Justin’s note: Regular readers know President Trump’s recent tariffs on steel and aluminum could have serious ramifications for the economy. They could even trigger a global trade war.
This idea is so big, I’m featuring another essay to help you understand what’s really going on. Read on to get Crisis Investing editor Nick Giambruno’s take…
By Nick Giambruno, editor, Crisis Investing
Trump’s steel and aluminum tariffs may set his epitaph in stone… “Herbert Hoover II.”
History remembers Hoover as one of the worst American presidents.
Like Trump, he was a rich international businessman. He was also a political outsider. Hoover hadn’t held public office before his 1929 inauguration. And, like Trump, Hoover faced intense pressure from struggling American workers.
In 1930, he signed the Smoot-Hawley Tariff Act into law, raising tariffs on thousands of imported goods to record levels. This kicked off a tariff war, reducing American exports by half. It was a crushing blow to the American economy.
Nearly a century later, Trump seems determined to make the same mistakes…
Trump Started This Trade War Last Summer
Trump placed tariffs on steel and aluminum earlier this month. China, of course, is the world’s largest producer of both.
The mainstream press called the tariffs “unexpected.” But they didn’t come out of nowhere.
Last month, I told readers of my advisory, Crisis Investing, that steel and aluminum tariffs were likely.
In fact, I’ve been telling my readers about a trade war—specifically a trade war with China—since September.
Frankly, I think Trump fired the first shot in this trade war last summer, when his administration launched an investigation against China using Section 301 of the Trade Act of 1974.
This rarely used provision allows Trump to “take all appropriate action… to obtain removal of any [trade] practice that is unjustified, unreasonable, or discriminatory, and that burdens or restricts US commerce.”
Traditionally, World Trade Organization (WTO) members, including China and the US, have settled trade disputes through it. But Trump, using Section 301, has taken a unilateral approach.
The Financial Times describes it like this:
Under the 301 statute, which has not been widely used since the 1995 creation of the WTO, the US would in effect act as judge, jury and executioner on any grievance that it identifies.
No doubt, the investigation will ultimately show that China is pursuing unfair trade practices. This will give Trump all the justification he needs to further escalate his war.
A Record Trade Deficit With China
The investigation was the start of a major pushback against China.
Trump even said, “This is just the beginning, I want to tell you that. This is just the beginning.”
He wasn’t bluffing.
In January, Trump fired another shot. He slapped tariffs on imported solar panels and washing machines. China is by far the largest producer of solar panels.
After that, in his first State of the Union address, Trump said that previous trade deals have “sacrificed our prosperity and shipped away our companies, our jobs and our wealth,” and that the “era of economic surrender is totally over.”
Then embarrassment hit…
In February, the Commerce Department announced that the US had realized its largest ever trade deficit with China during Trump’s first year in office. (He’d repeatedly promised to shrink the deficit.)
Trump sees the trade deficit as an economic scorecard between the US and China. Now, with a record high deficit, he has another convenient excuse to escalate the trade war.
One Promise Trump Can Keep
During his campaign, Trump threatened a 45% tariff on Chinese goods entering the US.
He also said China was sucking “the blood out of the United States” and “we can’t continue to allow China to rape our country.”
Getting tough with China on trade is a campaign promise Trump can actually keep. Legally, he doesn’t need anyone’s cooperation, as he demonstrated last week.
It also caters to his base, which believes China is largely responsible for the loss of middle-class jobs.
And, as I’ll explain shortly, the new tariffs are part of a much larger and genuinely dangerous conflict with China…
How the American Dream Slipped Off to China
China is displacing the US as the #1 world power.
Its GDP is on track to double compared to US GDP by 2030. In other words, China’s economy will soon be twice as large as America’s.
China has already surpassed the US in more ways than you’d think.
For the first time in modern history, Asia is richer than Europe in terms of private wealth. It will also be richer than North America within the next two years.
China is driving this shift.
The Chinese are some of the most aggressive savers in the world. They save more than 30% of their disposable income.
This is a big reason why more than 700 million Chinese people—the equivalent of nearly twice the entire US population—have risen out of poverty over the past couple of decades.
On top of that, China graduates four times as many STEM students (science, technology, engineering, and mathematics) as the US. And that doesn’t even include the Chinese students enrolled in US universities.
This is a powerful trend in motion. And trends in motion tend to stay in motion, unless something bigger stops them.
In this case, that trend stopper could be a war.
The Biggest Player in World History
There’s a 75% chance the US and China will go to war. That’s according to Graham Allison, a professor at Harvard.
Allison looked at the structural stresses that a rising global power creates when it challenges the ruling power. He studied 16 such cases. In 12 of them, the result was war.
This dynamic played out between Athens and Sparta. It played out between Germany and Britain. And today, it’s playing out between China and the US.
Lee Kuan Yew, the former leader of Singapore, put it this way:
The size of China’s displacement of the world balance is such that the world must find a new balance.
It is not possible to pretend that this is just another big player. This is the biggest player in the history of the world.
Military conflict between the US and China is not inevitable. But if history is any guide, there’s an excellent chance—say, 75%—that the US and China will go to war in the not so distant future.
The US government knows this. Steve Bannon, previously one of Trump’s closest advisers, said, “We’re going to war in the South China Sea… no doubt.”
As China overtakes the US, one or a combination of these three things will happen:
- The US will do nothing. Current trends will continue. China will displace it as the most powerful country in the world.
- The US and China will go to war (the traditional kind with troops and bombs).
- The current economic battle between the US and China will escalate into an all-out economic war.
A full-blown economic war is the most likely and most imminent outcome here. I think it’s almost inevitable under President Trump.
China Won’t Cower in the Corner
Trump knows his supporters are passionate about trade and strongly anti-China. It’s a big reason why he won the election and could be reelected. I don’t see him backing down here.
That said, the Chinese have effective ways to retaliate.
They could dump Treasuries. They could limit imports from the US and reduce exports, like iPhones, to the US. They could also harass American companies operating in China.
China could also restrict access to rare earth elements (REEs). It has a virtual monopoly on REEs, which are absolutely essential to advanced electronics and military equipment. Think electronic cars, flat-screen TVs, drones, and fighter jets.
At this point, a full-scale economic war is pretty much baked into the cake. And as we’ve seen in the past week, it’s also imminent.
Unfortunately, this probably won’t end well for Trump or the US.
As Chinese commerce minister Zhong Shan said recently, “There are no winners in a trade war. It will only bring disaster to China and the United States and the world.”
Editor, Crisis Investing