Chinese Checkers - The Tariff Edition (Part 2)

In the first part of today's story I walked you though everything that's happened on the tariff front this year. I concluded the first story by saying that I see two potential outcomes, one that's extremely positive and one that's potential reason for concern.  

The United States is the world's top economy and we've been on the short end of the trade stick since 1975. To President Trump's point, (that he's made for forty years) and to his credit, he's discussed the absurdity of having the most leverage on trade deals in the world but by willingly allowing ourselves to get the raw end of everyone of them. This has included trade deficits, currency manipulation and IP theft. There's been no bigger trade partner or rip off artist than China. According to the US Trade Department our current annual trade deficit is $375 billion but that pales in comparison to the estimated $600 billion loss in intellectual property theft by the Chinese government and its companies of American companies and interests. The most public of which was the Chinese government hack of the US Chamber of Commerce, where they stole US company data and trade secrets for two years prior to the hack being discovered. The Obama administration's response? Nothing. What message did that send?  

I concluded the first story by saying that I see two potential outcomes, one that's extremely positive and one that's potential reason for concern. So, let's get to it. I'll start with the bad outcome first. 

  • Worst case... China and related trade partners take significant action against the US 

So, what happens in this instance? China along with other displeased trading partners (like the EU) get together for a one-two-punch of retaliation on American goods. The US position as the world's top economy is leverage for better deals but only as long as we remain on top. If other countries see a window of opportunity whereby they may be able to get together and knock us off - they could try and at worst succeed. Sure, they'd hurt their own economies by doing this in the short-term but the idea would be short-term pain for long term gain. This would send the US economy, currently the best it's been at least 13 years, into a likely recession.  

  • Best case... There's a renegotiation of all trade deals  

Realizing that they've been taking advantage of lax US trade policy for decades, and there's a sheriff in town who gets it, China along with other trade partners renegotiate trade policy that's more favorable to the US and all tariffs are eventually dropped. This would be a win-win-win for the US. The US economy/consumer would benefit from truer "free trade". US manufacturing would be playing on a level playing field. US companies wouldn't be subjected to constant, unchecked IP theft.  

Here's the good news. I think that of the two possibilities the latter is the most likely. I believe that China drew a line in the sand on Friday by suggesting that they'd grant the Trump administration the rope they'd already pulled up to this point but wouldn't be willing to take anything else. What China did is barely noticeable outside of lean hog futures (and no I'm not kidding). I actually viewed it as a "de-escalation" of trade policy rather than a ramp up. If, and it's an if, President Trump tries to negotiate trade policy from here rather than issue additional tariffs - there's a good chance for a great ending to this. If not, there would be legit reason for concern. To be continued... 

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