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China cleverly targets U.S. red states in trade fight

On March 22, President Donald Trump signed an executive order that will impose up to $60 billion of tariffs on Chinese exports to the U.S., first on steel and aluminum, and next on technology products, accusing China of stealing technology from U.S. companies.

In an aggressive response, China announced that the U.S. had violated World Trade Organization regulations, and announced that it would impose tariffs ranging from 15 to 25 percent on 106 U.S. exports, including fruits, nuts, soy, wine, liquor, steel/aluminum, vehicles, and pork products. The value of the tariffs is estimated to be $50 billion. In reaction, the Trump administration upped the stakes and threatened to tariff another $100 million of Chinese goods.

Now, it appears that the U.S. wants to negotiate with China before imposing more tariffs, and China appears willing concede in a few initial areas. However, no details on either side have been revealed.

The back-and-forth is being described as a “trade war.” If viewed this way, U.S. agriculture and the stock market would be the infantry, in the trenches taking shots on the front line. China is using what would be akin to pinpoint bombing to take out strategic targets in Republican red states, as it slaps tariffs on Harley-Davidson products and cranberries from House Speaker Paul Ryan’s home state, peaches from Georgia, and Kentucky bourbon.

Meanwhile, stock markets not only in the U.S., but in countries such as Japan, have gone on a roller-coaster ride as the drama unfolds.

And if we can compare the opening shots of this trade war to the early months of World War II, another term comes to mind. The so-called Phony War or Sitzkrieg, as it was known in the U.K. These were the eight months at the beginning of the war in which limited operations and skirmishes were undertaken, until the major fighting started.

And what is the reality of the current actions? Trump’s publicly stated premise that China needs to be slapped with tariffs on its steel and aluminum exports to the U.S. because it is destroying these U.S. industries is a fallacy. Accounting for only 2.9 percent of steel/aluminum exports to the U.S., China ranks tenth on the list of all exporters of these products to the U.S. Canada (16.7 percent), Brazil (13.2 percent), and South Korea (9.7 percent) are the largest exporters of steel/aluminum to the U.S.

On the flipside, China’s threatened imposition of $50 billion of tariffs on U.S. products, while a large number, is a small figure compared to the overall value of the U.S.-China trade relationship.

In any case, both sides appear to be attempting to feel each other out on trade issues by firing tariffs at each other.

Whether the situation will escalate and which actual tariffs will be levied on specific goods is uncertain. What is certain is the fact that businesses in the American agricultural sector, both in the commodities and value-added agriculture industries, are pawns, caught in the middle of this fight. China’s strategic tariffs on U.S. goods is intended to make Trump supporters in red states clearly aware that the president’s actions have a direct negative effect on them, and that their support of the president will have financial repercussions.

In the short run, it isn’t always easy to substitute products from other countries for the products for which you are now paying an extra 15 to 25 percent. In economics, an elastic product is a product that,when its price goes up, consumers simply stop buying it or easily substitute other similar products. Many of the U.S. commodities that China is targeting, such as nuts, fruits, and aluminum scrap, can most likely be quickly substituted by products from other countries. The effect of a tariff war on these U.S. sectors will be more pronounced.

Inelastic products are those for which demand does not change significantly if the price goes up, and substitutes are not easily available. Products on the list such as U.S. wines and liquor may have an element of inelasticity, and Chinese consumers may simply choose to pay higher prices for their booze of choice.

In the medium and long run, the higher prices caused by both countries’ tariffs will result in products from other countries becoming more competitive and establishing a beachhead in previously challenging markets, or absorbing the market share given up by the Chinese or American exporter because of higher prices.

The U.S. appears to have the next move in this fledgling fight. I imagine there are pork producers, nut farmers and fruit producers in parts of the U.S. that strongly supported Trump wondering how they were unwillingly put into the front lines of a trade war that could affect their ability to generate profits and to keep Americans employed.

Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or at jerry@nmiba.com.

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