President Trump and his cabinet secretaries announced that “we have a deal with China!” – and the stock market didn’t react.
Didn’t go up, didn’t go down. The first two days since the announcement, at least, the market remained flat.
In part, this is likely due to the fact that everyone’s waiting to see the final deal, though they’ve given us the big picture: both sides give in a little; the U.S. will still have high additional tariffs on Chinese goods and will allow most Chinese college students, and mainland China will stop holding critical rare earth components hostage.
The devil will be in the details, of course, but this big picture should at least have been enough for either excitement or horror from the market, and it drew neither.
What it did draw, interestingly, was a lot of editorials, implying that President Trump has backed down, or that he never really had a strategy, even though the net end result has a much higher tariff total on Chinese goods than the tariff level in place when he entered office. So, from the President’s tariff strategy at least, it’s a win.
But there’s more to it than this. This entire experiment has been a lesson, to both the American people and the entire world, and more and more people are beginning to absorb this crucial lesson, at long last.
First, some background: All imported products have import duties, around five percent or so, give or take, which are the same for goods from almost all countries on earth. On top of those basic U.S. import duties, some products from some countries have some additional tariffs, such as the 7.5% additional and 25% additional that were added to most Chinese products during President Trump’s first term.
This year, for Chinese goods alone, President Trump added first ten percent, then twenty, then even more, until the new tariffs totaled 145% on top of the normal duty and the old 7.5% and 25% additions. So, for a short while, before the current truce, America was charging between 145% and 190% on Chinese goods, depending on the product.
Now with the new deal in place, it will about 55% plus the basic duty, possibly plus the first term tariffs (these details haven’t yet been clarified).
The people who want to attack President Trump can do so, saying that he’s been talked down to a much lower tariff, compared to the massive level briefly imposed in April. But is that really what’s happened? At the end of this process, the total tariffs on Chinese goods will be much higher than they were when he started his second term. So from the perspective of setting tariffs, President Trump has definitely won. He’s raised the tariffs considerably on Chinese goods.But that’s not the main lesson here.
President Trump’s thesis – and not just his, but the thesis of the conservative movement, the MAGA movement, the American working class, and all American patriots – is that the United States has lost far too much manufacturing over the past half century.
The United States of America was the king of the industrial revolution; our economic dominance was propelled by our ability to make everything, and to be more efficient than anyone else in doing it.
Gradually, over the generations, due to an unhealthy mix of union power, Marxism, bureaucracy, a litigation culture, high taxes, and crime, America lost our dominance, and gradually ceded the production of whole classes of products to other countries.
More and more, over the past forty years, due to China’s relentless industrial espionage and intellectual property theft, currency manipulation, subsidizing of industry, bribery of western politicians, and use of slave labor, China came to dominate this transfer of production.
Instead of the United States losing all this industry evenly to a couple dozen low-cost countries across the third world, we’ve lost almost everything to China. How can China be the best, most magnetic draw on earth, not just for textiles and toys, machines and appliances, raw materials and finished goods, but for all of the above? How indeed.
President Trump has set out to reverse this decline, to try to revive the American model.
This takes tax cuts, bureaucracy reduction, tort reform – lots of things. It’s possible, but it’s not easy, and it’s not quick. And it still requires some push, to overcome inertia, because it’s difficult and costly for any company to move production in the first place, so once it’s happened, it’s very difficult for a company to justify doing it yet again.
Here’s what we have learned from President Trump’s tariff experiments, in both the first term and the second:
· Our normal low import duties are not enough to discourage companies from importing from China.
· The new additional tariffs (Section 301) of 7.5% or 25% that he implemented in 2018 and 2019 encouraged a lot of companies to start finding other vendors outside China – both in other low-cost countries and here at home in the USA – but of course nowhere near enough.
· The new additional fentanyl tariffs of 20% in February and March of this year encouraged a lot more companies to start moving away from China, but again, not nearly enough.
· The next 125% in additional tariffs in April, on top of everything else, brought importing almost to a stop.
So now we will settle on some lower number that won’t stop all trade, but which will be enough to get most American companies to look seriously at moving their supply base outside China.
What we learned from this experiment is that 5% wasn’t enough, 30% wasn’t enough, even 60% wasn’t enough to get American businesses to take the issue seriously, but 150% to 180% certainly is. So we will now look forward to a period in which the tariff on Chinese goods will be something like forty or fifty points higher than the tariff on the goods of any other country.
The president is pursuing a combination strategy: much higher tariffs on Chinese goods to encourage American businesses to look for new sources outside China, and lower taxes and much less regulation here, to enable American suppliers to at least compete for some of that business.
Nobody expects 100% of the business taken away from China to come back to the United States. But twenty percent? Thirty percent? Maybe even forty percent? That would be wonderful for the American economy.
And it will be wonderful too, for all of our other allies whom China has been smothering over the years with their corrupt trade practices: Taiwan and the Philippines, South Korea and Costa Rica, and so many more -- there are lots of other low-cost countries who have been frozen out of participation in global manufacturing growth, due to China’s countless violations of international law and fair trade policy.
Perhaps most important of all, this process has pulled off the tarp that had hidden how terrible our dependence on China is, for so many years. Now we all realize how unforgivably dependent the American manufacturing sector has allowed itself to become, on the world’s biggest rogue nation.
We have long known that we bought too much from China, but only in the last few years, and especially the last few months, have we realized how bad it really is.
One day, China will attack Taiwan or the Philippines and start the war of all wars in Asia. We all know it’s going to happen; we just don’t know when. But once it does, we know that we will be unable to get anything at all – components, subassemblies, or finished goods -- from China, for years and years, no matter how desperately we need it.
To the extent that the American economy survives that future period, we will all owe President Trump all the credit -- for fighting so hard, for so long, to inoculate these vulnerable United States against that fateful day.
