Get Ready, America. Trade War’s Coming for Your Hip Pocket

(Bloomberg Opinion) -- “A wise general makes a point of foraging on the enemy,” according to the Chinese general Sun Tzu. “One cartload of the enemy’s provisions is equivalent to 20 of one’s own.”

The lesson of that maxim — that leaders need to pay close attention to the economics of conflict, and make sure that costs are imposed more on the enemy than the home front — holds as true today as it did two and a half millennia ago. Washington doesn’t appear to be listening.

The White House’s promise to impose 10 percent tariffs on $200 billion of Chinese goods on top of the existing $50 billion issued this week — with an option to add a further $200 billion on top of that — would put almost the entirety of the U.S.’s $526 billion of imports from China in jeopardy.

That may look like a strong move. China, with only $155 billion or so of imports from the U.S., simply doesn’t have enough trade to respond in kind. In truth, however, the big numbers conceal some deep weaknesses.

To see why, consider Sun Tzu. The initial lists put out by U.S. Trade Representative Robert Lighthizer have been surgical in targeting only goods that can avoid a widespread popular backlash against President Donald Trump’s trade policies. Most of the 1,102 products on the latest tally are intermediate goods such as storage heaters and lubricating oils, whose raised costs are unlikely ever to directly hit consumers’ hip pockets.

The exceptions threatened to date have tended to be rarely purchased durable goods (such as the washing machines that have risen 17 percent in price since tariffs were imposed in a separate move in January), or products such as flat-screen televisions that have become dramatically cheaper over the past decade.

In both cases, the products are ones where average Americans might be expected to initially miss the pain of rising costs — and even flat-screen TVs were removed from Lighthizer’s most recent list after consultation with industry.

In other words, Lighthizer has been ensuring that his trade armies forage on the enemy. The tariffs will hurt the revenues of Chinese exporters, as higher prices damp demand while U.S. wholesalers switch to other countries wherever substitution is possible.  By avoiding swathes of consumer products, meanwhile, he’s limited the risk of popular discontent.

The problem is that the U.S. is at a strategic disadvantage on this front. As we’ve written before, China’s exports to the U.S. tend to be consumer goods, while trade in the opposite direction is weighted toward raw materials and intermediate parts. That means Lighthizer is already close to or past the limit where he can raise prices on Chinese products without American voters noticing.

What are the next major categories of goods where the U.S. can impose further tariffs? Mobile phones, with $73 billion of imports from China in 2017, would be next on the list, followed by computers and accessories; furniture and mattresses; toys and games; clothing and shoes; and televisions. The six categories together amount to another $273 billion.

Such action would smack Middle America between the eyes, and Washington could be expected to do its utmost to avoid it. But the wiggle room is limited, as the Council on Foreign Relations’ Brad Setser has pointed out. While it’s possible in theory to compile the next $200 billion hit list by imposing levies on almost every traded item other than those big six consumer categories, there’s no way to reach Trump’s final total without doing so.

Look at how the two commanders-in-chief are arraying their armies and you should be concerned about America’s ability to withstand attack.

The careful curation of Lighthizer’s existing lists suggests a general aware of his weaknesses on the home front who is following orders from a commander oblivious to the risks. Should the trade war begin in earnest, Washington had better be ready with an explanation for the rising cost of living and decline in farm exports ahead of November’s midterm elections.

Meanwhile, China’s domestic industrial machine — which managed to offset the wrenching export declines from the 2008 financial crisis without pushing economic growth below 6 percent — is roaring in readiness. Steel production in May rose 12 percent from a year earlier, the fastest pace in five years, while thermal electricity output climbed 10 percent. That stimulus may worsen China’s economic imbalances and harm the global climate, but — combined with the relative immunity from popular anger you’d expect in an authoritarian state — should keep the nation strong as the trade battle heats up.

It may well be that the White House’s latest threat is no more than a gambit. America’s consumers had better hope so. If not, the front line of this conflict is coming to their hip pockets.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

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