Making China Great Again — Trump's Tariffs Reverse Effect
BEIJING, CHINA - NOVEMBER 9: U.S. President Donald Trump takes part in a welcoming ceremony with ... More China's President Xi Jinping on November 9, 2017 in Beijing, China. Trump is on a 10-day trip to Asia. (Photo by Thomas Peter-Pool/Getty Images)
The sympathy calls have been coming in. A good part of my audit practice revolves around working with Chinese companies. Friends want to know if I'm 'okay' as the Trump administration continues to build its tariff policies around American industry.
The short answer is: I'm more worried about America than China at this point.
A tariff of 145% on Chinese goods (or 245% for autos) may impose significant short-term pain on China's export sector. It will also require a heroic effort from the government to stimulate Beijing to reach its goal of 5% GDP growth in 2025.
However, the Chinese people have already demonstrated the ability to absorb tremendous pain during the COVID-19 lockdowns and the slump in the real estate and tech sectors that followed. I would argue that your average person living in China is more ready to subsist on rice and bitter melon than your average person living in the U.S. is prepared to pay $3,000 for a made-in-America iPhone.
For Chinese leaders, this is a civilizational struggle over the direction of the 21st century. From this perspective, the Trump administration's first hundred days almost seem like a playbook to help make China great again.
American universities are the envy of the world. The U.S. is home to eight out of the world's top 10 universities, according to Times Higher Education. China's best, Tsinghua University, ranks 12th. These academic institutions generate advances in artificial intelligence, quantum computing, materials science, biomedicine, and other fields that underpin our innovation and economic prosperity. They are magnets for the brightest minds from around the world. In the past month, many of these universities have been ordered to relinquish their academic independence, stripped of federal funds, had their students seized on the streets, and watched as faculty have begun an exodus to foreign academic institutions beyond the reach of the U.S. government. China could not have envisioned a more effective way to undermine the foundation of America's scientific future.
China, Europe, and the United States have one shared fundamental economic challenge: plummeting fertility. China has 1.2 births per woman, the European Union has 1.6, and the United States has 1.62 absent immigrants — all well below the 2.1 rate required to maintain the current population. With a shrinking population, gross domestic product growth becomes increasingly hard to achieve while the pyramid of working-age citizens inverts, bankrupting social welfare programs. With this backdrop, economic prosperity in the 21st century will largely depend on trading with, investing in, and growing alongside regions in the Global South, including Southeast Asia, India, Africa, and South America.
The Trump administration is seeking to slash foreign aid as part of a proposed 50% reduction in the State Department's budget, The New York Times reported. Southeast Asian countries that had benefited from earlier Trump tariffs on China, such as Vietnam, have been punished with tariffs of nearly 50%. Tiny developing countries like Lesotho, Madagascar, and Botswana will tax their goods at 50%, 47% and 38%, respectively. Madagascar's mistake was selling too many vanilla beans, perhaps? Meanwhile, China has now persuaded 20 countries in Latin America and the Caribbean to join its Belt and Road Initiative and is dominating the physical and digital infrastructure in the Western Hemisphere. They are stepping up their international economic efforts as America is stepping back.
A Chinese bank employee counts 100-yuan notes and US dollar bills at a bank counter in Nantong in ... More China's eastern Jiangsu province on August 6, 2019. - The Chinese currency steadied on August 6, a day after Beijing let the yuan weaken against the dollar, sending markets into freefall and leading the US to formally designate China a "currency manipulator". (Photo by AFP) / China OUT (Photo by STR/AFP via Getty Images)
For 75 years, the United States has enjoyed the 'exorbitant privilege' of having the U.S. dollar serve as the world's global reserve currency and our 10-year treasury serve as the default safe-haven asset in times of turmoil. In simple terms, the U.S. Treasury can spin its printing presses, cranking out Benjamins at less than a penny, which we then exchange with other countries for goods and services worth $100. It has also allowed Congress to run massive debts without suffering the explosion of inflation that has beset Argentina and other spendthrift nations.
China has long sought to dislodge the dollar's preeminence in favor of a multipolar currency system in which the Renminbi would be the star. If the United States suddenly withdraws from trading with the world, then the world doesn't need our dollars. The recent spike in 10-year rates will pose a real hardship on anyone who needs to borrow to buy a home or a (now more expensive) car. This year, the U.S. Treasury must sell $2 trillion in new debt to finance our deficit while rolling over another $9.2 trillion in maturing notes, the I/O Fund explains. Should those auctions start to fail, the spiraling consequences could be catastrophic.
Beyond its natural resources, the prosperity of any nation depends on attracting the best human talent and creating an environment where it can strive and thrive. The U.S.' ace card in the competition with China has always been our ability to attract the brightest, most ambitious, most creative people from around the world and allow them to plug into an ecosystem that includes the best universities, most flexible private and public capital markets, and network of leading companies. Foreign-born Americans account for 50% of all PhDs, notes the Center for Immigration Studies; 60% of the founders of American AI companies, according to an Institute for Progress study reported in Axios; and over 20% of new businesses overall, per the Information Technology and Innovation Foundation.
The Trump administration has been revoking the visas of thousands of students studying in the United States, reports Reuters, including one 22-year-old MIT student from China who was just weeks away from earning her degree. This sends a stark message to the best and the brightest to take their talents and aspirations elsewhere, risking generational damage to America's pool of human capital. Meanwhile, Beijing is increasing its efforts to poach scientific talent.
It is hard to believe that in just 100 days, the leadership of one country could have done so much to further the objectives of its most significant strategic rival. In response to the latest escalation of tariffs against China, Xia Baolong — the director of China's Hong Kong and Macau Affairs Office — had the last laugh. Boomeranging the U.S. government's characterization of China back to Washington, he said, 'Let those peasants in the United States wail in front of the 5,000 years of Chinese civilization," according to Reuters.
While I have tremendous respect for China's civilization and genuine affection for its people, I infinitely prefer to live in a world governed by the democratic principles enshrined in the U.S. Constitution. Let us hope that the damage to the U.S. not irreversible.
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