oldephartte (oldephartte) wrote,

Is the trade war more easily won by China or the USA? : Quora

Adam Hu
Adam Hu, Product Manager

Is the trade war more easily won by China or the USA?

The US cannot win this trade war. It’s not possible. Nope.

It’s not because one country is better or worse than the other.

It’s not based on who has a bigger economy (the US), who is more reliant on exports (China), who has a stronger military (the US), who has more allies (the US).

The US cannot win based on the definition of winning - reduce the trade deficit. Its. Not. Possible.

But first, we need to agree on a basic set of facts. If you don’t agree with these facts, you don’t have to bother reading the rest of the answer.

  1. The trade deficit is not $506 billion. That’s the total import. The trade deficit is closer to $350 billion, depending on if you use year-average or year-end exchange rates.

  2. This number is calculated using the “Customs Value” in other words, what the buyer pays the seller.

  3. This deficit is not the result of 3,500,000 companies each contributing $1,000,000 in goods sold into the US, but rather follows a power-law distribution in which the top 5 categories of goods accounts for more than 50% of the value, and the top 2–3 companies in each category account for more than 50% of that category. So we’re literally talking about 10–20 companies that account for ~30% of the imports, or nearly half of the deficit.

    1. This point might be difficult to believe, but I assure you it’s true. Here are the industries:
      Explore all $506 billion in goods that the US imported from China in 2017

    2. It takes some small bit of research to identify those companies, but I don’t have the time. I will only mention a few that I’ve personally invested in sometime in the past, and therefore know for certain they are amongst the top contributors:
      Apple, IBM, Cisco, Goodyear, and Caterpillar.
      If you want to know the other 10–15 companies, you’ll have to do your own research, but basically these 15 or so companies are responsible for 50% of the trade deficit.

OK so onto the answer.

  • Customs Value is key because the “price that buyer pays the seller” for goods coming out of China is essentially 100% of the final cost of goods sold. This is because China ships finished products, including packaging since their economy specializes in supply chain aggregation and assembly.
    Why is that important? Please see this outdated, but still basically accurate break down for the company, nay a single product responsible for over 12% of the entire annual trade deficit:

What this means is that even though the iPhone costs ~$650 for Apple to buy from Foxconn, Foxconn only makes ~3.6% of that amount. Apple first of all makes $350 gross profit, and multitude of other suppliers make the rest.

The accounting here is that China imports the camera from Sony, the chip and screen from Samsung, etc, assembles it, and then sells it to Apple for $650. If you could convince Tim Cook to move all manufacturing of iPhones back to America tomorrow (not damn likely) then the trade deficit with China will reduce by about $50 billion, but the trade deficit with Japan and Korea will increase by $25 billion, and with other parts of the world by $23.5 billion. Woohoo!

But wait - this might end up cost more money per unit to manufacture, especially at first. So what happens then? Remember what’s not shown on the diagram is the 35% going to Apple as profit. So that will reduce dramatically as volume reduces. And your damn iPhones (aka communism-phones) will get way more expensive, and harder to buy.

The exact same thing applies to Cisco. And IBM. And so on.

Move all of these company’s manufacturing back from China and yes, the trade deficit with China reduces by 100%; but the overall trade deficit for the US is going to reduce by about 5% - which is the average Chinese value add.

In fact, you can reduce the trade deficit between US and China by 50–70% just by accounting for it differently (correctly). Problem solved.

  • What about Goodyear? and textiles?
    Great question! Again, the labor is a small portion. Most of the money goes to raw materials, energy, and transportation.

Rubber - US is the #4 exporter of rubber to China. So if demand for tires decreases due to rising prices…oops.

Textiles - this is even worse. Most clothes are made from cotton - I hope we can all agree on that. The world’s biggest exporter of cotton to China is…*drumroll*…The United States. So if the demand for clothes falls because it costs more money, the United States loses money - oops I did it again!

So no, the US cannot win a trade war with China because the US is the main beneficiary of the current global hegemony. The more they win the war, the more they lose the war.

This is a contest of basically who can punch themselves in the face the hardest - how can you “win” a war like that?

<<- - ————————————————— - ->>


If it’s a face-punching contest you want, then it’s about which citizens can take more pain.

In the US, when gas prices rise, people get very unhappy. Gas is less than 5% of total monthly expenditures for most people, and when it goes up 50%, people tend to drive less, and in the end a 50% increase in gas prices probably hits the pocketbooks by about 2% at most.

And yet…Do Presidential Approval Ratings Follow Gas Prices?

Granted, there are many other factors involved in the above, but do remember the graph in the article happens to be an economic boom time.

Now we’re talking about increasing prices of every day goods by 15 - 25% while simultaneously reducing employment in red and purple states. In a democracy. Where’s there’s a consequential election every 2 years including this year.

How about China?

One party system, where most people still remember starvation, have over 50% savings rate, very little personal debt, and where most people own their homes.

Oh yah, they remember the Opium Wars, they remember Nanking, they remember being partially colonized by 8 different nations while their weak-handed government did nothing. 100 years of humiliation.

Their national anthem literally says they will pave the way to tomorrow with their own blood and their own flesh.

It’s a face-punching competition, the Chinese know what it means to lose one - and Americans don’t even know that’s what the competition is about. The ones that do are already trying to back out.

The US cannot win - by financial definition and won’t be allowed to foolish punch its own face too hard before the populace revolts.

Tags: #4, balance of trade, free trade, tariffs
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