Trump blinks in tariff war

San José, CA – On Wednesday, April 9, one week after President Trump declared a universal 10% tariff and for all the countries that the United States ran trade deficits with, he announced even higher tariffs of up to 50%. Even while members of his administrators were saying the tariffs were going to stick, Trump blinked and declared a 90-day pause for all countries except China.

While Trump tossed off the large declines in the stock market last Thursday and Friday, April 3 and 4, this week bond prices began to decline, driving up interest rates. These higher interest rates seemed to threaten Trump’s ability to get his tax cuts passed in Congress, so Trump pulled back.

While most of the world breathed a sigh of relief, Trump did not mention the tariffs that he put on Canada and Mexico. Nor did he pull back on the 25% tariffs on imported automobiles, which will hit Mexico and Canada especially hard, given how the auto industry has integrated their supply and productions over the three countries since the signing of the North American Free Trade Agreement in 1994.

Trump even increased tariffs on China to 125% after China matched Trump’s tariffs, bringing the Chinese tariffs on U.S. imports to 84%. So far, China has not responded to Trumps latest escalation. Trump and most economists think that China is weaker because they sell more to the United States than the U.S. sells to them. But China mainly buys agricultural goods, oil and gas, electronics, medicinal drugs, and airplanes from the U.S. – products that China can either buy from other countries or can make themselves. On the other hand, it would be harder for the United States to replace the large amount of consumer electronics (such as the Apple iPhone) and rare earth elements that the U.S. mainly sources from China. In addition, the U.S. runs a large trade surplus in services that China could also restrict.

While China exports more to the United States than any other country, the U.S. only accounts for less than 15% of China’s goods sold abroad. Even since the first Trump administration and his tariffs on China, China has been diversifying its trade away from the United States. Further, pulling back on tariffs from the rest of the world will still allow Chinese companies to shift their production to other countries, especially the private companies that began to so this long before the Trump trade war because of rapidly rising wages in China.

China’s sophisticated supply chains, skilled labor, and machinery means that some U.S. businesses will refuse to move production out of China. They figure that Trump’s tariffs won’t last forever (in fact of the rest of the world the so-called “reciprocal tariffs” didn’t even last 24 hours before Trump “paused” them). And in the meantime, they can look for other countries to export to from China and try to find ways to cut costs in China.

Last but not least, China has a greater ability to offset the pain of tariffs domestically through government borrowing and spending. The U.S. government budget deficit is already very large, at $1.8 trillion, and growing as the economy slows. The Republican majority in Congress is much more interested in renewing Trump’s 2017 tax cut that mainly benefited corporations and the well-to-do, while food programs that benefit the poor are already being cut. China’s people are much more united against the U.S. tariffs and Trump, whereas most Americans do not support Trump’s tariff policies, even before most the side effects, such as higher prices and layoffs actually hit.

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