An Urban's Rural View

The Most Important Battle in the Trade War

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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China's economy is heavily dependent on exports. The huge tariffs the U.S. is imposing on Chinese products will cause serious economic pain. (Photo by cseeman; BY-NC-SA-2.0)

The battle in the trade war that matters most is the one between the United States and China. Handicapping the likely outcome isn't as easy as you might think.

It's true that the U.S. holds a lot of cards; China sells a lot to the U.S. But the Chinese hold some cards, too.

The U.S.-China battle is the most important in many ways. Start with size. These are the world's two largest economies and they do $583 billion in bilateral trade. (The U.S. $295 billion trade deficit with China is far and away our heftiest.)

It's important, too, because China is challenging the U.S. position in the world geopolitically, technologically and economically. Fear of China's dominance of world manufacturing and America's dependence on China's factories is an underlying reason for the war.

The battle is certainly important to American farmers and ranchers. China is a huge market with an enormous appetite for foreign agricultural products. The U.S. was China's preferred ag supplier until President Donald Trump's first-term tariffs turned China more to countries like Brazil. This trade war threatens to further erode China's interest in U.S. ag goods.

Combatants in a big battle wield big weaponry. At 145%, Trump's tariff on Chinese products is nearly three times larger than the next highest rate he imposed. China retaliated with 125% tariffs on U.S. goods and has stopped selling the U.S. some critical minerals we have a hard time buying elsewhere.

Lately Trump has indicated he'll lower the China tariffs, though he hasn't said how much. Both sides have started granting exemptions to certain products. There's talk of negotiations, though so far just talk.

Who will win this battle? In a shooting war, winning means inflicting casualties the opponent cannot bear. Assuming that definition applies to trade wars, the key thing to examine is each country's ability to tolerate pain.

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The U.S. economy is consumption-driven; personal-consumption expenditures constitute nearly 70% of GDP. We consume more than we produce; we buy a lot of what we don't produce from China. We don't have alternative sources for some Chinese imports. There's already talk of a Christmas toy shortage.

If tariffs end up giving us higher prices, empty shelves and a slowing economy with fewer jobs, voters will be unhappy. The president knows he was elected to bring down prices, not propel them higher. An inflationary surge would undermine America's staying power.

Public opinion isn't our only pain point. Financial markets are jittery, too. When they tumble, this administration tends to react.

China, by contrast, has a production-driven economy. Household consumption is only 40% of GDP. Because China produces a lot more than it consumes, its economy is heavily dependent on exports.

The U.S. is China's largest export market. If tariffs effectively seal much of our market, Chinese factories will close and workers will lose jobs. That's already starting to happen. It will get worse.

Chinese leaders, however, are not elected. They rule with a strong hand and need not be as sensitive to public opinion as American politicians. They're not as sensitive to markets, either. China's leaders can simply order big investors not to sell, as they've reportedly done of late.

It's instructive to recall what happened during the worst years of the COVID-19 pandemic. China adopted a zero-COVID policy that made ours look wide open. It included harsh lockdowns, quarantines, testing and mask mandates.

Despite the economic pain this inflicted, Beijing stayed with it for nearly two years. Only after widespread "white paper protests" -- large numbers of Chinese holding up blank sheets of paper hinting at what they wanted to say -- did their leaders begin to relent.

China holds two other cards. For a time, at least, government spending can goose the economy, substituting domestic consumption for exports.

Meanwhile there's nationalistic sentiment. Beijing is urging the Chinese to prepare for a long war against the U.S. "bully."

Can China gut out big factory layoffs the way it gutted out COVID? That's unclear.

Can the U.S. gut out rising inflation, a slowing economy and market turmoil? That, too, is unclear.

What's clear is that there are pain points on both sides. Neither holds all the cards.

It may not be easy to negotiate a deal that lets both sides claim victory. Neither side can afford to look like it's backing down. Moreover, the Chinese have to wonder exactly what President Trump wants.

At times he seems to be demanding an end to China's trade surpluses. That would require China to reduce drastically what it sells to the U.S. Lately he has spoken of "substantial" Chinese purchases of American products.

That might be good for American farmers and ranchers, but we're a long way from taking anything to the bank. The Chinese are tough negotiators. They may think they have time on their side.

The battle has just begun.

Urban Lehner can be reached at urbanize@gmail.com

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