By WILLIAM JONES
The impending U.S. tariffs on US$ 34 billion of Chinese goods went into effect on Friday, July 6. China responded with tariffs of an equal size, largely targeting airplanes, cars, and U.S. agricultural products. A ship loaded with U.S. soybeans on July 5 increased its speed heading to the Chinese port of Dalian, hoping to make it before the 12 A.M. deadline. It didn’t. And the cost of those soybeans surged by several million dollars. And that’s just the beginning. For American consumers, we can expect a similar price spike on many of their most cherished items. The U.S. has also threatened another US$ 200 billion of tariffs, which, if levied, would lead China to take reciprocal and equivalent measures against U.S. goods. The ultimate effects of such measures are difficult to foresee, but they will be dramatic.
President Trump, intent on reversing the decades-long decline of American industrial capabilities, has fallen for the cheap-shot analysis of his National Trade Council chair, Peter Navarro. Navarro has been something of a marginal figure in academic circles, at least until Trump adviser and son-in-law Jared Kushner, reportedly searching around on Amazon, came across one of Navarro’s anti-China diatribes “Death by China” and thought well of it. Navarro was then brought into the Trump campaign as an economic adviser. He was relatively unknown by those U.S. China scholars who could have provided the President with competent advice on China, and was seen as a right-wing political wonk with an ax to grind by serious economists.
So why does the U.S. President, who has established what appears to be a rather close relationship with the Chinese President, take his lead from a China-hawk like Navarro? It’s probably because Navarro, in his book, has also quite well documented the damage done to the U.S. economy over the last four decades. What the President doesn’t understand is that this development was NOT a result of trading with China, but rather a result of the gradual abandonment of any sort of industrial policy by the U.S. government during this long period of major change in the world economy.
This problem of the declining U.S. economy was clearly analyzed already in the 1970s and 1980s by economists like Nobel-prize-winner Maurice Allais and economist Lyndon LaRouche, who successfully predicted the 1987 financial blow-out. And the problem was not caused by changing flows of trade, but rather by the rapid retreat of government support for crucial items like infrastructure and new science and technology platforms and the rapid increase of financial flows away from production and into speculation. The last major science driver for the American economy was the manned lunar landing program announced by John F. Kennedy in 1961, well over 50 years ago.
But President Trump is fundamentally a realist rather than an ideologue. He would like better conditions for U.S. industry and for the U.S. worker. But the punitive tariffs he has imposed are already having the opposite effect. American farmers, who have a great deal of their produce tied up in trade with China are already looking at hard times. There will be a loss of production and eventually farm foreclosures resulting from the tariffs. All the major U.S. industries, which for years have purchased Chinese electronics as part of their supply chain, will have to look elsewhere or pay a substantially higher price – and some will have to close up shop if they are unable to pay the price. And American consumers, particularly those in the low-income brackets, who have been able to afford appliances, computers, flat screen TVs, and smart phones at reasonable rates because of Chinese production, will see prices soar. And under these conditions the support for the President will dwindle to a trickle, perhaps making it felt already in the upcoming congressional elections in November.
The measures will also have a dramatic effect on the international markets, forcing a major reorientation of trade flows for all the companies who have been dependent on the U.S. market for their products. More seriously, the trade dispute could well lead to a new financial blowout. Talk of such outcomes has been rampant in financial circles for some time given the bloated nature of the international financial markets. A cessation of payments in one limited, but crucial section of the world financial system could send the entire system into free-fall.
It is likely that once President Trump realizes that his game-plan won’t work and has become a political liability rather than an asset, he will change course. The only real question is: how soon will that occur? It is to be hoped that it will happen before a decision is taken on a planned second tranche of even more sweeping tariffs in August. The tragic irony of the whole situation is that if President Trump really wants to revive the U.S. economy, China with its unique ability in infrastructure development as reflected in the Belt and Road Initiative, could well be his most important asset.
WILLIAM JONES is the Washington Bureau Chief for the Executive Intelligence Review magazine, and senior fellow of the Chongyang Institute for Financial Studies at Renmin University of China.