Tariff - Who Will Blink First?

The world's economy is at a crossroad. It would seem that we are at very unsettling times beyond which, uncertainty rules. If the global economy goes south, peace will hang on a balance.  Once it passes the gamesmanship, the world's best hope is that one or the other side  blinks.  Humanity will be best served if both sides blink, each doing a half blink to make it what economists  define as a negotiated settlement.  No one may claim total victory but neither will admit to defeat either.  That, in a nutshell, is what the world will want.  But ...

Human nature, unmetered hubris, and miscalculation are humanity's worst kibitzers.  They can be loud. They just might drown out the voices of reason. The world can easily slide into inevitable disorder.

Uncertainty will write up several scenarios.  It will remain an issue if the idea that tariff should be fair and reciprocal is not adhered to by all sides.

Let's look at just one. 

The side with the biggest to lose will blink first.  The problem is that neither side will admit it.  First, how does one define "the biggest to lose"? Which side will actually admit it?  One rule of diplomacy  caters to, "The one with the biggest to lose, will likely lose the most". Historians tell us about the rise and fall of empires but we cannot be so sure now what trajectories modern superpowers will trace today. 

I use the analogy of a one-acre farmer and one with ten acres.  The one acre farmer has less to tend to and defend against infestation.  The one with ten acres has ten times the area to take care of and defend.  But then the bigger acreage may allow for a more robust capability to defend.

Now, for the sake of argument let's only take, for example, the case of the U.S. and  China since they are for now, as individual nations are gauged, the No. 1 and No.2, respectively in economic size. By land area, China is only 2.2% larger but  it has four times (1.4 billion) more people than the U.S. (.345 billion). As gross domestic product (GDP) goes, the U.S. has $30 trillion versus China's $20 trillion.

If this were a heavy weight boxing match, odds makers will claim that one is heavier, with more heft and girth but the other has quicker hands and agility; one a slow mover with a heavy punch but the other has peppier and faster jabs but both can score a knockout. Not exactly a very good analogy but just keep that in mind anyway.

Stats are good but how about if we go back to how either one came to be.  What kind of upbringing each had to go through.  Both of their births were ushered through revolutions. One by rebelling against its ancestral forefathers/colonizers. The other took power from its dynastic rulers.  One took up the path of a democratic system of governing itself; the other by a totally opposite system.  A free market system versus one that is based on a more restrictive version of socialism.  But the latter had learned to make a successful adaptation in its later  and current development by running its economy under a semi-capitalist model but running its government under the guidance of military socialism. Ideally, it could work if there is a distinct demarcation or hands off policy from those who govern over the governed that run the businesses.

The U.S. adopted the free wheeling market system while China embraces central planning.  While the U.S. allows for truly independently run corporations under sets of regulations and laws via democratic legislations, China allows for the establishment of "private businesses" that are beholden to the government. Very simplified view, any economist will say, but this is just a musing, not a geopolitical paper.

China was almost totally an agrarian economy from the time Mao wrestled power after the revolution. Feeding a huge population with very little industrial technology meant heavy reliance on farming.

Then between 1959 and 1961 the  country suffered one if not the worst  famines the world had ever seen.  Record keeping was not very good so historians rely on mere estimates that said 15-45 million people died from starvation. Disastrous implementation of central planning was to blame when Mao and his Great Leap Forward mandated a vigorous jump into industrialization at the expense of agriculture very abruptly. Accompanied by a combination of unforeseen  environmental and weather conditions made it worse.

Fast forward to 1972 which was the history changing visit by Pres. Nixon.  The aftermath of that visit by opening up China's labor capacity made what it is today - the world's biggest factory.  Other nations followed when the U.S. paved the way for China's entry into manufacturing goods with the cheapest labor cost.  Soon companies started moving their manufacturing facilities there.  The rest is history.

China's economic growth was fueled by the West's consumption of products made cheaper than can be manufactured locally by the consuming nations. Later and, of course now, China had reversed its economy from agrarian to manufacturing from post revolution after the 1950's. 

Ample land and an ever growing labor work force made for rapid expansion of manufacturing to the point of gross over capacity.  That capacity to produce goods is vulnerable to the side effects of a tariff contest. The effects on other nations that relied on China will have less issues turning back to manufacturing as opposed to China throttling down its production. A 10-20 % slow down will be devastating to  its economy and political landscape.

The effects on the consuming nations are inflation and a possible recession. In China, if factories close and ancillary factory-based businesses suffer, the consequences will be magnified several times more than all the nations that depended on cheap prices. The shock wave will be spread out over many nations while China will carry the burden by itself, in terms of its huge population and the unemployment to follow as factories start to shut down.

I do not wish for any of the scenarios.  Unfortunately, we are hostage to the uncertainty of the future.  All of history's lessons will still remain unlearned.