Trump versus China: Is the Tariff Man making a comeback?

Is the Tariff Man about to reappear?

It does seem likely as tensions between the US and China continue to intensify.

The Trump administration, increasingly focused on the looming US election, is searching for ways to redirect blame for its own mismanagement of the coronavirus pandemic towards China’s responsibility for the initial spread of the virus.

As the administration has become more desperate – witness Secretary of State Mike Pompeo’s unfounded allegations that the virus emanated from a laboratory in Wuhan and that China has been engaged in a giant cover-up exercise – a raft of mechanisms for punishing China have been floated.

The Trump administration is canvassing a range of options for punishing China for its role in spreading the coronavirus, including new tariffs.Credit: Bloomberg

The most bizarre has been the notion that the US would cancel some of China's $US1.1 trillion ($1.7 trillion) holding of US treasury bonds.

Any attempt to do so would ignite a panic in a market reliant on foreign inflows, and that at a time when, with the US Treasury about to hit the market for $US3 trillion to fund the US deficit, America needs foreign investment support more than it ever has.

It would be akin to a sovereign default scaring off foreign investors, and would jeopardise the US dollar’s status as the world’s reserve currency. It’s also doubtful whether the Trump administration has lawful or practical means to do it.

'Ultimate punishment'

Other measures floated include sanctions, a ban on Chinese students attending US universities, tougher disclosure requirements for Chinese companies listed in the US, a ban on public funds being invested in international share indices that include Chinese companies and removing China’s sovereign immunity so it can be sued in US courts for is role in the pandemic.

Ultimately, however, tariffs remain Trump’s weapon of choice. At the weekend he described them as "the ultimate punishment". The administration has consistently ignored the overwhelming analysis that Trump’s tariffs have been paid for by American businesses and consumers, not China’s exporters. The trade war damaged both the US and China.

While the pandemic and the election might provide the backdrop to the edgier tone the US is adopting towards China, the early outcomes from Trump’s much-vaunted Phase One trade deal with China, agreed last year and formally signed in January, aren’t helping relations.

That deal involved a commitment from China to increase its imports of US agricultural products, energy, manufactured goods and services by $US200 billion over two years, relative to a baseline of its purchases in 2017.

In exchange, the US halved the tariff on $US120 billion of imports from China and deferred the imposition of tariffs on another $US160 billion, even though it retained increased duties on a further $US200 billion worth of imports.

China’s early performance lags its commitments. It has bought more soy beans and energy from the US but it has also increased its purchases from others and, barring a more than doubling of the rate of purchases over the remainder of the two-year timeframe of the deal, it looks most unlikely that it will meet the terms of the truce.

It has an excuse. The Chinese economy contracted 4.8 per cent in the March quarter – the first fall in GDP since the financial crisis – and the pandemic can be expected to continue to weigh heavily on both its domestic economy and demand for its exports for quite some time to come.

Shallow thinking

The pandemic is, in fact, exposing the shallowness of the thinking behind Trump administration’s fixation with trade deficits.

It was always the case that if Trump wanted to shrink those deficits (which he believes reflect foreigners unfairly ripping off the US) all he had to do was engineer a recession. In a recession an economy with a large trade deficit will see it shrink as its businesses and consumers stop buying imported goods and services.

While trade data this week showed the US deficit increased 11.6 per cent in March, that was mainly due to a 9.6 per cent fall in exports. Imports fell 6.2 per cent. The trade deficit in goods with China fell $US4.2 billion, or 26 per cent, to $US11.8 billion – the smallest deficit in more than a decade and a half.

As the economic fallout from the pandemic increases – other data this week showed more than 20 million US jobs disappeared in April – the overall US trade deficit could be expected to shrink.

Trump threatened this week to terminate the trade deal with China if it doesn’t increase its purchases of US products and services, despite its obvious economic challenges. But he also said the trade deal was secondary to any action he might take against it for its role in the pandemic.

Yet given that he, in the context of the pandemic, sees tariffs as the ultimate punishment, it is possible that the two issues could be conflated and lead to the same result-- the resumption of Trump’s trade war with China.

Playing to the base

While that might play to his political base, particularly as Americans generally and both major political parties have become increasingly hostile towards China since the outbreak of the coronavirus in the US, it could be destructive for the US and other economies around the world.

With economies imploding in response to the coronavirus, the last thing the global economy needs is a flare-up on trade between the world’s two most important economies. It was US protectionism – the Smoot-Hawley Act in 1930 and the responses of other nations to the US tariffs – that played a major role in deepening the Great Depression.

The US could afford to absorb the cost of Trump’s tariffs while it was humming along at a reasonable pace. It’s now spluttering violently and a renewed bout of trade hostilities would only exacerbate the damage the pandemic is wreaking.

Hopefully someone in the administration will point out to Trump and the trade hawks in his administration that any resumption of the trade war would also really sink the stockmarket that he appears obsessed with and views as a barometer of his success.

Punishing China, whether for its role in the pandemic or for failure to keep up with its commitments in the trade deal, may appear to be a good election strategy. But, with the economic outlook in the US and the rest of the world already so dire, it could be a very costly and destructive one.