Seeking Alpha

The Madness Of Tariffs, And Why China Will Lose This Battle

Summary

China’s two largest customers (US and EU) both have large trade deficits with China.

The US and the EU both have large IP theft claims against China.

IP theft may be a bigger issue than tariffs.

“I am a tariff man, standing on a tariff platform.”
William McKinley

As the battle rages over tariffs and trade wars I decide to look a little further into the whole phenomena of tariffs from an amateur’s viewpoint. I mean, what do I know about tariffs?

I found out that the EU has over 12,000 tariffs that are apparently maintained, regulated and monitored by thousands of European Commission trolls happily ensconced in Brussels.

Some of the more important EU tariffs are telescoping umbrellas (but not regular ones) at 4.70% per unit, ketchup (but not mayonnaise) at 10.2%, unicycles at 15% and my favorite historical swords and cutlasses at 1.7%. And as if poor Jeff Bezos doesn’t have enough problems with President Trump beating him over the head with tweets, the EU decided to slap a 4.2% tariff on sub-orbital space vehicles. For Jeff’s sake let’s hope his Blue Origin spacecraft doesn’t accidentally land in Europe.

You can’t make this stuff up. See (here) for more laughs from Brussels.

And before you start thinking I am just picking on the EU I also looked into the tariffs set by the good ole US of A. I downloaded a tariff spreadsheet (see here) from the USITC (US International Trade Commission). It contains over 10,000 tariffs. And at least a couple of them affect me personally.

I was thinking about getting a goat for my backyard to keep the grass down so I don’t have to mow so often. So I looked into getting a goat from Canada where most of our imported goats come from. And low and behold, there was a tariff staring me right in the eye. It was 68 cents a head for imported goats throwing my goat budget completely out of whack. So I had to rethink my backyard strategy.

I then decided to buy chickens for my backyard instead thus giving me fresh eggs every morning. So I arranged to import 5 chickens from Mexico. You guessed it: more tariffs this time an outrageous .9 cents per head adding a nickel to my purchase cost. I know if you do the arithmetic its only 4.5 cents but I am assuming the green eyeshade tariff bean counters would round that baby up. I cried ‘fowl’ at the extra cost but to no avail.

If you want to see more detail go (here) and enter the code for goats (01042000) and/or chickens (01051100) then hit the “List Item” button then the “Detail” button. One of the more interesting things about the goat lookup is the annual dollar amount of the imported item. In this case for goats it was $204,000 for 2017 which is roughly 1,000 goats meaning the government picked up all of $680 less of course the cost of maintaining this database, collecting the tariff, recording the transaction, reporting the transaction, and disbursing the tariff to someone somewhere. I am sure it was worth every penny.

Source: USITC

So now with my dream of being a backyard farmer shattered by the outrageous hydra-headed monster called the Tariff Council I will move on to less important things like the tariff war with China.

Here are 5 reasons China will lose the battle.

1. China is big but a long way from dominant.

Sometimes if you read the press you have the feeling that China is an economic powerhouse that rules the world. But the fact is the US is still by far the largest country by GDP and the EU is also larger than China.


Source: Eurostat

2. China is much more dependent on US trade than vice-versa.

If we create a chart showing exports to GDP we can see quickly that China’s GDP depends on exports to the US a lot more than the US depends on exports to China. And the same is true for percentage of total exports for each country. This is not a position of strength for China.


Source: Author

3. China is not the only country with surpluses.

Just about everyone one else the US does business with has a surplus too. Note the US has much larger trade deficits (imports minus exports) than any other country. Even Russia has a surplus.

Looking at this chart you can see why Trump thinks there is a big trade problem.

4. When it comes to trade deficits with the US, China is number one and Mexico is number two.

Looking at the US trade deficits by individual country shows some interesting numbers. I had no idea Mexico was second and with Germany, Italy and Ireland in the top 6 you have to wonder how much of a trade battle the EU wants with the US. This does not bode well for China’s effort to get the EU to join them in punishing the US. And that EU reluctance is probably going to be enhanced by China’s stealing of EU IP (Intellectual Property). Think Rolex watches and St. Laurent clothing.

Not to mention the EU has a trade deficit of over $150 billion with China too.

So my guess is China is going to be on their own in the fight with the US.

5. The big kahuna in the tariff battle is not tariffs but IP theft.

When disparate opponents of Donald Trump such as the NY Times and the EU both back his efforts to bring China’s IP theft into the open, you must know this is the real issue.

Here’s the NYT (see complete article here):

“President Trump’s action on Monday is a major step in the right direction. If the investigation proves extensive Chinese government support for intellectual-property theft, it could trigger retaliatory action by the American government, based on the Economic Espionage Act, Section 5 of the Federal Trade Commission Act and the National Defense Authorization Act.”

And:

“All together, intellectual-property theft costs America up to $600 billion a year, the greatest transfer of wealth in history. China accounts for most of that loss.”

And the EU agrees assuming Trump goes thru the WTO (World Trade Organization) to mete out punishment though that would probably take years.

The chart below shows sources of IP theft and China plus Hong Kong are about 85% of the total.


Source: IP Commission Report

Conclusion:

If tariffs are bad why do we have over 10,000 of them? And if tariffs start trade wars why don't we have a trade war now? Or are we in a trade war and we don't know it?

This tariff war is really a one-sided battle where China is facing off against not only the US but the EU and Japan. Those are some very formidable enemies to have. And the Chinese know it is very bad business to antagonize your best customer.

In the end China will lose but I think some sort of compromise on the punishment will be reached. But going forward everyone will be watching China even more closely than they are now. And perhaps that is the best thing to come of this.

I think Trump's goal is to get some sort of agreement with China while re-doing the NAFTA Treaty both before the November election. When (if) that happens, the market will soar. Until then it will remain extremely volatile but something will be done on both before the end of the year so stay invested.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.