Let’s just consider the US’ largest export to China… Soybeans.
Now, let’s look at where China get’s it’s total supply of Soybeans:
Now let’s say that US beans become 25% more expensive because China places a retaliatory tariff upon them.
Prices will increase and this will create opportunities for other suppliers to take advantage of higher prices and potentially increase output. Perhaps output pre-tariff is capped due to costs to expand, but now, South American suppliers will be able to increase prices between 1-24% and still sell for less than US suppliers while incurring no additional costs. Competition between non-US suppliers will prevent gouging, but demand from non-us suppliers will increase, so prices will increase and so will profits.
My question is this…
What prevent’s non-US suppliers from increasing output long term and permanently cutting into US supply? That is, right now, South America supplies 56 million tons of Soybeans to China, what happens if traffits shift that to 60 million or more? And thanks to higher profits, marginal costs in South America decline making Soy cheaper in South America long term such that when the tariffs are removed Chinese companies continue to purchase Soy from South American suppliers reducing US output?
Now I don’t pretend to have all of the facts here, but I don’t think situations like this are unreasonable.
One other point. Ret seems to think that China needs the US more than that US needs China.
Trade between China and the US is a trade for something other than just goods and services. China has over 1 billion working aged people they want to keep employed and they lack the domestic demand to make that happen. The US on the other hand wants low prices that its domestic market can’t supply (either in cost or volume).
So low prices for us and relatively speaking, lower unemployment for them.
So the next question in my mind is who has greater leverage?
The US? Maybe if China was it’s only target, but the US has imposed tariffs on Canada and the EU, which only drive Canada the EU and China closer together.
I think Xi will wait out Trump because Xi, being a lifetime ruler, has more long term control than Trump, especially given that an election is right around the corner. When US consumers see laptops, TV’s, Cellphones and a host of other produces increase in price over the next year (assuming this goes the distance) US consumers will revolt and Trump, as Teflon coated as he has been, will get burned.
Bookmark this and we’ll discuss it 6 months to a year from now…
Of course, there is more than economics going on here. There are geo-political implications I admit that I am unaware of…So if this works out in Trumps favor, I’ll say it now, it won’t be because of how he’s perceived the economics of it…