How Trump’s Trade War Could Cost America Everything
(ANTIMEDIA) — As the Trump administration moves forward with its plan to impose tariffs on goods shipped into the U.S., like steel and aluminum, the term “trade war” is emerging in headlines across the media. Abandoning the principle of free trade marks a monumental shift in America’s stance towards the globalized economy and will undoubtedly come with severe repercussions.
President Trump seems to be convinced that the nation’s future prosperity depends on shrinking trade deficits by subsidizing domestic production through protectionism. Focusing on the industries that America thrives in, like service-based technology, has been overshadowed by the administration’s desire to revitalize a manufacturing base that lost its competitive advantage years ago. Unfortunately, this perspective ignores the economic reality while embracing the use of government power to choose winners and losers.
Those who praise the short-term benefits of this kind of policy fail to recognize the potential harm it could cause in the long run. Additional costs imposed on goods will not be paid by the government or a foreign nation but will instead burden U.S. citizens with increased prices. The United States doesn’t operate in a bubble and no longer holds the influence on the world stage it once did.
The sustained growth and stability of America’s economy relies heavily on foreign nations’ willingness to buy treasury bonds and sell us their goods for U.S. dollars. The assumption that this relationship is set in stone and will be maintained forever is dangerously untrue. Other countries aren’t going to simply roll over while such actions are taken to undermine their own productivity.
In a recent article, economist and investor Jim Rickards wrote about this ongoing process and how it could degenerate over time:
“It is true that countries can obtain short-term relief by cheapening their currencies, but sooner than later, their trading partners also cheapen their currencies to regain the export advantage. This process of tit-for-tat devaluations feeds on itself with the pendulum of short-term trade advantage swinging back and forth and no one getting any further ahead. After a few years, the futility of currency wars becomes apparent, and countries resort to trade wars. This consists of punitive tariffs, export subsidies and nontariff barriers to trade.”
China, in particular, could be poised to seize this opportunity and jumpstart its transition from a U.S. trade partner into a true rival for international economic dominance. The notion that America holds tremendous leverage over China isn’t nearly as true as it was a decade ago. The Chinese middle class has developed rapidly in recent years, and the purchasing power held by this group will likely continue to increase. China has also established close relationships with nations like Russia and many others in Asia to lessen their dependence on western consumerism.
China’s National People’s Congress spokesperson, Zhang Yesui, made a direct statement on the potential fallout:
“China does not want a trade war with the United States, but we will absolutely not sit idly by and watch as China’s interests are damaged…If policies are made on the basis of mistaken judgments or assumptions, it will damage bilateral relations and bring about consequences that neither country wants to see.”
The retaliatory actions China might take in response to this new kind of economic warfare will likely come in a variety of forms. Rumors have already started to circulate that the top aircraft exporter to China, Boeing, could be one of the first to fall into the crosshairs. Three-hundred Boeing aircrafts worth $37 billion were part of a November 2017 trade deal that totaled $250 billion but could be revoked if relations falter.
Another area that may suffer is agricultural exports like beef and soybeans, which have recently boosted demand for U.S. production. Rare earth minerals are another sector that could be restricted and hinder capabilities for technological development. China holds a near monopoly on these materials and accounts for nearly 90% of the global mining output. These minerals are crucial for producing cell phones, batteries, and other cutting-edge hardware used by Silicon Valley in particular.
Perhaps the most critical vulnerability is China’s significant holdings of U.S. treasuries, which account for 19% of all held by foreign governments. If they were to begin liquidating those positions and refuse to make any additional purchases going forward, it would put immense pressure on the federal government’s ability to keep expanding the mounting national debt. On March 26th, the first trading of oil futures denominated in Chinese yuan will begin, giving the world a legitimate alternative to the dollar’s world reserve currency status.
This experiment of protectionism is more than just an abstract policy and could end up affecting the standard of living of the Americans struggling most to get by. Unfortunately, since power has been consolidated to the executive office over the decades, the entire country will be forced to follow the dictates coming from the president’s administration.
Although this analysis has focused exclusively on the impact of China’s reaction, other nations could implement similar tactics to move away from relying on the U.S. to set the world’s financial standards.
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