US President, Trump makes the trade dispute with China will escalate and announces new duties. But for his re-election, he needs a Deal, says Gabriel Felbermayr, President of the Kiel Institute for the world economy.
Deutsche Welle: On Wednesday, the commercial has ended talks between the United States and China, without result, in September they are to be continued. Now, US President Trump, for the 1 has. September more punitive tariffs on Goods to the value of $ 300 billion announced. Do you think that it would come to this? Or Trump wants to increase ahead of the next negotiations, only the pressure?
Gabriel Felbermayr: Trump up the pressure, because he needs a Deal. No later than the election campaign for his re-election, he would like to present a large Deal with China. For this, he must bring everything he has on the field of battle. The $ 300 billion value of goods, which he wants to prove now, with ten per cent duty, are not the who he still has in the quiver, more imports from China, there are. He uses anything to achieve his great goal.
Of the punitive tariffs, this time, normal consumer goods would be affected, which buys every American iPhones, electronics, shoes, clothes. Would be more expensive then everything by 10 percent?
It is very visible price effects for consumers in the United States were not, however, likely to ten percent. Walmart and other importers would pay part of the cost, and also the Chinese producers would bear part, by lowering their prices. But part of it will be in the super markets, and this will not please the voters. With this new escalation Trump wants to bring the Chinese to make concessions, he can announce in the election campaign as a great epoch-making victory.
You said in may, Trump did not “see that he’s gambling” is, because the political costs were high. How likely is it that Trump will lose voters, because consumer goods are more expensive?
I think this is a real danger. Just swing voters could turn away from Trump, if you see that Goods are significantly more expensive that you would like to buy. iPhones, electronics, toys, clothing, or shoes – all of these are important goods for American families. At the same time, Trump has a very loyal following, many of which say that Rising prices are unfortunate, but these are sacrifices we make in this great struggle with the Chinese for supremacy in the world economy.
Gabriel Felbermayr is the President of the Institute for the world economy (IfW) in Kiel
If the duties were coming, I would have China, the economic damage, the U.S. consumer also. Trump is risking damage to a political Corridor. Who has the longer breath?
This question is not so easy to answer. On the one hand, the Americans sit at the longer lever, because they import about four times as much from China as the Chinese from the United States. Trumps pressure are so much greater, because of the economic damage in China is about three to four times as large as in the United States. On the other hand, China autocrat is, the political leadership must take no account of elections, in contrast to Trump. It is difficult to assess to what predominates: Can Trump it with the economic Power of the USA in a hard-hitting, or win political sensitivities of the upper hand?
The Chinese foreign Ministry has said: “It makes no sense that the United States conduct their campaign the maximum pressure at this time. It is pointless to tell others that they should take medication, if you are the one who is sick.” How do you rate the price of the Chinese?
Of course, a further escalation of the Chinese leadership may not like it. But the facts speak a clear language: with regard to the economic balance of power, sitting in China at the shorter lever. We now see that production out of China in neighbouring countries. Americans buy clothes and shoes now for less from China and more from Vietnam. For China, this is a Problem, because the trade diversion may damage the own model of the economy permanently.
I think the Chinese leadership is in search of a face-saving Exit from the trading dispute. You don’t want to be by Western powers humiliated as it was in the past, often the case. But you also know that the stability depends on China’s business and economic risks the claim to power of the Communist party threaten. This fragile balance in China and the elections in the USA, in my opinion, to ensure that there will be an agreement – maybe not yet at the end of August, but in good time before the elections. The Deal will not be in the substance, maybe great, but he will be the Trump, as well as the Chinese leadership as a major breakthrough to be able to present.
Trump needs before the elections really a Deal? Or is it enough for his campaign to present himself as a tireless fighter, the negotiations with maximum hardness leads?
A Deal would be better, because then he can defend himself against the criticism of the Democrats, he smashes only China, but achieved nothing. Trump is not only with China, there is a Problem. He also has a Problem with Europe. With India. With the Turkey. He has found many allies in front of the head, but nothing really New is achieved except for the agreement with Mexico and Canada, but also exposed to considerable criticism. As a hard dog present, case with China, no Deal is concluded, enough perhaps for his die-hard followers. But for swing voters he’d need a Deal.
Trump also has a Problem with the own Central Bank. He accuses to have the interest does not go far enough reduced. What is the calculus here?
If Trump has a Problem, is questionable. Because the Central Bank is about to fold is a part of. From an economic perspective, there was no reason to cut interest rates. Central Bank chief Powell has done it yet. Although not as strong, like Trump wanted, but still. The independence of the US Central Bank is grazed and it became clear, that they will cushion the economic damage caused by the war-led trade policy. And this, in turn, gives the President more room in the negotiations with China. I don’t think it’s a coincidence that the escalation with the new duties is the same after the rate cut.
Trump should have at the end of success, what effect this will have on other politicians? The willingness to put in the course of negotiations to the maximum conflict?
Yes, you have to worry about unfortunately. Of course, there is only one USA in the world, it is the largest economy with the largest internal market, a high Per capita income and a high level of innovation. Trump has so makes a much bigger negotiation than others. Nevertheless, the fear is that other politicians of similar calibre to imitate his strategy. It then runs on a new world trade regime, where Power and economic influence is everything. For small countries and developing countries that would be bad. Even for Europe it would be hard. On paper we have a great economy, but politically we can’t implement them due to the inner European difficulties.
Gabriel Felbermayr, Professor of Economics at the Christian-Albrechts-University of Kiel, Germany, in March 2019 President of the Institute for the world economy (IfW) in Kiel.
The Interview was conducted by Andreas Becker.