Wednesday, April 04, 2018

Trade Wari?


China has recently threatened $50 billion in tariff retaliation against the equivalent planned tariffs by the United States against China ... thus raising the spectre of a trade war. Is this a serious threat? Let's first look at the numbers: in 2017 China exported $560 billion of goods and services to the U!S. and we, $185 billion to it ... for a total U.S. trade deficit of $375 billion, see: NY Times Article. Although China is the second largest economy in the world, it exports to the U.S. represent a far bigger proportion of its GNP than our exports to them.

Now there is in game theory the notion of the optimal gaming strategy being minamax ... minimize your maximum loss. Therefore, if China and the U.S. get into an all-out trade war, reducing both these trade numbers to zero, China would be far more damaged ... probably to the point of massive social disruption. Using game theory, which I am sure China understands, the United States does have the strategic high ground in this pissing contest.

OK, but China does own well over a trillion dollars in American government debt. Can't they use this as a cuddle against Trump's tariffs? But Trump knows this game quite well from his previous banking relations  -- when you owe the banks a huge amount of money, they don't own you ... you own the banks. If China were to start selling this U.S. debt, it would drive down the prices on that which it still holds ... and also, in the process, make the Federal Reserve Bank's job of paring its balance sheet easier.

Trump has stated that his objective is to reduce our trade deficit with China by $100 billion over the next year. Obviously, an all-out trade war would accomplish this ... but also would serious talks with China wherein Trump uses our above negotiating leverages effectively ... much more likely the latter than the former.

9 comments:

ChillFin said...

A good start would be to be put the squeeze on Walmart (mot Amazon). Recall that Walmart was the one destroying small downtown shopping. They did it by turning against the founder's premise of "Made in America" by building trade deficits with China. Walmart China “firmly believes” in local sourcing with over 95 percent of their merchandise coming from local sources. In America, estimates say that Chinese suppliers make up 70-80 percent of Walmart's merchandise (about $50B/yr), leaving less than 20 percent for American-made products.

Maybe Ivanka would manufacture in the USA. Wouldn't that be patriotic!

ChillFin said...

How do you reduce the deficit if both the imports and the exports go down? Isn't that a wash?

George W. Potts said...

If both are zero, then the trade deficit is zero. It depends on relative rates of decline.

ChillFin said...

"relative rate of decline"? Maybe Ivanka?

ChillFin said...

So why don't we tell Walmart USA to locally source 95% of their products, while Walmart China would sell 80% goods made in the USA?

Walmart is the evil one. Why doesn't Donald call them out on their anti-American behavior, lo these many years?

George W. Potts said...

I wonder if Walmart's success has anything to do with the fact it was and is an Arkansas company?

ChillFin said...

Huh?

George W. Potts said...

Did the Clintons help Walmart back then?

ChillFin said...

Maybe. In 1992 when Sam Walton published his book also the year he died. Then the kids went full greed, droping prices, killing downtowns, cozying up to China.