Trump's no-win trade war
We are now, officially, in a full-fledged trade war. Effective Monday morning, President Trump will be taxing half of China’s imports into the US, with aggressions set to intensify further in January when the tariff rises from 10% to 25%.
Trump's bigger-picture view is well-known: "TRADE IS BAD." That's all trade, not just trade with China. So be wary of rushing to the conclusion that Vietnam and other southeast Asian countries could end up being the winners in this trade war, as companies move their operations out of China. More realistically, as in most trade wars, there will be no winners at all.
- The trade war could become a currency war if the Chinese government continues to keep weakening the yuan as tariffs hit domestic exporters. That's not a likelihood, yet, but it's something to worry about.
- Trump doesn't begin to understand Ricardo's principle of comparative advantage, and he also doesn't understand tariffs. (He thinks they're paid by China, when in fact they're paid by American importers.) When the guiding principle at the top of the US government is "trade is bad," it's hard to see what would cause this war to end.
This trade war could last for decades, if not forever. American voters share Trump's ignorance of Ricardo, which means that there's not much political incentive for a president of either party to rapidly normalize trade relations.
- Canada is in the crosshairs, too: Trump has threatened its "ruination" in the event that a new NAFTA deal isn't reached.
- So far, market reaction to the trade war has been muted. That's bad news. If the tariffs had been greeted by a 900-point plunge in the Dow, Trump might take the wails of pain more seriously.
- Alibaba's pledge to create 1 million US jobs has already been vaporized. It won't take long for real jobs to go the way of hypothetical ones.