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Wednesday, April 4, 2018

Tariffs as Symbols, not Cymbals

China has responded to the latest list of tariffs proposed by the USA on Chinese goods with a list of its own.  That announcement has sent the Dow futures down by over 400 points.  We will see later today where the market actually goes, but right now we are getting fear and breathless coverage of that fear as the news of the moment.  The real point here, though, is that the tariff announcements by China and the USA are meant as symbols of what will happen if China does not change its policies regarding theft of intellectual property and China's responsive symbol of the costs the USA will incur if it actually follows through on the actions threatened against China.  This is not (yet) the start of a trade war.  There is just too much to lose on both sides.  There is no need for crashing cymbals and blaring trumpets calling the economies to battle.

If tariffs were to cut US/China trade in half, it would be a serious blow to the US economy.  We could see a reduction of between 0.3 and 0.5% of GDP.  The same cut in trade, however, would reduce China's GDP by between 2 and 3%.  I seriously doubt that president Xi wants to see such an economic contraction forced on China by a trade war.  More likely some sort of accommodation will be reached that will protect American companies from Chinese theft of intellectual property and we will see a return of more normal conditions.

It is possible that Xi will think this a challenge that he cannot fail to win.  That seems unlikely though.  President Xi is now in the strongest position he has ever held in China.  He is president for life if he wants to stay in power.  There is no organized opposition.  An economic downturn would embolden his enemies perhaps to organize.  Surely he will not want that.

Remember that the tariffs are Symbols and not Cymbals. 

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