General George Custer met his doom charging into a battle he thought he could win, against an opponent he did not understand. Based on his views about the fast-emerging trade war with China, it looks to me that Donald Trump, another blonde with a very high opinion of himself, is charging into an economic version of the Little Bighorn. By mistaking the real nature of international trade, the costs of tariffs, the effects of currency movements, and the supposed ease with which the United States could quickly re-establish itself as a low-cost manufacturer, Trump risks shredding the safety nets that have undergirded the U.S. economy for decades and plunging us into a war we are ill-equipped to fight.
The prevailing view is that a trade war hurts both sides, but in a war of attrition, we can both outpunch and outlast the competition. Many argue that based on its smaller economy, the spotty performance of its stock market, and its vital need for American customers, China is in a weaker position. With our larger economy, surging stock market, strong currency, and prodigious borrowing capacity they believe that the U.S. can pressure China to capitulate, albeit with some short-term pain.
But President Trump goes much further, and asserts that a trade war itself, not just the results that may flow from it, will be a boon to America. He believes that tariffs are currently boosting growth and are restoring our manufacturing prowess. Based on his rhetoric, it's hard to imagine why we would ever want a trade war to end. CNBC's Jim Cramer went one step further, arguing that tariffs may place a small burden on U.S. consumers but Chinese manufacturers will cut prices in order to preserve U.S. market share. In other words, China will throw itself on a grenade meant for us by bearing the cost of the tariffs, and their expenditures will flow directly into U.S. coffers.
Many are also arguing that China's potentially heaviest weapon, its ability to dump more than $1 trillion in U.S. Treasury Bonds onto the open market, is unlikely ever to be used. They argue that such selling could cost China too dearly as it would reduce the value of China's own Treasury holdings and strengthen China's currency against the dollar, thereby further disadvantaging Chinese exporters looking for U.S. market share.
Before I delve into the emptiness of these arguments about tariffs and Treasuries, a quick word about Trump's negotiating skill and his potential motivation. For weeks, he has been saying that the Chinese have been dragging their feet because "they were being beaten so badly" in the negotiations. Basic tactics would suggest that a way to get your adversaries to agree to a deal that is not in their interest is to convince them that it is in their interest. By saying loudly that the deal favors the U.S., Trump is not exactly pushing them over the finish line. In my mind, Trump may not want the agreement. He may just want the war instead. More importantly, the economic uncertainty could force the Federal Reserve to cut interest rates, which may be his most desired outcome.