Here’s the reality: the USA is pumping up China by indirectly contributing $500 billion toward their $1 trillion trade surplus. Yes, 50% of that $1 trillion comes from the United States. Over 50% of the US trade deficit is with China. Yet, the USA only imported about $440 billion directly from China, so how is the USA contributing $500 billion?
The data is clear: Vietnam shipped $109 billion in goods to the USA, while Mexico shipped $480 billion, Japan $150 billion, South Korea $120 billion, and Germany $160 billion. All of these billions add up, and their products, especially in the case of Vietnam and Mexico, contain Chinese components—about $160 billion to $200 billion worth. So, the actual trade deficit the USA has with China is $460 billion to $500 billion. The same goes for Europe; their trade deficit with China is $300 billion, Turkey’s is over $30 billion, and India’s is about $100 billion.
By 2030, China will be responsible for 45% of all manufacturing in the world. The USA will be more dependent on China in 2030, not less; the trade deficit will be higher, not lower. All the economists and business leaders don’t seem to care if the USA is not in charge. Their only solution is to avoid tariffs. The problem in the United States is that people believe the use of tariffs is to raise money, when their purpose is more about geopolitics.
There is a solution, and it involves two simple actions: The Congress of the United States of America should put two tariffs in place. Nothing major, very benign, but effective:
- An initial 1% to 2% per month tariff increase on goods from China, until trade is balanced.
- A 1% per quarter tariff increase on all products entering the USA that have Chinese components, until those components are sourced elsewhere.
Ideally these tariffs should start with a bang of 20% or 5%.
For the first few years, no one will even notice these tariffs. There are five ways that the tariffs can be neutralized:
- China’s currency devaluation: The yuan is currently 7.33 to the dollar, while 11 years ago it was 6.04. China has devalued its currency 21% in 10 years. This makes a $100 widget now worth $80.50. China has the capacity to devalue the yuan to 10 yuan to the dollar over two years. This represents a 37% devaluation. In the case of ever-increasing tariffs, China would be able to neutralize them. The weakest the yuan has ever been was 8.73 to the dollar, which is 19% weaker than today, so going to 10 to 1 in a scenario of ever-increasing tariffs is totally feasible.
- Cutting profits for manufacturers in China: The manufacturing sector in China can cut 5% off current prices to absorb tariffs.
- Importers can cut 5%: The companies that import products can reduce their margins.
- Subsidies in China are reported to be 3% by experts, probably much higher. However, with China’s banking system, cheap loans for manufacturers, loan forgiveness, and forced labor, China can deflate the cost of making a product by 5%.
- Deflation of goods: Using the crisis of the last two years related to construction and real estate, despite the booming manufacturing and technology sectors, China has been able to deflate the value of its goods by 9.8%. Deflation, if implemented over time, could reach about 10%.
- Some things will cause prices to be more expensive in China, such as the cost of imports, which will rise by 12% as China consumes raw materials.
The tools China has at its disposal can offset about 50% of the tariffs over five years. China’s industry is nearly self-sufficient; it doesn’t need the equipment from Japan or Germany anymore. This means that China is able to absorb a lot of the impact from tariffs.
That is why a 60%, 80%, or 100% tariff doesn’t work on its own. A 20% tariff does, but with 1% added per month after that.
Imagine that $100 widget again. Five years later, the widget costs $50 because China used every tool in its mercantilist arsenal. Imagine a 20% tariff plus 1% per month for five years; the tariff would eventually be 56%. A 56% tariff on a $50 widget results in a final price of $78. This is why a 60% to 100% tariff is needed to combat China; it works out in the USA’s favor. The USA could raise tariffs up to 120% over five years before China caves.
China’s trade surplus didn’t happen overnight; it took decades to develop. Therefore, it will likely take a decade of gradually increasing tariffs (by 1% per month, for example) to balance it out. This would result in a 140% tariff.
Consider a $50 widget today. In 10 years, with the cumulative tariffs, its cost will become prohibitive. Once the tariff exceeds 100%, companies will begin to move out of China. This would lead to a slow, 10-year decline as companies grapple with ever-increasing tariffs. One thing is certain: no one will build new factories in China for 10 years.
