President Trump’s top trade adviser Peter Navarro is quoted today as saying, “President Trump has given China every chance to change its aggressive behavior. China does have much more to lose than we do.” The size of American threats against China’s trade surplus now reach as high as $450 million.
Navarro and Trump seem to think they can force the Chinese into making concessions that would diminish their drive to become a technology powerhouse by 2025. But the Chinese are simply not going to sacrifice that goal. President Xi Jinping has proclaimed that it is time for the Chinese people to recognize “the Chinese dream” of a soverign nation in charge of its own destiny. This is powerful language for a country that is deeply mindful of having been occupied and exploited by foreign powers for a century. They feel they are standing up to a declining imperial power that is unfairly trying to sabotage their efforts. If Xi were to demonstrate weakness in a moment such as this, he would be hounded out of office.
The Chinese will be prepared to pay any price to stand firm in opposition to what Trump is doing. I see zero chance that they will be intimidated. And they have plenty of tools to hit back. Trump and Navarro keep pointing to the size of the Chinese trade surplus, But that is just one piece of the overall picture. Apple’s entire supply base is in China. GM sells more cars in China than in the United States. Intel sells more semiconductors in China than it does in the United States (though it wisely has maintained the bulk of its production here.)
The Chinese could interfere in subtle ways or not so subtle ways. These American giants could be badly damaged. Then there is the damage that American consumers will feel in Wal-Mart, Target and Home Depot. The share price of all these companies could be hit.
The ultimate weapon the Chinese possess is their holdings of U.S. government debt. They alternate with the Japanese over who’s the largest investor. But at the moment, the Chinese are financing Trump’s budget. There are limitations on how far and how fast they could pull back because any shocks would affect the value of their U.S.-dollar holdings. But even a modest decline in their purchases would drive interest rates sharply higher.
Trump has zero chance of success because he does not see the whole picture.
