I think the risks to China's economy are overstated.
Overall, exports account for about 9% of China's GDP (US exports account for about 8% of ours), and less than 20% of those exports are to the US.
Tariffs can certainly inflict pain but don't pose an existential threat to China.
Now if we had a coordinated trading bloc, like the TPP members working together, we might have some real leverage.
I'm afraid we've miscalculated the pressure we can bring to bear. As someone said this morning om CNBC, China isn't some concrete supplier from Queens that Trump can just squeeze until he gets what he wants. They have the world's largest economy in terms of purchasing power parity, 1.4B people, a much higher growth rate than the US and they're a proud sovereign country with time on their side.
The problem is the pain isn't limited to China. That's why the Dow is down 750 points right now.
China's a problem and hasn't played fair on trade, but I keep going back to my main question; what's the goal of the tariffs and are they effective?
“I think the risks to China’s economy are overstated. Overall, exports account for about 9% of China’s GDP”
It is certainly possible that they can manage/manipulate things within these margins. It became almost conventional thinking, that because of China’s centralized control over the levers of the economy, they were effectively immune to the business cycle, or even any practical limit on their ability to simply endlessly print money and accumulate debt.
Part of the current equation, is that China has already driven such tools to historically dangerous levels. So they are going into this in a precarious situation. They are carrying very high debt loads, combined with the fact that there is extensive fraud and mal-investment behind that debt. They are primed for a world class debt crisis/bank failures (they are unlikely to allow widespread domestic bank failures - they would likely just fiat money into them, but foreign debts could be defaulted).
By the numbers, they are also at high risk of a housing crisis.
Their ability to stimulate their economy by injecting more liquidity into the banks, or by Government spending on infrastructure (which they have relied on to a massive degree), have steadily declined over the years. They have been getting less and less of a response for every dollar spent. Those primary tools of their steady expansion are increasingly less effective, and both are under a massive and growing overhang from past abuse.
Devaluing their currency risks reigniting the capital flight of a couple of years back, which could further devalue their currency. When currency and stock market collapses were occurring a couple of years ago, the Government stepped in to manipulate those major markets, using their large reserves of foreign reserves. Although large, they are not unlimited. Hitting those limits would take events out of Government control in a fundamental way.
China also needs foreign reserves to pay for their imports. They need about a half trillion in foreign reserve accounts, just to keep the wheels turning for port clearance of shipments at current levels. On a net basis, they run a trade deficit with the rest of the world combined, excluding the USA. They are highly dependent on energy imports.
Without a big enough trade surplus with the USA, they will likely be on a downward trend on their foreign reserve balances. They have about $3 trillion, giving them roughly $2.5 to fight with. The external debt of the Federal Government is about $2 trillion overall. Local Governments and businesses have extensive foreign debts as well.
If the economy simply loses a few hundred billion per year on the trade balance, with no other shocks, they should be able to manage for years, until circumstances change. Should multiple major demands on foreign reserve (like supporting collapses in the currency and stock markets) hit at the same time however, they are within striking distance of some major economic failures.
Another factor, is the supply chain behind the exports. There is some multiplier of the export value, to determine the total contribution to the economy. Even down to the level of the noodle shop near the factory, when exports contract, supply and support chain activity contracts as well. The Chinese economy, compared to global norms, is highly dependent on export of manufactured goods.
During boom times, many Chinese firms were able to grow rapidly, through the equivalent of juggling a lot of credit cards to pay each other off. If the torrent of real earnings dries up, many of those firms could collapse.
“what’s the goal of the tariffs and are they effective?”
I believe the real goal of the tariffs, is to fundamentally restructure the huge and complex relationship between the USA and China. There are several things I think the Administration hopes to achieve (multiple goals)
In summary, it would be to reroute the cash and technology flows structurally, to strengthen the USA and weaken China.
An economic divorce is a main goal, simply to reduce (eliminate) our growing dependency on China, and to develop a more reliable supply chain, in the event of a conflict.
I think there is also a goal to reduce the funding flow that is expanding the military power of the communists, who explicitly identify us as their main military target, in their internal doctrine. They have been specifically growing a military tailored to confront the USA.
Even if they manage the loss of exports to the USA (a reasonably likely outcome), at least they will have less money to go around, and their rivals (such as India or Vietnam - and the USA) will have somewhat more.
Although we don’t have a TPP, we do have a regional consensus on the threat from China, and most are more than willing to cooperateto take business from China.
P.S. Looks like China devalued today, to crack 7 to the dollar, and will halt agricultural purchases. Maybe we will get an earlier interest rate cut than expected. We are in the real trade war now - the major moves.