Trade war with China: dumb and getting dumber

As if the trade war that has cost the US economy billions of dollars was not bad enough, President Donald Trump raised the tariffs from 10% to 25% on US$200 billion worth of Chinese “imports” and threatened to impose duties on the remaining $300 billion worth of Chinese-made products if China does not give him the deal he wants. Further, Trump has banned Huawei and other Chinese telecom equipment from the US market as well as barred US tech firms from selling chips to China.

Trump might have a long wait for the deal he wants, because China is hitting back with tit-for-tat tariffs on $60 billion worth of US goods and vowed to take further countermeasures. So the US economy could be hit harder than Trump wants to admit.

A big chunk of “imports” from China are in fact “Made by America in China,” so the tariffs are taxes imposed on US goods that have been passed on to American businesses and consumers. In a country that is seeing its infrastructures crumpling, the impoverished and homeless population rising, and social services taxed to the hilt, the trade war is the last thing the US needs.

Impact on the US economy

Raising the tariffs from 10% to 25% on $200 billion worth of Chinese goods would shave 0.37% off US gross domestic product over three years, eliminate 934,700 jobs and reduce real family income by $767 each year, according to a study released by Trade Partnership Worldwide (TPW).

If Trump were to follow through with the threat of imposing tariffs on all Chinese imports, the cost to the US economy would be much larger. According to TPW, GDP would be shaved by more than 1%, more than 2 million jobs would be lost and average family real income could be reduced by more than US$2,300 annually.

Global impact

Trump’s trade war has not only harmed the US and Chinese economies, but those of nations that are directly or indirectly linked to the US-inspired global supply chain.

Taking Apple’s iPhone as an example, it was conceptualized and developed in the US, engineering was carried out in Japan, parts were produced in South Korea, Taiwan and other places, and final assembly was done at a Taiwanese-owned factory in China. The supply chain was set up to take advantage of relative efficiencies that each country or region can offer.

It worked, and every country involved in the supply chain prospered. Country specialization brought economies of scale, bringing down prices and fueling economic growth. Because every country received a “piece of the pie,” all economies grew.

However, Trump’s trade war disrupted the supply chain, akin to pouring money down the drain. As a result, the economies involved in the supply, including those of the US and China, slowed down.

The telecom war

Perhaps the dumbest decision Trump made was the banning of Chinese-made telecommunication products from the US market and preventing American technology firms from selling products to their Chinese counterparts, because of the potential loss of revenues and markets and disrupting the global network ecosystem.

Huawei owns the property rights of some parts that are required to complete the West’s 5G architecture, including those of Finland’s  Nokia and Sweden’s Ericsson. Additionally, the two Scandinavian firms could lose considerable business in China as the trade war heats up.

According Edison Lee of financial services firm Jefferies has estimated that the two companies could lose up to 15% of their business in China. In a full-blown trade/tech war, Chinese telecom carrier firms – China Mobile, China Unicom and China Telecom – would most likely award contracts to Huawei, ZTE and other domestic firms.

But the biggest losers would be American technology firms. Apple could stand to lose the Chinese market, from which it gets more than 25% of its revenues.

Chip maker Qualcomm could lose more than $56 billion over five years because more than 60% of its revenues are from China. According to a CNN report last month, Huawei bought $11 billion worth of products from a dozen US firms in 2018 alone.

More important, the tech war would disrupt the global telecom supply chain. As indicated earlier, many parts of the West’s smartphones and other telecom equipment are produced in China, making it extremely difficult for US, European, Japanese and South Korean firms to remain operational, at least in the short run.

Chinese tech companies, of course, would also be hit in the short term. Google banned Huawei from its Android architecture, which could slow down the Chinese firm’s business, particularly its smartphone division.

However, many analysts agree that Huawei would likely emerge stronger in the medium and long terms because it has sufficient resources to weather the tech war. With almost half of its more than 150,000 employees engaged in research and the company spending billions in research and development, Huawei could develop new operating systems and be self-sufficient in semiconductors and other components for its smartphones.

Nothing sort of stupidity

If China did violate World Trade Organization rules and “eat America’s lunch,” and if Huawei does pose a security threat to the US, then it has every right to defend itself. However, all charges of “unfair” trade practices and that the Chinese government “forces” tech firms to spy on the US are nothing more than scaremongering speculations to garner domestic support for a fight with China.

Moreover, it is too late for the US to “bring China to its knees” even with the help of its allies without resorting to an all-out economic or even military war. That is a scenario even the China hawks might not have the stomach, for because unlike the powers of the past, the Chinese and US economies are intertwined, and both are nuclear powers with sufficient economic and military resources to cause mutual assured destruction, destroying the world along with themselves.

Trump should end the trade war because it unnecessarily puts the US, Chinese and world economies at risk.