'Bungling amateur': Trump starts trade war with China without understanding trade. Or war. Or China

File photo taken in November 2017 shows U.S. President Donald Trump (L) and Chinese President Xi Jinping at their joint press conference at the Great Hall of the People in Beijing. (Kyodo)

Foreign Policy reports that the trade war kicked off by Donald Trump is a fight that America is very, very likely to lose. The end result is likely to be a continued weakening of America’s position, and a boost to China’s rise.

Trump’s calculation appears to be that China has more to lose and so will back down. He is wrong.

Trump’s statements on trade have regularly revealed him as someone who understands nothing about either how international trade works or how how it should be regulated. But, as he does on every topic, Trump believes he knows everything. Which is what makes his gleeful entry into a fight he pre-declared “good” and “easy to win” so particularly frightening.

The idea that the United States’ trade deficit with China provides an edge in negotiation isn’t just wrong, it’s entirely backward. Most of China’s exports to the United States are assembled goods, many of them built for US companies. Replacing those goods doesn’t mean just throwing up a factory and putting items together. It means replicating the whole supply stream of components and materials that China has built up over decades. Many of which are not in China. If the United States could move those industries home it really might involve a large number of jobs—but as China vividly illustrates, there’s little reason to think they would be good jobs.

In the short term those items are going to keep coming exactly where they’ve always originated. US consumers will simply pay higher prices and US companies will see depressed sales. Additionally, more than a third of China’s exports to the United States are parts used in building things at factories already in the United States. Raising the price on those goods leaves companies little choice but to pass that additional cost on to customers.

On the other hand, what China takes in from the United States is often raw materials and agricultural goods. And, at what might seem to be the far end of the spectrum, China also uses a large number of US services, primarily technical services, where the US enjoys a large trade surplus. While these industries may appear worlds apart, they share one big feature: They are fungible. Corn and soybeans can come from somewhere else. So can software services.

What the United States gets from China is mostly items that, for now at least, it can only get from China. What China gets from the United States is available from others. That is not a great formula for winning a trade war.

The way in which China’s exports to the United States are calculated also greatly misrepresents the true value of Chinese goods. As Foreign Policy points out using a popular example:

Take Apple’s iPhone. When iPhones are shipped from Chinese factories to the United States, the full import cost is attributed to China. Yet these phones include a Samsung display from South Korea, a Toshiba memory chip from Japan, and many other foreign components. According to one estimate, assembly in China accounts for only 3-6 percent of the $370 manufacturing cost of an iPhone X. Since that smartphone retails for $999, the bulk of the value added is American: Apple’s margin and that of U.S. retailers.

The iPhone is also sold in China. Year over year growth brought those sales to record levels last year. As reported in the South China Morning Post, Apple’s sales in China over the last year came in at just under $18 billion. Despite the way it appears on paper, it’s not even clear that this most iconic “built in China” product represents any deficit for the United States. What Chinese companies take away from each thousand dollar phone is probably less than twenty bucks.

More than half the goods Trump has currently targeted for import tariffs are electronic goods. Most of them can be expected to follow similar formulas when it comes to the paper value of goods exported from China, and the real value to Chinese factories. By Foreign Policy’s math, if Trump’s tariffs were successful in dropping sales of these products by a quarter, the real cost to China would be about ”$6.5 billion—roughly 0.05 percent of the country’s GDP. For an economy growing at 6.8 percent per year, that would be a pin prick.”

Just because China runs a large official trade deficit to the United States doesn’t mean that number presents anything about the real value equation between the countries, and it certainly doesn’t speak to the cost of replacing that relationship. For many companies, what China does is exactly what they do for Apple: Component assembly at low cost. What they’re selling is the handiwork of millions of laborers who suffer in conditions and wages that US workers would regard as an outrage. The big bucks get assigned to China only because it’s the last stop in a global supply chain before the item heads for the US, not because every step of the process happens there.

That means that the imposition of a tariff on goods coming from China is a much bigger blow to the US companies that sell those goods, than it is to the Chinese companies that get a sawbuck for putting them in a box.

Even a blanket U.S. tariff on all Chinese goods exports — iPhones and all — would be bearable for China. The OECD reckons that around a third of the content of U.S. imports from China is actually of foreign origin. So the Chinese value added of its exports to the United States is perhaps $329 billion — some 2.7 percent of China’s $12 trillion economy. So even if a blanket Trump tariff slashed China’s exports to the United States by 25 percent, the direct hit to GDP would be 0.7 percent. That would hurt. But it would still leave the Chinese economy growing at 6.1 percent a year.

Meanwhile, the price of those tariffs is not paid by China. It’s paid by US consumers. When Trump talks about the “billions flowing into the coffers” from tariffs, what he’s actually saying is billions of consumer taxes. And there’s another reason to expect that the US is not going to win this war.

For all his bragging about his negotiating skills, Trump is a bungling amateur. He has opted for a solo fight against a smarter, more patient, and more resilient adversary. So far, this is mostly political theater. But since Trump is overestimating his leverage and underestimating Chinese resolve, there is a real danger that the conflict will escalate.

Donald Trump thinks that he and Xi Jinping are fighting over the price for a condo. And he thinks that, since he gave Xi a nice slice of cake, that he and the Chairman of the Communist Party of China are great pals who will surely just put on a show for the dupes at poolside. But Trump is wrong about every single step. He’s opened a war, but he’s armed with a popgun.

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