In a shockingly short period of time, we appear to be swinging from a period of U.S. economic gain to one that is quite possibly a disaster. The United States and China have essentially merged their economies and much of the world’s economy has been predicated on the assumption that the world will make things in China and the Americans will buy them. The Germans, Japanese, Koreans and others are supplying parts and components, but American companies also have been leaders in creating this situation. We all know that Apple has all its phones made in China, but the pattern is much deeper than that. Every major retailer relies extensively on goods it orders to be made in China. Just walk into any Home Depot or Wal-Mart if you want to examine where things that consumers want are made.
China will definitely retaliate for President Trump’s imposition of tariffs. This is a matter of face now and President Xi Jinping is a proud man. There will be no negotiations. If Trump follows through on his announcement, here are things that could happen:
–Many Americans, certainly well into the hundreds of thousands, will lose their jobs if their companies or their farms can no longer export to China.
–Prices will go up for millions of consumers because of the tariffs the U.S. places on items made in China. Inflation, long dormant, could be re-ignited. The alternative to this is that the goods simply would not be imported and there would be shortages of many basic consumer goods while companies attempted to shift their patterns of procurement, which could take many months, if not years.
–The Chinese, along with the Japanese, are the largest buyers of U.S. government debt. If the Chinese start to ease back, our interest rates will have to increase even more dramatically than the Federal Reserve intends. Of course, if they are really angry and start selling U.S. government debt aggressively, it would create a financial crisis. Our financial system is based on money from China and Japan.
So add it up: greater unemployment, greater inflation, possible shortages of goods, higher interest rates. Sounds like a recession to me. Problem is, how can it be contained once it starts? A recurring cycle of tit for tat retaliation could mean the unraveling of the current world economic order as we have known it for decades. That would spell a depression–the Trump depression.
