U.S. President Donald Trump shakes hands with China's President Xi Jinping during a meeting on the sidelines of the G-20 summit in Osaka, Japan, on June 29, 2019.Susan Walsh/The Associated Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
It turns out that trade wars are neither good nor easy to win, notwithstanding Donald Trump’s claim to the contrary. After a week of insisting he wouldn’t change course – and a mere day after boasting that “countries are calling us up, kissing my ass. … They are dying to make a deal: Please, please, sir, make a deal, I’ll do anything, I’ll do anything, sir!” – the President caved. Faced with a bond-market revolt reminiscent of what ended Liz Truss’s British government in 2022, he suspended most of his tariffs for 90 days.
In response, the stock market rocketed higher. But overnight, the rally fizzled out. The market remains down for the year, bond yields are hovering well above where they were on “Liberation Day,” corporate bond rates are rising so fast they could choke off investment and tariffs remain on most of what the U.S. imports. Worse yet, Mr. Trump raised those on China to 145 per cent, hardening his resolve against what he sees as the main enemy.
Donald Trump’s bizarre trade war brings the Western age to its end
But he may find this is yet another battle his brave talk can’t win. Although China depends more on the U.S. market than the U.S. depends on China’s, Canadians know better than anyone that’s not the calculus that matters. Game theory shows that, as in a boxing match, the fight’s outcome is determined less by who can deliver the most damage than by who is prepared to absorb it.
Make no mistake, China can hurt the U.S. The tariff fantasists around Mr. Trump imagine that blocking imports from China will impoverish the Middle Kingdom while encouraging Americans to buy local. But this reorientation is not like Canadians substituting rye for bourbon. Most U.S. imports from China are intermediate goods, and some, such as critical minerals, are all but impossible for American manufacturers to do without. Unless Americans are prepared to stop buying cellphones or cars altogether, they’ll have to suck up plenty of pain. Few of Mr. Trump’s supporters can recall him promising them that back in November.
Moreover, Chinese producers are adept at rerouting through connector countries. Some will ship out of Vietnam or even Mexico to get around the tariffs on China, so the effect will then be merely to raise the price of what Americans pay for the goods. U.S. inflation will likely rise this year, which will not only hurt American living standards but possibly cause the Federal Reserve to go slow on lowering interest rates, prolonging the misery.
That misery is hitting Main Street. Whereas Chinese President Xi Jinping doesn’t have to worry about midterm elections, congressional Republicans do. Mr. Trump’s approval rating is plunging alongside the stock market, and if he leads his party to defeat next year he’ll become a lame duck president. When the cameras and microphones are on, Republicans are standing by him; when they’re off, they’re getting antsy. There’s only so much of this they can take.
China, meanwhile, can absorb a fair bit of punishment. The country has extremely low inflation and a huge savings rate, amounting to nearly half of total output. If the government reorients a mere tenth of those savings to consumption, by raising wages or boosting spending, it could make up for all lost sales to America. And unlike the Fed, China’s central bank can increase liquidity in the banking system and thereby reduce interest rates without fretting that inflation will spin out of control.
In fact, the Chinese authorities have already begun taking both these steps, which may explain why the stock markets there have so far held up better than the American ones. If the markets were bettors, we might conclude the early money’s on China. Americans have already lost several trillion dollars in the stock market, and it could get worse. More strikingly, the dollar has fallen and U.S. bonds have fared badly, an apparent sign that the world’s investors are losing faith in America.
The America First crowd underestimates just how important the world’s goodwill is to their success. While U.S. government interest rates have risen since “Liberation Day,” those of European Union governments have held steady, suggesting that foreigners now see Europe, not America, as the safe port in a storm. That’s not surprising. As the famed bond investor Bill Gross remarked, “Would you want to own highly volatile U.S. stocks whose price depends on whether POTUS had a good night’s sleep and woke up the next morning to reverse yesterday’s policies?”
But if the world’s creditors won’t bankroll the Trump administration’s war with China, America would have no choice but to call on its own people, which would drive interest rates even higher and thereby reduce consumption. Given that Americans said they wanted Mr. Trump to bring down egg prices, it seems a stretch that they’d love that plan.
The economist Nouriel Roubini put it well: In a three-way game of chicken among Mr. Trump, Mr. Xi and Fed chairman Jerome Powell, expect Mr. Trump to blink first.