Trump will win the China trade war

The stock market slide of the last several months has accelerated into a full flung panicked sell off in recent days. The dip has been a cold shower reminder for many that trade wars are ugly things. Americans have lost trillions of dollars of wealth this year as the trade tensions have mounted. Moreover, things are going to get a lot worse if a deal is not reached with substantial concessions by China in 2019. The alternative to an agreement when the current 90 days cooling off period is up early next year is going to be mutually assured destruction for both of our great economies.

But there is a fairly high likelihood this is not going to happen. The stock market is now experiencing the opposite of the “irrational exuberance” cycle that former Federal Reserve chairman Alan Greenspan once warned about. Now we are witnessing a “Chicken Little” stock market. But the sky is not falling. The real economy is still growing at a torrid pace, as are earnings. More importantly, investors would be wise to calm down and ride this turbulence out. There is a high probability that President TrumpDonald John TrumpTrump nominates ambassador to Turkey Trump heads to Mar-a-Lago after signing bill to avert shutdown CNN, MSNBC to air ad turned down by Fox over Nazi imagery MORE is going to win the trade war with China. If I am right, the stock market is going to soar. Here are the reasons why I am betting on these odds.

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First, Trump is a master negotiator. (You must read “The Art of the Deal” if you want to understand this man.) He understands well the concept of leverage. America has huge leverage over China in this standoff. There is a lot of truth to the saying that if we cannot trade with China, we sneeze. If China cannot trade with us, they catch pneumonia. Forget the spin talk that China can substitute its export market to the United States by raising its sales to Europe and other Asia markets. It is a myth. China wholly depends on the $10 trillion American consumer market to maintain its growth rates of the last two decades. Leaders in Beijing know this, and that is why they are under intense pressure to get a deal and to make the tariffs go away. The consequences of no trade deal may be mutually assured destruction, but most of the destruction will happen to them.

Second, the Chinese economy is getting crushed by the just preliminary round of 10 percent tariffs that are leaving Chinese warehouses, factories, and docks stacked to the ceilings with unsold goods. According to the South China Morning Post, “Industrial production grew 5.4 percent in November compared to the previous year, well below the 5.9 percent gain in October and expectation for a like sized 5.9 percent rise this month, according to the median forecast in a Bloomberg survey. The November growth rate was the lowest in 10 years, matching the 5.4 percent gain in November 2008.” Chinese consumer spending will do nothing to bail out the economy because those numbers were even worse. Retail sales are now growing at the slowest pace since 2004. By the way, we know the actual, not the reported, numbers are much worse because China, much like the old Soviet Union, is notorious for lying about economic statistics.

Even more catastrophically worrisome is the Chinese stock market hit from the Trump administration tariffs. The Chinese stock market was already down some 20 percent this year and that was before the big sell off last week. The American stock market is comparatively down around 3 percent to 4 percent for the year. Imagine what happens to China if the tariffs are ratcheted up to 25 percent in the spring of next year. China would plunge into its most gut wrenching recession since the days of Mao Zedong. Can Xi Jinping politically survive the economic unrest that will send the Chinese marching into the streets with pitchforks in protests that could make the recent Paris riots look like a picnic? I would not bet on it.

Third, Trump has the moral high ground here. Every day we learn of more nefarious activities in China, such as industrial espionage, successful hacks, expropriation of property, theft of trade secrets, selling technology to our enemies, $300 billion a year of stolen intellectual property from American firms, jailing of political dissidents, building its military in ways that threaten all our allies in Asia circa Japan in the 1930s. Much of this is financed by our one sided trade relationship with China. Winning this trade war is not just essential to our economic security but our national security as well. Backing down is no option, and the consequences of a United States retreat here would be far worse than even a trade war.

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Fourth, every one of the United States demands in the ongoing trade negotiations with China is irrefutably defensible. Yes, China must stop stealing our technology. Yes, it has to open up its markets and eliminate tariffs of 40 percent or more. Yes, it should end the de facto confiscation of intellectual property of American firms that do business in China. China does not have a single leg to stand. Even the Neville Chamberlains in Europe and Asia are coming around to realize that Trump is fighting the good fight in trade, which is further isolating the communists in Beijing.

Fifth, lowering trade tariffs is in Chinese economic interests. The one billion Chinese consumers would benefit from having full access to American soybeans, blue jeans, bourbon, motorcycles, medical devices, and the thousands of products that we make better than they do. This is the law of comparative advantage. The ultra protectionist policies out of Beijing have denied their one billion citizens a higher standard of living.

Finally, my China sources tell me that the leaders in Beijing are in a four alarm panic right now. Trump has them totally off balance, and they now know he is like Ronald Reagan. He says what he means and means what he says. He is not bluffing and he is not backing down. When we get to about 80 days in this 90 days cooling off period, they will cave. Ironically, the end result of the trade war is likely freer trade across the world.

This will be good for America, and it will be good for China. It will be good for the rest of the global economy. Moreover, it will be the greatest boost for the stock market in decades. The big winners of the trade war will be those investors who have not fled for the exits and sold Trump short.

Stephen Moore is a senior fellow with the Heritage Foundation and an economic consultant with FreedomWorks. He served as an adviser to the 2016 Donald Trump campaign. He latest book out with Arthur Laffer is “Trumponomics: Inside the America First Plan to Revive Our Economy.”