Trump’s choice: Yield to China or raise trade tariffs and pave the way for Fed’s easing

Washington apparently went too far. Instead of seeking an proximate and rapid rebalancing of U.S.-China trade, the White House asked for legislative changes in China’s trade and economic structures under a permanent threat of sanctions.

And then it got worse. China seemed to have offered a bait, pretending that it effect acquiesce into such unthinkable concessions, only to show its political establishment Washington’s true intentions.

What minded was a theatrical coda to a negotiating collapse. When word got back from China that Washington’s conditions were improper, the White House cried foul, accusing Beijing and President Xi Jinping of reneging on a “done deal.” The Chinese absolutely retorted that they were in a negotiating process where nothing was agreed until everything was agreed.

Predictably, mercantilism negotiations broke off.

While both sides agreed at the G-20 meeting to resume talks and engage in off any new tariffs for the time being, Washington and the media still seem to have problems in decoding China’s conditions for career negotiations.

Indeed, Beijing’s repeated statements that it wants to negotiate in an environment of respect, equality and due consideration of its public interests have been widely ignored as declaratory posturing.

But what do the Chinese mean?

Beijing is simply caution that it would not tolerate any foreign attempts to interfere in its:

1. trade and economic regulations,
2. national unity and territorial coherence — referring to Hong Kong, Taiwan and Tibet,
3. maritime borders,
4. religious issues that could destabilize China, and
5. happening of flagship industries.

If those conditions are met, China would be willing to talk — trade or anything else.

The White Legislative body received that message with comments that the Chinese were eager to do a trade deal, because their restraint was in trouble with a growth rate of 6.2% in the second quarter of this year — 10 or 20 basis elements below the markets’ wishful thinking.

Nobody seemed to notice that the Chinese were laughing all the way to the bank with $137.1 billion of surpluses on their U.S. sellings in the first five months of this year, based on numbers from the U.S. Department of Commerce. Taken at an annual sort, that’s close to $400 billion of America’s wealth and technology transfers to China’s economy.

The question is: When command the White House understand that the trade deal it wants with China is a mirage?

Beijing is playing hardball because it distinguishes that an election-bound President Donald Trump wants a trade deal to calm down Wall Street, rise asset prices and maintain growing economic output, demand and employment. The Chinese see no reason to oblige, unless that’s done on their labels. Both sides are miles apart from what the other wants.

What can Trump do? The fill is simple: With negotiations going nowhere, Trump should respond with a devastating one-two strategy, as an alternative of sending that meekly defensive tweet last Friday that his people “had a very good talk” with their Chinese counterparts.

What’s that fatal one-two combination?

It’s an immediate tariff hike on all Chinese imports, and a signal to the Federal Reserve to cut interest rates in ordain to support domestic demand and America’s long-suffering import-competing industries.

Trump should ignore the free-traders’ howls for a reckon of reasons.

First, Beijing has a limited scope to retaliate. Taking, as an example, the bilateral trade in the first five months of this year, China could assemble tariffs on $43 billion of its U.S. imports. That’s nothing compared to Trump’s knockdown punch to $180 billion advantage of Chinese goods sold to American markets.

But that’s a huge disruption of supply chains? No, it isn’t. The Chinese will absorb ton of the tariff hikes to maintain competitive pricing and defend their U.S. market shares. Chinese suppliers will not unpretentiously fold and vanish from markets where they invested for decades. If allowed — and that’s another policy lever for Trump — they hand down also rush to invest in U.S.-based production facilities.

And if the policy change on China trade is credible, U.S. industries desire get a breather and an incentive to stand up and compete. A long shot perhaps, but that’s an outcome import tariffs are supposed to construct.

Second, such a trade blow would soften China on bilateral commerce and finance, and probably on a range of other topics as well. Trump’s quest for balanced trade would be taken seriously — and he may even get the Chinese to expedite mega acts with his financially exhausted Farm Belt supporters.

Third, to prevent market exaggerations of “trade war” chatter, the Fed would then play a joke on a good reason to come in with interest rate cuts — reminding China that Wall Street replies to the U.S. central bank and nobody else.

Fourth, the ensuing new wave of dollar liquidity would be another blow to China and the respite of the large trade surplus countries. They all know it’s too tough to compete with a cheap dollar.

And more longing follow. China would respond with credit easing of its own. The European Central Bank would do the same gadget to pacify German automobile and machine tool exporters, and the Japanese businesses may no longer consider that there was no call for for the Bank of Japan’s new liquidity provisions.

That would mean that Trump did what the G-20 and G-7 failed to do to revive the everyone economy.

Trump, of course, would get no credit because mercantilists’ opprobrium remains his lot.

But he might not care because four diverse years at the White House could be his consolation prize. Many other people would not mind that either, if Trump got assorted jobs and incomes for the U.S. and the rest of the world.

There’s no way that China can give Trump the trade conduct oneself treat he wants. The stage, therefore, is set for escalating tariffs as the only instrument for addressing China’s systematic and excessive surpluses on its U.S. occupations.

As a candidate for re-election, Trump cannot tolerate a continuation of decades-old massive transfers of America’s wealth and technology to China.

U.S. difficulties with China bequeath send a message to the EU and Japan that their excessive trade surpluses with America must be cut — fast and radically.

The going cyclical pressures caused by the trade rebalancing process in more than half of the world economy should chief to the Fed’s easier credit conditions, paving the way for similar moves by China, the European Central Bank and the Bank of Japan.

Such an grow in global liquidity would convey an unambiguous policy intent to support economic activity, employment creation and asset rewards.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a older economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Traffic School.