The Art of (Trade) War


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The Art of (Trade) War

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By Michael O’Neill

The Art of War by Sun Tzu is a 1,500 plus-year-old military strategy manuscript written by a brilliant Chinese general and philosopher. Chinese politicians and military leaders have studied this work for generations. The Art of the Deal by Donald J Trump is a 30-year-old vanity project by a billionaire real-estate developer who is now the President of the United States.

President Trump railed at China throughout his election campaign and his presidency. He blames China for America’s loss of manufacturing jobs and points to America’s $317 billion trade deficit with China as proof. He promised to act and he did.

The US and China traded tariff salvos at 12:01 am EDT July 6. Thirteen hundred items representing $34 billion worth of goods were slated for 25% tariffs when they land in America. They include flat-screen televisions, clothes dryers, a slew of manufacturing parts, motors, hydraulics, et, farming equipment and even sewing machine needles.

China added duties on soybeans, corn wheat, rice, beef, pork, fish, and dairy products. Some analysts suggest that those tariffs are a direct shot to Trump’s middle-America support base.

In the next few days and months, China President Xi Jinping and US President Donald Trump will employ strategies from the Art of War and The Art of the Deal as the US/China Trade War of 2018 unfolds.

For the US, tariffs on $34 billion are just a start. On July 5, the President suggested that $500 billion worth of Chinese goods may be subject to additional taxes. That’s impressive, considering that the US only imported $478.8 billion from China in 2016, per the Office of the United States Trade Representative.

That takes care of Chapter 1; ‘Think Big” in Trump’s book.

President Xi Jinping reportedly told officials that the country must pick its battles. That is a page out of Sun Tzu’s manuscript. He wrote, “According as circumstances are favourable, one should modify one’s plans.”

In Chapter 2 of the Art of the Deal, President Trump wrote “the best thing you can do is deal from strength and leverage is the biggest strength you have. Leverage is something the other guy wants or has to have or best of all, can’t do without.” The US has leverage. Its trade deficit with China in 2016 was $347.0 billion.

China has leverage as well. They hold $1.18 trillion of US government debt. China could wreak havoc with America’s economy by selling large chunks of their holdings which would drive interest rates higher, potentially derailing the US economic engine. President Jinping will heed one of Sun Tzu’s five essentials for victory which is “He will win who knows when to fight and when not to fight.”

This trade war may not be a long, drawn-out affair. President Trump could lose a lot of clout in November if the mid-term elections shift the balance of power to Democrats. There are 34 out of 100 Senate seats up for grabs. The Democrats only need to add two seats to control the Senate but would need another 25 seats to control the House of Representatives. President Trump also needs to get re-elected in 2010.

President Xi Jinping doesn’t have such worries. He is not subject to any term limits, and many believe he is as powerful as Chairman Mao Zedong in his heyday.

China may have the most to lose. The US is the destination for 19% of its total exports while only 9.2% of American exports go to China. (source: OEC 2016 data) However, Mr Trump is waging trade war on many fronts including against Canada, Mexico, and the European Union and history proves that multi-front wars are doomed to failure.

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Source: Statista.com

Global equity markets reacted with a shrug. The impact of tit-for-tat tariffs have been discussed and disseminated for a couple of months, so no one was surprised when they came into effect. China’s Shanghai Shenzhen CSI 300 index rose 0.68%, but it is down 16.52%, year-to-date. It has also underperformed the S&P 500 by 17% since March, evidence that the market believes that in the short term, China is more vulnerable to a trade war than is the US. European bourses have recorded small gains, except the UK’s FTSE100. FX markets were nonplussed as well and opened in New York close to unchanged from Thursday’s close.

Republicans (GOP) should know that anti-trade policies are cancer to an economy. The GOP was responsible for a trade war that exacerbated the Great Depression. In 1930, Reed Smoot and Willis C Hawley, both Republicans, sponsored a protectionist trade act. The result was devastation. Some historians believe the Smoot-Hawley act was responsible for 33% of the 66% decline in global trade between 1929-1934, according to a Fraser Institute article in October 2016.

In 1906, George Santayana, a Spanish philosopher and author wrote “Those who cannot remember the past are condemned to repeat it.” President Trump is not a history-major.

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