US-China trade war – 8: Can this get back on track?

So, here we are at the end of the series and back to the original questions: Will this trade war come to an end? Will we have tariffs on an additional $325 Bn? How long will this last?

The difficulty about predicting the outcome of this kind of event is that it does not depend on the logic of our wishful minds. Instead, it depends on the cold calculations of the leaders involved.  Since we do not know their minds, we are confined to examining their environment to try and understand what they will do.

So, over the last month we addressed the fact that the trade dispute is justified and that only the US has the clout to push for change; that tariffs are both a tax and a bargaining chip; that size matters and that a conflict between two giants affects the whole world.  We examined negotiations, what went wrong in March and what may go wrong again.

We also addressed the un-sung seeker of efficiencies, the importer who, in all its forms, suffered the most from this dispute.  We pointed out the obvious ways importers would protect themselves and how they needed clarity of vision to continue to supply the marketplace with low cost goods.

All through this, it became clear that it was up to Trump and Xi to show leadership, to cut the Gordian knot and agree to a new platform of trade relations.  During the writing of these blogs progress did occur; there was evidence that both leaders were willing to step away from the brink.

The main elements that will enable a trade agreement should be clear by now.  But a couple of points deserve highlighting before I offer my predictions.

The Fallacy of Tariffs

Tariffs add little to no value as a tax.  They are only useful as a bargaining chip; a tool that provides leverage for necessary change.  And, as such, the quicker the results, the better for all concerned.

A recent article from Liberty Street Economics illustrates this well.  Its analysis shows that there are two components to the cost of tariffs:

  • An added tax burden faced by consumers
  • A deadweight or efficiency loss

The article affirms, as do many other studies, that tariffs lead to a complete pass-through into domestic prices.  In other words, neither the Chinese suppliers, nor the importer bear the brunt of the tariffs.  The consumer does.

The fact that the treasury collects the tariffs adds little to no value to the economy because the immediate consequence of tariffs is to move the goods to countries who do not have them.  The higher the tariffs, the quicker the move.

Once this happens, the treasury no longer collects tariffs but the consumer, still in effect, pays the “tax,” the higher costs.

In Tariff wars, the losers are the consumers and the US economy in general. The only winner is the US Treasury – and only for a short time.

The Bigger Picture 

What has emerged from this journey of discovery is that this is not just a dispute between the US and China, this is a just cause as well as global issue, the outcome of which will affect us for decades to come.   The quick resolution of the dispute is clouded by many factors:

  • Isolationism
  • Fear of China
  • Legitimacy
  • Unforeseen consequences


“Trade keeps our economy open, dynamic, and competitive, and helps ensure that America continues to be the best place in the world to do business.”
Office of the United States Trade Representative.

Nicely said, but not representative of what the Trump administration is doing.

“I will bring jobs back from China and all sorts of countries that have stripped us from our jobs”


Trade is about efficiency, and for America to be “the best in the world to do business,” there should be no government intervention, and no tariffs.

Let’s be clear: the objective of reaching a new trade agreement with China should not be to “bring jobs back to the USA,” however, as politically exciting as this may sound, it is to repair unfair trade practices and set them on a sounder footing for a stable future.

The unjustified fear of China

With elections looming next year, one hears a lot of politicians venting about the rise of China, the danger of its high tech industry, etc.   China bashing is a favorite tool of US politics, but it sometimes borders on hysteria.

One would think that politicians, democrats and republicans alike, would understand that China’s rise is neither a bad thing, nor is it inevitable.  There is nothing to fear, but fear itself, to paraphrase FDR.

To fear China means that we are oblivious to its challenges and tacitly admit that we believe its government system is better than ours.

The facts are that:

  • The whole world will benefit if China continues to rise peacefully.
  • It is far from certain that the CCP will succeed in its current form

The world should watch and support China with respect, rather than fear it. We should not be afraid of China’s ability to compete, instead we should welcome it and use this competitive spirit as a spur to our own.


While the US should welcome China’s rise, at the same time, we are fully justified in demanding fair trade practices and in insisting on an even playing field for market access. But we must lead by example.

Recently there was disturbing evidence that the Trump administration does not do this.  It does not respect the trade deals it makes and is quite willing to using trade as a weapon to force its will on other nations.  Using tariffs to force Mexico to prevent migrants from crossing the Rio Grande (not a trade issue) creates a climate of instability with America’s trading partners.  And doing this despite having recently signed the USMCA creates distrust. The Trump administration has behaved in a similar ways with many countries, including Canada and India.  China paid close attention.

Unforeseen consequences

We have also witnessed a backlash from a large number of US companies who lobbied hard for an end to the trade hostilities.   A particularly interesting example was Apple.

Tim Cook was the master mind behind the set up of Apple’s China supply chain which enabled lower costs for higher profits for Apple.  It also has given Apple access to China’s market. He lobbied very hard to prevent tariffs on iPhones and tried to use his clout to ease trade tensions.

Morgan Stanley estimates that it would add $160 to the cost of a $999 iPhone X if 25% tariffs were levied on these products.  And yet Tim Cook not only does not seem to have a plan B for making Apple products outside of China, but he just moved the Mac Pro production from the USA to China.

Why has he done this?

The answer seems to be in 3 parts:

  1. China is the lowest cost provider – it is difficult to replace. (Apple tried India, not working so far. Foxconn said it would provide alternatives to China – but probably not at the same cost.)
  2. China is also a market for Apple. With $52bn in sales in China (2018) Apple has a vested interest in maintaining good relations with and open access to China.
  • Tim Cook believes a trade deal will eventually be made and that tariffs will not be imposed on Apple products.

Can This Get Back On Track?

The damage done:  It is considerable, both in dollar terms and in terms of trust and reputation.  But is it enough?

  • Public taunting was a big part of the problem and remains a big concern. Example: The Chinese can agree privately to change laws, but not publicly.  They would be justifiably concerned about a triumphant tweet about how Trump forced the CCP to back down.  This could be the biggest obstacle to an agreement.
  • The hardliners in the CCP may need more economic pain to convince them of the need to agree to US terms.

Where we stand now.

  • Trump agreed to halt additional tariffs indefinitely
  • The existing 25% tariffs will be kept in place until an agreement is reached
  • Huawei will be allowed to purchase key US components, but it is not off the hook
  • China will buy more US agricultural goods
  • China will facilitate foreign direct investment and improve control of joint ventures in China
  • China will go back to the negotiation table
  • Tellingly, no timetable for an agreement was given

In other words, we do not have an agreement, but we have backed off Armageddon.

The likely path:  This is what I get from reading those tea leaves:

  • 95% of the substance of a deal has already been addressed
  • A contract draft is already in place
  • It would take less than two weeks to complete
  • Distrust and personalities will delay things
  • The current level of pain can be endured by both – so far

Conclusion:  I perceive no great hurry by either party.  Trump is politically comfortable to hold the current status quo and Xi needs encouragement to sign off on the deal, especially its enforcement clauses.

So, I predict the following:

  • Will we have tariffs on an additional $325 Bn? No, there will be no escalation of hostilities
  • How long will this last? A deal could be signed during the fourth quarter
  • Will this trade war come to an end? Certainly.

Thank you for staying with me on this topic during the last few weeks.  I am very interested in your opinions on the above predictions and, in general, on how this trade war has progressed.


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