USA/China Tariff Outlook Possibilities
Today's post looks at the potential Plan A and Plan B between USA & China. Buckle up because this could get wild!
A massive thank you to
for allowing me to share this post with Contrarian Capitalists. looks at the bigger overview of all the recent tariff news and what could lay ahead between USA/China.The only two things that I have done is edited the format in order to improve both visibility and readability and also correct a small amount of grammar.
Bar that, all words and thoughts are those of
.Enjoy!
Recently, I predicted that the tariffs are for negotiation purposes and would later be removed. Now we have announcement of delays of most tariffs in order for there to be negotiations. Tariffs on Canada, Mexico and China are still there, and the tariffs will still later go into effect.
Overall, while the situation was not perfect the market did still rocket (With the Nasdaq 100 rocketing over 10% in a single day) as I predicted it would in my latest post (parts of it are free.) OK, so what do I expect to happen from here?
We need to split the tariff situations into 3 categories:
Negotiations with China
Negotiations with Mexico and Canada
Negotiations with the rest of the world
NEGOTIATIONS WITH CHINA (PART A)
This is the main major tariff that was kept and was not delayed. So to figure out ehat will likely happen we need to figure out why Trump still kept the tariffs on China to figure out what happens next. There are basically two reasons Trump kept Tariffs on China and why they are so massive.
USA has huge trade deficits with China which is about $300 billion/year, equivalent to 1%-2% of GDP.
Trump claims these trade deficits are due to China using unfair trade practices.
Does he have a point?
Trump here is right, China does have:
Higher tariffs.
Higher non-tariff trade barriers.
Artificially low interest rates.
Higher subsidies.
Intellectual property theft.
Since Trump is right about all of these counts and considering USA is more economically powerful than China, I expect China to fold in these negotiations at least somewhat (although I expect low interest rates in China to remain considering their economy is not doing so well right now.)
I expect that the resolution of this will lead to the American economy growing faster although I do still expect there to be some sort of trade deficit with China due to them having lower labour costs, being a lower cost producer in general, and due to Triffin’s dilemma.
NEGOTIATIONS WITH CHINA (PART B)
The second dimension to these tariff negotiations have nothing to do with economics but to do with a mix of security and posturing. I expect the USA and China to get into a cold war with each other due to Thucidides trap. This is where you have group A and group B. Group A is currently more powerful than group B but group B will later become more powerful than group A.
There are basically two ways this dynamic can lead to a war:
Group A distrusts group B so decides to attack them while they have the advantage.
When group B is more powerful they attack group A.
75% of the time where Thucydides trap occurs on the world stage a great conflict between the two powers arise. First, it is only a trade war. Later this becomes an arms race. Then an actual war.
Anyway, why am I talking about a potential cold war between the two and how will this affect tariff negotiations?
I believe USA and China will both seek to look tough in order to set a precedent of who runs the world. USA will particularly seek to look tough in order to discourage China from invading Taiwan, because if the USA looks tough China may assume a more tough response when it comes to Taiwan also (and negotiations in general.)
China will want to set a precedent that they are in charge of the new world order. This will reduce the range of possible deals they can make which may cause tariff negotiations to last longer than it otherwise would and decrease the probability of a deal occurring although I still expect there to be a deal.
The second part of how preparations for a cold war affects things is that I expect both countries to focus on protecting things that are important for military use or dual use (food, energy, rare earths, steel etc) and not want to source their supplies from any country other than their own or maybe their allies.
NEGOTIATIONS WITH CHINA (PART C)
Ok, so who has the leverage here?
Argument for USA-USA is being treated unfairly in trade terms objectively and is the wealthier nation this gives the USA leverage in the negotiations.
Argument for China- China due to being a dictatorship is able to withstand economic pressure for a longer timeframe. We recently saw the USA delay tariffs on most of the world due to a stock market reaction.
Overall, I expect tariffs between USA and China to be resolved through negotiations, the USA to have more leverage and get some terms they want from the agreement but certainly not all of them at all.
I expect tariffs to be kept where it helps a country’s military power and I expect a deal to be made soon although i do believe there could easily be more volatility in the tariffs due to hard bargaining negotiations which I believe will be the choice used by both countries since it is most optimal to be used meaning
Trump will likely make it seem as if he wants to stop all negotiations at some point. Don’t worry if this occurs, this is just part of the negotiations, this can easily occur in all negotiations.
NEGOTATIONS WITH MEXICO AND CANADA
Trump says he wants to takeover Mexico and Canada and kept tariffs on them. To be clear, these tariffs are from a long time ago. I don’t see the logic with Trump attempting to invade Canada since they are a NATO member and I do not see the logic in Trump putting tariffs on Canada in order for them to become a state since they are a fairly wealthy country.
I exepect Canada to understand that Trump is mearly bluffing here but I do still expect some concessions frome Canada regarding border security. Overall, I think Trump overplayed his hand here and is taking on too much risk although it will still probably work out since there is just not much upside.
In terms of Mexico I can certainly see the logic. Mexico is not a NATO member, has a much weaker economy and the cartels there are a big threat to the USA. The USA can easily threaten to annex Mexico while having enough military might and potentially enough popular support due to the threat of the cartels.
I believe tariffs on them can just be the first part of threatening Mexico whose gangs are a legitimate threat to the USA. The USA can also easily just embargo them or whatever specific moves they decide to pull and completely crater the Mexican economy.
I don’t think military might is even necessary. Due to these huge imbalances between the USA and Mexico I expect Mexico to quickly just follow the USA’s demands.
Overall, the Canada negotiations may take a while to play out while the Mexico negotiations will be relatively quick. Anyway, with or without a deal I don’t think tariffs on either country will really affect the market anyway due to their economic size bordering on being irrelevant to the world.
NEGOTIATIONS WITH REST OF THE WORLD
I expect negotiations with the rest of the world to basically split into different categories
The USA tariffed them because they decided to tariff everyone. The USA doesn’t have disagreements with these countries and the USA deems the other countries to have treated them fairly and basically just removes the tariffs.
Any country which is basically not in the EU which the USA considers to be screwing over the USA. I expect the economic power difference to be enough that the other country basically just gives in to the USA’s demands due to lack of negotiating leverage.
Negotiations with the EU. Since the USA and the EU are of similar economic size they have similar amounts of leverage which will draw out negotiations but both sides are already willing to negotiate with each other which is a good sign that a deal can be made.
CONCLUSION
I believe the only two tariff negotiations that will actually matter to the market be the negotiations with China and those with the EU. I expect both to leaf to negotiations especially those with the EU.
While I believe negotiations with China will be successful, I believe China being a dictatorship and Thucydides trap could also mean that is not the case.
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Aren't you leaving out the part that it was US companies that offshore everything to China and us trade negotiatora who agreed to the terms?
I stopped reading when I saw you incorrectly analyzed this key reason. “We recently saw the USA delay tariffs on most of the world due to a stock market reaction.”