With a United States-China trade war seemingly escalating amid new tariffs and no additional scheduled talks, the question now becomes whether the U.S. can "win" this battle.
While, the U.S. can definitely broker better (dare I say fair?) dealings with China in terms of trade, the entanglements of making that happen are far more daunting.
Here are the factors I see at play.
Regarding long-term negotiations and maneuvers, China has one big advantage. It does not have to worry about the electoral changes that occur so often within the United States.
President Trump has to run for re-election next year. If he loses, the next president might not have the same bite when it comes to this issue.
Historically, presidents have preferred to avoid too many entanglements regarding U.S. trade deficits. Because China's current leadership doesn't have to deal with the same level of pressure next fall, the country might be able to outlast the current administration.
Disparity Between Exports and Imports
The main leverage that the United States carries in this fight is the trade imbalance.
In 2018, the U.S. imported $539.5 billion in goods from China. In contrast, the U.S. exported a decidedly smaller $120.34 billion in goods to China.
In the first three months of 2019 alone, the U.S. imported $105.97 billion in goods from China and had $25.9 billion in exports to China.
When you look at the stark contrast in goods being moved, it's abundantly clear that the Chinese economy is far more dependent on being able to move goods to the U.S.
In 2018, the U.S. exported $1.66 trillion in goods globally. That means U.S. dealings to China represented roughly 7.25% of its total trading exports last year. In contrast, using stats from the WorldBank.org from 2017, 19% of Chinese exports went to the United States, making the U.S. its largest single trading partner by far.
China is much more reliant on being able to sell goods within the U.S. market, giving the United States far more bargaining power in this area.
Chinese Economy vs. United States
That inherent need to have cheap production performed domestically, and then shipped elsewhere is at the core of why China can't make a deal. President Trump's endgame basically seems to be focused on driving producers to do their manufacturing in the U.S. There really isn't a scenario where that ends well for China.
China's economy has already shown weakness through these tariffs, and that would only get worse if it made a deal that damaged its ability to essentially undercut the U.S. on price. It would cost China its appeal to many companies as a cheap place to do business. China's economy is caught between a rock and hard place.
At the same time, President Trump can only push so far in terms of forcing production back to the U.S. (or elsewhere). It's a delicate balance.
If you drive up costs for corporations too quickly, company profits will suffer and there is the potential for big hits to the stock market, which would hurt many pensions and retirement accounts.
Many U.S. companies have investments in Asia. At the same time, there is a lot of merit to putting more pressure on forcing them to use American labor.
Because of the 2020 presidential election, President Trump is under pressure. The exact source of that pressure isn't clear yet, though.
If the domestic economy remains strong in terms of unemployment and wage growth, I think he has some wiggle room regarding pure percentage growth of gross domestic product. He can campaign on the idea that he's fighting a trade war for the American worker, and that voters should reelect him to get it done. On the flipside, if the economy starts to weaken in a way that damages consumers or labor, the lack of a China trade deal could hurt him.
The Chinese government has to worry far less about the angst of its citizens. My bet is that China is hoping with all their heart that it can simply outlast the Trump administration.
Caught in the Crossfire
Perhaps by their own doing, automakers are definitely in a tough spot. Pick any automaker, dig deep enough into their manufacturing processes, and you're going to find out a great deal of their parts are made in Asia.
I believe names such as General Motors GM, Ford F and Toyota TM will all experience increased costs. Past the potential of tariffs, costs related to supply chains, if consumer sentiment were to weakness, the already declining auto cycle could see further declines. The big names have all been relying on trucks to carry their earnings of late.
Semiconductors and tech are also very vulnerable to this trade war. Like many companies, Apple AAPL has profited from very cheap manufacturing conditions by producing in China. Therefore, the maker of iPhones, along with many chip companies, could suffer.
On the domestic side, agricultural companies that export food to China are vulnerable to retaliatory tariffs. That would add some pressure to a key voting group for Trump, along with companies such as Deere & Co. (DE), but you have to wonder how long China could handle not importing that food.
Based simply on the disparity between the number of goods exported to China to the number of goods imported from China, the United States can absolutely win this trade war if it wants to. The problem here is the election. U.S. administration's change, and China could play the long game and hope for a new president.