Making China great again

 Donald Trump’s “Liberation Day” has come and gone, and the self-described “Tariff Man” has launched a new phase in his international trade war. The president’s announcement, made after markets closed on Wednesday, set a universal 10 percent minimum tariff on all imports with higher taxes on imports for countries that Trump doesn’t like. These include 34 percent on China, 24 percent on Japan, and 20 percent on the European Union in addition to a 25 percent tariff on autos, per the Wall Street Journal. This is how one man takes a vibrant, stable economy and turns it into a recession. 

Actually, the tariffs are not universal. They have a notable exception in that they don’t include Russia, Belarus, Cuba, and North Korea. Per Newsweek, the omission is because the US has no trade with these countries due to sanctions, but two other sanctioned countries, Iran and Syria, were assigned tariffs of 10 and 40 percent respectively. 

Inconsistency, thy name is Trump! And you know what they say about inconsistency. 

Prior to the announcement, much of the talk had been about reciprocal tariffs. Trump’s announcement was much worse than that. 

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While some argument can be made for reciprocal tariffs, famed economist Milton Friedman explained long ago why such tit-for-tat protectionism is a bad idea in his 1962 book, Capitalism and Freedom, saying, “Our tariffs hurt us as well as other countries. We would be benefited by dispensing with our tariffs even if other countries did not. We would of course be benefited even more if they reduce theirs but our benefiting does not require that they reduce tariffs. Self-interests coincide and do not conflict.”

But Trump’s tariffs are not reciprocal. Trump’s universal tariffs even tax imports from countries that do not tax American imports. This includes Israel, which unilaterally dropped tariffs on US goods the day before Trump’s announcement. Israel’s 17-percent tariff gives lie to the claim that Trump’s tariffs were only a negotiating tactic. 

And since Trump’s tariffs are not reciprocal, the target countries, which include the entire world, can be expected to impose their own reciprocal tariffs on the US, Milton Friedman be damned. Will Donald Trump then increase American tariffs in return? The magic eight ball says, “All signs point to yes.”

The bottom line is that Trump is not “protecting” American industry from foreign imports; he is killing American export markets. This isn’t supposition because we’ve seen it before in Trump’s first term when American manufacturers and farmers lost foreign buyers because of Tariff War I. 

If we ask ourselves what Trump’s “Liberation Day” is liberating us from, that list includes lower prices, consumer choices, economic stability, higher standards of living, good international relations, and, of course, jobs. Tariffs are a crony capitalistic tactic that may protect some jobs in favored industries but kill jobs elsewhere. The tariffs of Trump’s first term even killed hundreds of thousands of the manufacturing jobs they were meant to protect. 

With a tariff war, as the military supercomputer said in War Games, “The only winning move is not to play,” but you might ask yourself who would emerge with the least worst outcome. One thing I can tell you is that it won’t be the country that isolates itself against the entire world. 

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No, the trade war won’t benefit the US. And it won’t benefit the Trump Administration or the Republican Party either. Politicians and parties who start recessions on purpose are not usually rewarded for their actions. 

Instead, the countries that are most likely to emerge from the trade war with expanded influence and markets are our competitors. And who is our biggest competitor? China. 

Follow along with my reasoning. When Trump’s trade taxes go into effect (and some will be effective by the time you read this), other countries will throw up their own walls of protectionism. When this happens, American exports will become more expensive, and our trading partners will look for new producers. China, with its growing industrial base and desire to expand its influence (rather than isolate), is a logical choice.

Other countries will benefit as well Brazilian and Canadian farmers will sell to buyers who used to parter with American sellers. Again, this is history, not speculation. Canada is also a major source of American oil imports. Do Trump and MAGA really think that Canadian oil producers won’t be able to find markets for the oil that we don’t buy? They will do so easily and probably at higher prices. 

With China, the opportunities from Trump’s foolish policies go beyond the trade war. The Trump-DOGE attack on federal programs leaves much of the world wide open to Chinese overtures. Not only have the Trumpists (probably unconstitutionally) shut down US AID and many other foreign aid programs, they have also silenced American outreach to people in authoritarian countries through the Voice of America and pro-democracy programs. China and other aggressive dictatorships love this. 

Left unsaid by the supporters of Trump’s tariffs is that Trump’s attacks on our economic partners also strain our military alliances. The trade war may not break NATO, but Chinese ascendancy with countries that were formerly partnered with the US for trade could easily leave the US without support in an international crisis. 

Suppose China makes a move on Taiwan in a year or two. They’ve recently been rehearsing for a blockade of the breakaway republic, so this is not farfetched. If Donald Trump or a MAGA president is in office, there is a nonzero chance that the US won’t do anything because MAGA is isolationist and tired of “endless wars,” so the odds are good that Xi will roll the dice and go for it. 

Assuming that the US does decide to intervene, we may find ourselves with a small and ineffective coalition because Trump’s trade policies have forced other nations to become more dependent on China. It is also not farfetched at all to think that China would use economic blackmail to keep countries on the sidelines both in the UN and on the frontlines, and Donald Trump’s talent for diplomacy is nonexistent. 

I’ll say it again: The trade war won’t be good for anyone, but it is going to be not good in the extreme for the US. Trump is isolating America against the world, and the world is about to find ways to get along without America. 

Donald Trump isn’t making America great again. He’s making America irrelevant, and China will be the main beneficiary of that new reality.

From the Racket News

Why Trump can't win the trade war

 An old piece of advice that has been handed down from generation to generation is, “Don’t start something that you can’t finish.” I’m not sure that Fred Trump ever passed along this bit of simple wisdom to his son, but if he did, little Donald likely didn’t listen. 

More current advice to the president might sound more like Stinger’s (played by James Tolkan) advice to a young Maverick in the original Top Gun: “Your ego is writing checks that your body can’t cash.”

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It’s unlikely that even the full faith and credit of the United States will be able to cash the checks that Trump’s ego is writing these days. Financial markets have lost more than $10 trillion (that’s trillion with a “t”) under Trump so far and the rout shows no signs of stopping as the trade war ramps up, Wednesday’s rally notwithstanding.

Mr. Trump is a self-described “Tariff Man,” but before launching his latest tariff war, he should have considered the advice that Fred Trump and others should have given him. Instead, Trump’s strategy is akin to that of the Underpants Gnomes from South Park:

Phase 1 - Impose tariffs

Phase 2 - ??????

Phase 3 - Profit!

To be clear, I’m not totally sure what Trump’s thinking is here. I don’t think anyone knows for sure because he has given a plethora of often-contradictory goals and explanations. He has claimed to want to increase US manufacturing, promote free trade, raise tariff revenues, stop smuggling, and punish China. The evidence would suggest that Trump just wants a trade war for its own sake. 

Nevertheless, on Wednesday, Trump did provide some relief to markets with a 90-day pause on tariffs against all countries except China, for which he raised the tariff rate to 125 percent. Trump also left 25 percent duties on Canadian and Mexican imports that are not covered under the USMCA. Trump’s universal 10 percent tariff remains in place for other countries.

The news provided some relief to markets, but the on-again/off-again nature of the trade war makes it difficult for consumers and businesses to plan, and the sword of Damocles hanging over our trading partners, the knowledge that Trump’s tariffs on them are only suspended and not paused, makes it difficult or impossible to put together a meaningful coalition against China. 

Many consumers and businesses may take the opportunity to stock up on staple items during the pause, but such behavior can drive up prices. This strategy runs the risk of being stuck carrying high-priced inventories if Trump later decides not to resume the tariffs (spoiler alert: he will) or if he adopts a different strategy. Longterm planning is not possible in the current climate.

The problem is that Donald Trump cannot win a trade war, particularly one against China. To put it in poker terms, China does not have all the cards, but it does have an hand full of aces. 

The first ace is that China holds a large share of US Treasury debt. A few months ago, China’s holdings were estimated at $759 billion. One potential weapon that China could use is to dump a large part of the US debt that it holds. 

Flooding the market with Treasury certificates would have the effect of lowering demand for the safe-haven investment. The value of US debt would plummet, and yields and interest rates would rise. Overnight, it would become much more expensive for the US to finance its deficit spending. 

The Treasury selloff would also cause the value of the dollar to drop, which, ironically, is something that Trump and his advisors have advocated in the past. MAGA financial advisors believe that a weak dollar would help to erase the trade deficit (as Milton Friedman explains, trade deficits are not really a bad thing) and allow the federal government to pay back debt with devalued (i.e., inflated) dollars. In case you didn’t get that, weakening the dollar is inflationary. 

This process may have already started. There was a large bond selloff on Wednesday, and there is speculation that China was behind the sale since it coincided closely with Trump’s imposition of 104 percent tariffs on the Asian giant, a move that has already been countered by China with another 84 percent tax hike on US goods being imported to China. 

China’s second ace is its control over the rare earth industry. Rare earths are a set of 17 minerals that are vital components in high-tech consumer goods and military hardware. Over the past few decades, China has developed monopolistic control of the rare earth market. 

If you think allowing China to control 97 percent of such a rare and important commodity is a bad idea, you’d be right. It might be possible that the only worse idea would be to launch a trade war against a monopoly that both your consumer economy and national security depend on without a backup plan. It’s that pesky Phase 2 that is problematic. 

Our vulnerability is not a new thing. China shut off Japan’s supply of rare earths in 2010, prompting the Japanese to seek alternatives. In Trump Trade War I, China threatened a similar move against the US but never executed it as the world’s focus shifted from trade disputes to the COVID-19 pandemic. In December 2024, China banned exports of gallium, germanium, and antimony to the US in retaliation for American controls on microchip exports to China. 

In Trade War II, the Trump Administration telegraphed American vulnerability by exempting Chinese rare earths from its tariffs. The problem with this strategy is that China can still embargo the materials from import to the US. If the Trump Administration knows we need rare earths, the Chinese know it as well. 

And they have already fired a warning shot. A few days ago, China placed export controls on a number of rare earth minerals with technological and military applications. This is a signal that they are ready to shut off the spigot if Trump continues along his current path. 

What would happen if China embargoed rare earths? The production of tech devices that use the minerals would plummet and prices would skyrocket. In 2010, rare earth prices in Japan increased by a factor of 10. High-tech US manufacturing would be hobbled. Commerce Secretary Howard Lutnick may fantasize about Americans installing screws on iPhones, but there will be no phone production in the US under a rare earth embargo. 

Trump’s Phase 2 might include the annexation of Greenland for its rare earths or a mineral deal with Ukraine, but neither can be exploited quickly. Ukraine is still fighting for survival against Trump’s buddy, Putin, and Greenland’s mineral reserves haven’t been exploited already because of inherent difficulties in doing so.

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I will agree that we need to follow Japan’s lead in challenging China’s dominance in the rare earth industry, but doing so in the middle of an (unnecessary) trade war is not a prescription for success. The White House has indicated that it is not serious about developing alternatives to Chinese control of rare earths through its attacks on the bipartisan CHIPS Act and crippling US microchip makers with tariffs. 

So why hasn’t China invoked these options already? The most likely answer is that they, unlike Donald Trump, realize that our two economies are dependent upon each other. China could destroy our economy, but they would ravage their own economy in the process. Nevertheless, the farther Trump pushes them toward the brink, the more likely it is that they will invoke these “nuclear” options. 

Finally, the third ace in China’s hand is that it is an authoritarian regime, not just a wannabe. It is a fantasy to think that Donald Trump could outlast President Xi as both economies crumble. The Chinese are adept at using martial law to control their population in ways that are not possible in the US (and thank God for that!), while Trump is already a lame duck who is limited by courts and midterm elections that cannot get here fast enough. 

Trade brinksmanship also runs the risk of becoming military brinksmanship. Trade wars can easily turn into shooting wars, especially if one side sees an existential threat in the other. Few remember that the attack on Pearl Harbor was preceded by a trade war between Japan and the United States. 

The current financial crisis is probably the most stupid and easily avoidable in world history. All Donald Trump had to do was nothing, but the president ignored the risks and followed his own whims and desire for a tariff war to remake the global economy. But when you tear down the global economy, you should have some idea of what should replace it. 

Trump may not yet realize it, but he has painted himself into a corner and the country with him. On one hand is a global economic collapse. On the other is backing down and losing face. The longer he continues along this path, the deeper the crisis will become and the more likely it will be that the results are catastrophic. 

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NO NEGOTIATIONS: Europe finally retaliated against Trump’s tariffs on Wednesday, but the Washington Post reported that the EU tried to avoid escalating the trade war. Per the report, “European officials have offered ‘zero-for-zero’ tariffs on cars and industrial goods, as well as increased purchases of U.S. exports, from liquefied natural gas to soybeans,” but the Adminstration of the Tariff Man refused to negotiate. 

It’s not about a fair deal. It’s about Trump’s belief that tariffs are a good thing for America and that the US economy needs to be fundamentally transformed (to coin a phrase).

That’s not going to end well. 

AND THAT’S NOT ALL. Matt Yglesias echoed my own sentiments on the platform formerly known as Twitter when he wrote, “Something I would like sane conservatives to consider is the possibility that DOGE cuts to medical research, the Social Security Administration, and foreign aid are conducted with the same level of care and rigor as we see in trade policy but without the market feedback.” 

Trump, Musk, and DOGE have been merrily ripping apart large parts of the federal government without understanding what those departments do or how their actions might affect the country and the world. We know that some of their actions are bad, such as firing medical researchers looking for cures for cancer and other diseases, but other Easter eggs of destruction won’t be discovered or understood for years or decades. 

From the Racket News