to 25% on $3bn in food imports from the US, raising uncertainty over the possibility of a trade war between the two countries.
China is going after products that the US genuinely exports in bulk—including pork, fruit and wine. The return shot is fired at farmers, because that’s where they can do the most damage. And that’s how trade wars work. But not to worry. Donald Trump has this under control. Because he has already lined up another $60 billion in tariffs against more Chinese goods.
Trump inherited a burgeoning economy and a booming stock market. And he just managed to wring out of that market its first quarterly loss in three years, through little but his own stubborn insistence on starting a trade war for political purposes.
There’s still plenty of room for this trade war to escalate. China is the third largest export market for American-made goods. With over $115 billion heading out of the United States, they can easily up the ante when Trump makes his next move. And while there’s more than three times as much Chinese material heading the other way, that may not leave quite the room for delivering blows that Trump thinks.
The bulk of what the US imports from China is, unsurprisingly, electronics ($129 billion) followed by machinery, furniture, toys and shoes. Many of these things are manufactured in China explicitly for US companies. The transient nature of tariffs means that few companies will respond by moving these products elsewhere. Consumers will just be faced with higher prices to absorb the tariffs.
Similarly, the US exports both aircraft ($15 billion) and cars ($11 billion) to China. Some of these items may shift their manufacture sites to avoid tariffs, such as shifting auto production to plants owned by US companies sited in Mexico. But for others, it will simply make these products more expensive in China. Some of these items, like the planes, will be purchased in any case. But a Chinese consumer who finds that Fords are more expensive at the dealership, has options.
The biggest item that China gets from the US is agricultural goods. They are the second largest export market for farmers and ranchers, taking in huge quantities of soybeans, corn, cotton, leather and pork. None of those items is unique to the United States. In the short term, placing tariffs on these items may raise prices in Chinese markets, but agricultural goods are fungible. US pork can be replaced by pork from Mexico, or Brazil, or some combination of nations. These products are not complex, or specific to manufacturers. If the tariffs are sustained over a longer period, they won’t cost more—they’ll simply be purchased elsewhere.
And US farmers will pay the cost of the tariffs in lost sales and higher consumer prices.
At the moment, China is showing restraint. Trying to match their replies to the shots fired into the market by Trump.
Analysts say the fact that China’s tariffs do not cover some of the US’s biggest exports to China, such as soybeans, is a sign Beijing wants to avoid an all-out trade war.
But if Trump goes ahead with the larger set of tariffs, he will have punched the button for an all-out trade war—and blown a giant hole in the economy.