Trump's Tariffs Are Helping Push U.S. Allies into China's Arms and Undermining National Security

Last week, British Prime Minister Keir Starmer visited Chinese President Xi Jinping. This is the first time a British PM visited since 2018. The purpose of this visit was to reset Sino-British relations. One of the topics of discussion at this visit was trade. If this were an isolated incident, that would be one thing. But other Western nations are initiating trade talks with China. Last month, Canada struck a new trade deal with China. Finland, Ireland, and Germany are also re-engaging with China. There are multiple reasons for other Western countries to re-engage with China, whether it is economic development, access to a large consumer market, investment flows, or shifting geopolitics. 

Unpredictable U.S. Foreign Policy Adds Fuel

Those shifting geopolitics are particularly notable. In the last month alone, the Trump administration has captured Nicolás Maduro and threatened allies with tariffs in order to chase his dream of annexing Greenland, the latter of which is categorically unwise. Trump's foreign policy unpredictability creates incentives to hedge against an increasingly unreliable ally, which is hardly unsurprising seeing more Western countries gravitate towards China. One major factor that I would like to cover today is Trump's tariff policy and how that is becoming a turnoff for the US' allies. I will caveat by saying tariffs alone do not explain why other countries are re-engaging with China, but it is a major element that is part of the broader drive towards a pivot, as this analysis from the Chatham House details. 

Trade Diversion: Another Form of Tariffs Backfiring

The sad part is that this pivot is wholly predictable. I have talked about trade retaliation before here at Libertarian Jew. There is direct retaliation, which is when a country responds to tariffs by implementing their own tariffs in response. Then there is indirect retaliation, such as trade diversion. Trade diversion is what happens when tariffs or other trade barriers cause countries to shift imports and exports away from the most efficient or preferred trading partner toward alternative countries simply to avoid higher costs. Under trade diversion, the trade does not disappear but rather gets rerouted. 

Historical Evidence of Trade Diversion

Trade diversion has played out in history more than once. During the 1930s with Smoot-Hawley, a National Bureau of Economic Research (NBER) paper shows how U.S. exports to retaliating countries fell by 28-33 percent, and trade diversion also occurred. Another NBER paper discovered trade diversion as a result of US agricultural tariffs from 1990 to 2014. In Trump's first term, tariffs on China caused China to divert $21 billion of trade flows away from the United States to other countries (see below). In its 2025 paper on responses to Trump's tariffs, the International Monetary Fund (IMF) recognizes trade diversion as a response. Additionally, a study from the North American Journal of Economics and Finance shows how the signing of NAFTA and preferential tariff treatment with Mexico and Canada shifted US imports away from Asian sources toward Mexico. 

Trump's Tariff Strategy and Consequences for National Security

Trump's current trade strategy fits within this historical pattern of trade diversion. The problem is that Trump's posture on tariffs will continue to agitate U.S. allies and make it more attractive for some allies to deepen their economic ties with China. What Trump seems to not understand is that national security is not merely about what the U.S. can produce, but also the allies that one can rely on in times of crisis or need. Research shows that economic cooperation lends itself to stronger security cooperation.

Since tariffs make allies economically worse off, they are incentivized to look elsewhere. Having these allies increase trade and investment with China will create increased strategic dependence on China. What is more is that this re-engagement will mean that U.S. allies will invest more in China and Chinese suppliers. This entanglement with the Chinese economy will make U.S. allies less likely to align with U.S. strategic priorities. When allies rely more on China, China gains leverage and the U.S. will have less influence in trade negotiations, diplomacy, and security concerns abroad. This will undermine U.S. influence, which in turn weakens U.S. national security. 

"America First" Becomes "America Alone"

Trump's tariff strategy ultimately defeats its own stated purpose. Trump is not isolating China or strengthening American security. He is weakening the very alliances that give the United States leverage on the global stage. With a tariff-first approach, Trump is treating allies as economic adversaries, which understandably leads allies to diversify their trading partners more, including toward China. As allies partner more with China, the United States loses its global influence. National security is not only about domestic production, but also partners who share risks, supply chains, and strategic goals. By undermining these foundations, Trump is handing China geopolitical leverage. By alienating allies and strengthening a rival, "America first" becomes "America alone" while China has the last laugh. 

Trump Telling Walmart to "Eat the Tariffs" Acknowledges That His Tariffs Ultimately Hurt the American People

President Trump's tariff tantrums continue. After weeks of duking it out with China on tariffs, Trump went on a rant about Walmart and tariffs on Truth Social. In addition to implying that Walmart makes too much, he said that Walmart should "eat the tariffs" and to "not charge valued customers anything." Forget for a moment that he implicitly threatened a business into telling it how it should handle its pricing strategy or that he peddled a right-winged version of "greedflation", the latter of which is a theory that I debunked in 2022.

By telling Walmart to eat the tariffs, he both shows a misunderstanding of the economics of tariffs and undermined his previous argument for tariffs. Throughout the 2024 presidential campaign, both Trump and Vance continued to claim that it will be other countries that will ultimately pay the cost of tariffs. It is convenient for Trump to forget that he insisted at an August 2024 campaign rally that a tariff is a tax on foreigners. Trump touted tariffs as a magic bullet in which China would bear the brunt of the costs, jobs would magically appear, and the United States would become rich again. Once again, what Trump shows is that he really does not understand how tariffs work. 

The tariffs are paid by the company to Customs and Border Protection (CBP) at a port of entry before the good can enter the United States. That's basic tariff tax collection. Since the vast majority of industries do not have the adequate net profit margin to absorb Trump's massive tax hike in the short-term, it makes sense that passing the costs to the consumer would be a logical business choice, especially since Trump's tariffs are higher and cover a broader base of goods than they did during Trump's first term. As over a dozen academic studies confirmed (also read Tax Foundation research here), the tariffs during Trump's first term were paid for by American consumers and companies. I also covered this topic last year twice (see here and here) because I was hoping that Trump would not double down on tariff tomfoolery. Yet here we are. 

When Trump says "eat the tariffs," what he is really is saying is "the costs are real and you need to suck it up, even if that means paying more." So much for making America great again! Like with any other tax, you cannot tax your way to prosperity. The costs are real. Americans pay for the tariffs in the form of higher consumer prices, lower GDP, lower wage growth, and lower employment. Trump has eroded goodwill and triggered an economic downturn that did not need to happen. The ignorance with which Trump continues with his tariff delusions will ultimately end up being at the expense of the American people and economy, not China. 

Trump's Proposed 60 Percent China Tariff Would Be a Repeat of Economic Foolishness

Since I criticized Biden's "shrinkflation" public service announcement earlier this week, I only thought it would be fair that if I criticized President Trump today and his role in increasing consumer prices. Trump has been obsessed with tariffs to the point of earning the nickname "Tariff Man." During his first term, he quadrupled U.S. tariffs on China, from 3 percent to 12 percent. Now he is looking to outdo himself. Earlier this month, Trump proposed a 60 percent tariff on China, although he said it could very well be higher. 

We should first ask how well the tariffs fared under Trump's first term. I asked this question when I criticized Trump's proposal for a 10 percent tariff on all countries last year. Answer: not well. Tariff proponents think that tariffs hurt the other country, which in this case would be China. Trump's tariffs really didn't stick it to China. The truth is that a U.S. tariff on China is an import tax that U.S. consumers and producers paid, as this report from the United States International Trade Commission shows. During his first term, the annual net costs of Trump's tariffs were a reduction of GDP by 0.21 percent, a reduction of wages by 0.14 percent, and 166,000 fewer full-time equivalent (FTE) jobs. As one research paper from the Federal Reserve concluded, "the impact from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries." 

What effects would quintupling the current tax rate have? The Tax Foundation calculated that such a tax would cost $200 billion per annum. The National Taxpayers Union estimates that figure at an even higher $495.7 billion, which would amount to an average tax of $3,942 per household. That is even worse considering that the New York Federal Reserve found that Trump's previous China tariffs cost the average household $831 per annum. As the Tax Foundation correctly points out, such a tariff would not be created with the primary goal of tax revenue collection, but discouraging trade:

Imports from China would depress significantly. Supply chains would fragment, investment plans would be disrupted, and trade would be diverted to third countries. A prohibitive tariff would create a void in trading opportunities with China that other countries would fill, leaving the U.S. excluded. In sum, it is not a thoughtful approach to the U.S.-China economic relationship. 

Repeating a failed policy and expecting a different outcome is not sound economic strategy Trump's tariffs were unquestionable ineffective and economically damaging. Instead of reassessing his approach, he is proposing to quintuple the tariff rate on Chinese goods. Rather than strengthen the U.S.' position in global trade, Trump's China tariffs would set the U.S. economy further back.  

Although Congress has historically been responsible for tariffs, that responsibility has shifted more to the executive branch in the past century. There are ways to repeal those provisions that allow for executive abuse, as this report from the Competitive Enterprise Institute illustrates. Congress needs to take back its constitutional role of determining tariff rates. Otherwise, if Trump wins a second term, we will likely see even higher consumer prices than we already have while harming U.S. consumers, farmers, and manufacturers along the way.

Why a Federal Ban of TikTok Would Be a Ticking Time Bomb Waiting to Erode Our Rights

TikTok is a short-form video hosting service that has made the news lately. While the video-sharing app has brought entertainment and information to millions, it is facing the possibility of a ban in the United States. But why? It is true that TikTok collects data, gets people addicted on social media, and can be used to find what some would deem inappropriate or inaccurate information. TikTok also has had its share of vulnerabilities, privacy violations, and dubious practices. But the same could be said for Facebook, Instagram, Twitter, and YouTube. What is different about TikTok? In two words, Chinese influence. 

TikTok is a company that is owned by ByteDance (字节跳动有限公司). ByteDance is headquartered in Beijing and incorporated in the Cayman Islands. The issue with ByteDance are the allegations that ByteDance answers to the Chinese Communist Party (CCP). Ownership by a Chinese company brings up national security concerns about data privacy, propaganda, cyberattacks, and disinformation from the CCP. 

Whether or not the CCP already has collected TikTok data does not negate that the CCP could plausibly compel ByteDance to fork over TikTok data to the CCP. After all, modern-day China has a propensity towards surveillance, censorship, and overall cracking down on freedom. Plus, as the Right-leaning Heritage Foundation brings up in its report TikTok Generation: A CCP Official in Every Pocket, there are laws already in place that could make that possibility a reality. Furthermore, FBI Director Christopher Wray recently testified that TikTok "screams national security concerns."

It could explain why according to Pew Research, U.S. citizens favor a TikTok ban by nearly two to one. There might be a plausible case to disallow the use of TikTok for government officials and employees who guard state secrets or have Top Secret security clearances. After all, such government employees already have other restrictions on their lives due to the nature of their work. Outside of that notable exception, let me run through the reasons why a nationwide ban of TikTok would be highly problematic.

The first issue with banning TikTok is that it is unconstitutional. As Senator Rand Paul (R-KY) brings up in his op-ed, the First Amendment applies to speech whether you like it or not. The second is that a bill of attainder, which is a bill against a specific person or company, is prohibited under the Constitution (Article I, Section 9, Clause 3). Odds are that a TikTok ban would be overruled by the Supreme Court, especially since a federal court previously overruled former President Trump's TikTok ban. 

In the event that a TikTok ban were to be upheld by the Supreme Court, it would have serious ramifications for the freedom of speech. It is not only that TikTok is used by 150 million U.S. users, 10 percent of adults in the U.S. receive their news from TikTok, or that a TikTok ban would be the largest impairment of freedom of speech in the United States. If the government could ban TikTok, it would set precedent for the federal government to control what apps and technologies that U.S. citizens could use to communicate. 

What makes you think that this sort of oversight and regulation would ultimately be limited to TikTok? A TikTok ban is merely a pretense for more government power. That is not mere conjecture or fantasy. Take a look at this spot-on analysis from the Cato Institute on Congress' latest attempt at a power grab: the "Restricting the Emergence of Security Threats that Risk Information and Communications Technology" Act, also known as the RESTRICT Act. The power under the RESTRICT Act to define "adversary" nations and which companies could be subject to government restrictions would be a nightmare for freedom of speech and privacy protections. If the RESTRICT Act were to pass, China would not be the only potential threat to American citizens.  

Do you really want the the federal government to have the power to restrict free speech, along with other rights, like that? It would make no sense for U.S. politicians to be so appalled by China's disregard for civil liberties while responding by emulating the CCP's behavior of suppressing freedom of speech and free enterprise. How does embracing government overreach and censorship show that the United States is the land of the free? You think we would have learned from the civil rights abuses from the Patriot Act, but here we are. 

While we are on the topic of liberty, Americans should have the right and freedom to use the TikTok app. To quote the Foundation of Economic Education, "The government has no business telling people what apps they have on their phone. If individuals want to take the risk of exposing their data to the CCP, that should be their choice." If we are to maintain a free and open internet, individuals should take responsibility for their own data privacy. This would include reading privacy policies for given apps, using virtual private networks (VPNs), favoring apps that use encrypted messaging and other privacy features, or simply not using a smartphone to track you. 

There has been a lot of postulating and handwringing about potential national security issues. Let's ask some questions about whether the government could come up with a national security justification for the ban:

• 71.2 percent of TikTok users are between the age of 18 and 34. If CCP were to get its hands on the data of the average TikTok user, especially given age demographics, how would that threaten national security? 
• TikTok has a special-purpose subsidiary called TikTok U.S. Data Security that contracts with the company Oracle to store U.S. data. Is there proof that TikTok is actually sharing U.S. user data with the CCP, even in spite of the existence of this subsidiary? (Answer: not as of yet.)
• Why is there no evidence that the CCP has tampered with TikTok's content recommendation to disseminate CCP propaganda or disinformation?
• If TikTok were so pro-China that it was a puppet of the Chinese government, why is TikTok banned in China? Why do Chinese citizens have to use Douyin instead?
• If China were such a national security concern, why does the U.S. government still allow for the production of such consumer goods as smart appliances, pharmaceuticals, personal protective equipment, and computer chips to be consumed in the U.S.?

At this juncture, the national security harms of TikTok are conjectural. But let's forget for a moment that the national security concerns are not based on hard evidence or specific, concrete examples. TikTok colluding with the CCP on content acquisition is bad business. If TikTok were to facilitate pro-CCP tampering, it would be a public relations disaster for TikTok. They have a profit incentive to play by the free speech norms that are in the Western world, much like U.S. companies have had to comply with the Great Firewall of China if it wants to do business in China. The Chinese government also has a macroeconomic incentive for companies such as TikTok to be able to compete in the greater global market.

Finally, what good would a TikTok ban do? Bans can often be circumvented. If someone like Mayor Bloomberg tries to ban sodas greater than 16 ounces, you can buy two sodas under 16 ounces and consumer just as much, if not more, sugar. Illicit drugs could be purchased on the black market. A mass shooter could get around a high-capacity magazine ban by changing magazines or bringing multiple weapons. As for TikTok, users could circumvent the ban by purchasing a VPN and using TikTok that way. Given the number of TikTok users that exist, could you imagine the regulatory apparatus to monitor millions of smartphones and computers? 

As the Brookings Institution points out in its analysis on why a TikTok ban will not guarantee consumer safety, "much of the information collected by TikTok is like that compiled by many companies that host consumer facing products." Also, the CCP already has the ability to buy demographic, health, geographic, and political data (as well as device identifiers, and face or voice prints) from private third-party data brokers. In short, if the CCP wanted those data, it can already get a hold of them.

None of this even gets into the economic impact that a TikTok ban would have on a variety of professions, including life coaches, influencers, and small business owners. Instead of focusing on banning TikTok, Congress should be asking itself how it can pass broad-based data privacy rules or laws. By asking ourselves how to enact laws that protect the data privacy of consumers and individual freedom, the U.S. government can protect our values and democracy while not taking the authoritarian path that the Chinese government uses to censor and limit freedom.

5 Government Policies That Brought on the Baby Formula Shortage

Taking care of a baby can be challenging with the sleepless nights and the demands on free time. In 2022, raising an infant has become more challenging because baby formula has become harder to find. As grocery and retail data firm Datasembly shows, the out-of-stock (OOS) rate for baby formula has skyrocketed in the first half of 2022. Major distributors such as Wal-Mart, Target, and Kroger are rationing baby formula. This is significant since CDC data on breastfeeding show that a majority of infants use formula. While switching over to breastfeeding might be possible for some, other mothers might not be able to breastfeed (e.g., allergies, medical conditions) or are have time constraints. This shortage has the potential to truly impact pediatric health. 

So how did we get here in the first place? The most recent shock to the U.S. baby formula market was in February 2022 with a contamination problem at an Abbott plant that produces baby formula. This caused the FDA to recall formula from Abbott. While the OOS rates are higher in recent months, we can see from the above graph that OOS rates were still high in 2021. Part of this was due to the pandemic-induced hoarding in 2020, followed by lower demand in 2021. There is also the inflationary pressure, a phenomenon that the Federal Reserve Bank of San Francisco points out has been more prevalent in the United States than in other countries due to its larger-than-average government stimulus during the pandemic (Jordà et al., 2022). Since 2021, we have more generally found ourselves in a supply chain crisis. As I pointed out in October 2021, some of this was going to happen regardless because of the pandemic. At the same time, there was plenty of government policy that negatively attributed to the supply chain crisis. 

The infant formula manufacturer market was struggling with the same things other manufacturers were struggling with, whether that is labor, materials, transport, and logistics. The extent to which the government is responsible for the trends on a macroeconomic level does not change that the government has a heavy-handed approach when it comes to infant formula. As the New York Times reported in March 2021, "Baby formula is one of the most tightly regulated food products in the U.S." How bad is it? Here are five ways in which the government made the infant formula shortage as dire as it is. 

1. WIC Vouchers and Market Concentration. WIC stands for Women, Infants, and Children. It is a supplemental nutrition option program from the U.S. Department of Agriculture that is aimed to safeguard the health of low-income women, infants, and children. What could such a seemingly innocuous government program have to do with the shortage? Formula companies are heavily subsidized by WIC through the voucher program. In exchange for offering lower prices on infant formula in the form of rebates, the formula companies receive "the exclusive right to provide their product to the state's WIC participants." This means that the companies with the greatest number of lobbyists can vie for this exclusive right to a de facto state-level monopoly in this market segment for infant formula. This cannot be overstated since it is through these WIC vouchers that about 50 percent of infant formula is provided nationwide (Choi et al., 2020). Abbott holds 42 percent of the market share for infant formula, according to market research firm Euromonitor. This favoritism makes it hard for new companies to enter the market, which leads to market concentration. If the WIC vouchers did not attribute to this market concentration, one plant closing would not make mothers in the United States so vulnerable to such a supply shock. 

2. FDA's Non-Tariff Trade Barriers. Not only have FDA regulations gotten in the way of such things as making prescription drugs cheaper or e-cigarettes more available, the latter of which being a healthier alternative to traditional smoking. The FDA has specific labeling requirements and ingredient requirements, as well as a mandate stating that retailers wait 90 days before marketing a new infant formula. The excess of labeling regulations in particular make European infant formula illegal in the U.S. (DiMaggio et al., 2019). These onerous regulations provide little incentive to non-U.S. businesses to sell their formula to U.S. retailers. 

3. Infant Formula Tariffs. For the few brands of formula that can past the FDA gatekeeping, they are subjected to tariffs up to 17.5 percent (also see here). Looking at the economics of tariffs, tariffs are an import tax. Who pays that tax? The domestic consumer through higher costs of foreign goods or services. Between the tariffs and FDA regulations, is it any wonder that 98 percent of baby formula consumed in the United States comes from producers in the United States?  

4. Trump's Trade Deal and Export Fees. Part of the Trump Presidency was the enactment of NAFTA 2.0, which is better known as the United States-Mexico-Canada Agreement (USMCA). During the negotiations in USMCA, one of the sticking points was with the dairy industry. The U.S. dairy industry wanted certain provisions to protect themselves. Part of this negotiation had to do with China. Prior to the enactment of USMCA, Chinese baby food producer Feihe invested $225 million into building a manufacturing plant in Kingston, Ontario, Canada. Part of USMCA is limiting how much infant formula Canada can export, not only to the United States but globally. If Canada exceeds exporting 40,000 metric tons of infant formula, they are walloped with an export fee of $4.25CAD for each kilogram. While Trump was trying to screw over China, he ended up screwing over the American people by discouraging Canadians from producing baby formula that we clearly need. 

5. Marketing Orders. A marketing order is a series of price and income supports imposed by the USDA (see Cato Institute brief for more information). Looking at the economics of milk marketing orders, such orders drive up the price of milk (e.g., Chouinard et al., 2005). Since dry milk is an essential ingredient in baby formula, it is reasonable to assume that these marketing orders are attributing to the increased cost in baby formula. As Cato Institute scholar Gabriella Beaumont-Smith points out, there are import barrier provisions in the marketing orders that dampen U.S. producers' demand for foreign milk, which makes infant formula all the more scarce in a time of emergency. 

Postscript

Without a doubt, the pandemic threw the infant formula market in disarray, as the pandemic did with so many markets. The panic buying and hoarding in 2020 garbled market signals on infant formula demand in 2020 and 2021. The pandemic also had its role in contributing to the supply chain crisis and affecting various inputs of infant formula production. The factory of the leading domestic producer of infant formula in the United States does not do any favors. But make no mistake: government policy is a major culprit. USDA subsidies for large infant formula manufacturers increased market concentration. If the market were fragmented, the Abbott manufacturing plant closure would not have made the infant formula market so vulnerable. If trade barriers and FDA regulations were not so onerous and excessive, there would have been a U.S. demand for internationally produced infant formula that could have helped fill the gaps while the Abbott manufacturing plant worked on getting open again. In short, if it were not for government meddling in the infant formula market, mothers would not be scrambling to feed their children. This infant formula shortage serves as another reminder that instead of regulating its people to death, the government is much more likely to do a better job at improving our lives by deregulating and getting out of the way.

Improved Relations Between China and Japan: An Unintended Consequence of Trump's Trade War

As long as Japan and China have been around, I am at least somewhat surprised that Sino-Japanese relations (中日關係) have not been contentious for a longer period of time. On the other hand, Japan remained relatively isolationist prior to the Meiji restoration in the 19th century. Sino-Japanese relations were a bit messy in the First Sino-Japanese War (1894-1895), but they got really tumultuous with the Second Sino-Japanese War (1937-1945) on account of the Nanjing Rape of 1937 (南京大屠殺). As you can imagine, relations between the two countries were strained as a result. Things did not really start improving until Shinzo Abe came into power and released a report in 2010 acknowledging the WWII-era atrocities committed. After that, disputes over rare earth metals and the Senkaku Islands put further strain on Sino-Japanese relations. Combine that with a mutual dislike between Chinese and Japanese people (BBC), and it is not a surprise that Sino-Japanese relations have not been going well this decade, even in spite of the fact that Japan and China are major trading partners.

If studying international relations over the years has reminded me of anything, it is how quickly the nature of alliances can change. Since the beginning of 2018, Trump has gone on the offensive on his trade. China has become the primary target in this trade war, and back in July, I made the case for why Trump should knock it off. However, Trump has decided that he wants to go after the U.S.' allies with tariffs, including Japan. In September, Trump threatened to enact a 25 percent national security tariff on Japanese automobiles and trucks. Trump met with Abe in late September, but it looks like it was more of a delaying tactic than anything else.

As a result of both sides are feeling pressure from President Trump (Wall Street Journal), there seems to be a thawing of Sino-Japanese relations. Last month, Chinese President Xi Jinping and Japanese President Shinzo Abe met to discuss the future of Sino-Japanese relations. Does this mean that everything is copasetic between the two nations? Hardly. Does this mean that things will end up amicably between China and Japan? No, it does not. There are still strategic issues of a military nature. The United States still remains as Japan's primary military ally. Japan has also increased its alliances with Australia and India in hopes to keep China in check. Given the zero-sum nature of geo-politics in eastern Asia, I'm confident both Xi and Abe know why they are meeting.

However, since China is dealing with other economic issues, including a devaluing currency, a real estate bubble, and government debt, it is not shocking that China is trying to hold together its economic clout. Plus, let's not forget that Trump foolishly decided to pull out of the Trans-Pacific Partnership on his first day in office. All that these economic forces do is draw Japan closer to China, even in spite of militaristic and nationalistic factors. This is another unintended consequence of trade wars, especially when when the President enacts trade barriers on the U.S.' allies: it becomes that much more likely to push your allies towards your perceived enemy. If diminishing trade flows with allies in order to pursue some zero-sum protectionism hokum is your idea of making America great again, I fail to see the economic sense or the appeal in doing so. I hope Trump can see the harm he is doing by eroding relations with allies. Otherwise, I wouldn't be surprised if the result is handing over international power, both militaristic power and soft power, over to China.


12-13-2018 Addendum: Political scientist Jeffrey Hornung of the Rand Corporation is not so optimistic that China and Japan are going to get along. He has three reasons for such skepticism: difference of position on disputed territories, difference in threat perception, and difference in vision of international order.

President Trump, Please Stop the Trade War with China Before You Get Us in a Recession

Ever since Donald Trump started his presidential campaign, he has made it a part of his platform to demonize China. Trump went as far as saying that Chinese trade policy is akin to raping the United States. Although Trump broke his campaign promise to declare China a currency manipulator (even if they were, not a big deal), he has gone after China hard. This year, Trump has taken his protectionist trade policy seriously. Earlier this year, I rebuked Trump for his tariffs on solar panels, as well as on aluminum and steel. I thought that was going to have an adverse enough of an effect on the economy. It was a moment I thought that Trump was not going to pursue further protectionist trade policy. I was wrong. Last month, he enacted a 25 percent tariff on $50 billion worth of Chinese goods. China unsurprisingly responds in kind. Then Trump went to a 10 percent tariff on $200 billion worth of goods (see analysis here). You think he would have stopped there, but he did not. Late last week, Trump threatened to put tariffs on all $500 billion-plus of Chinese goods. Trump thinks he is in the right because, as his administration reports, China's intellectual property theft has been costing the United States $600 billion per year. Aside from retaliating against China for this theft, Trump has also made arguments about national security and trade deficits. Is history going to look kindly on the trade war that Trump has started with China?

Cost to Consumers: The American Action Forum found that Trump's 25 percent tariff on the $50 billion would cost consumers $11.5 billion a year. With the modified $200 billion in tariffs, that net cost to consumers increased to $31.5 billion a year. Looking at the washing machine tariff specifically, prices increased 16.4 percent from February to May 2018, which is the largest increase we have seen in the past 40 years. It is not at an all-time high, but it another piece of the puzzle showing how tariffs affect consumers. Steel prices have also increased since Trump enacted the steel tariffs. The New York Times estimates that if a 10 percent tariff were enacted on all Chinese goods, it would cost households an average of $270 annually. Although this might not seem like a terribly large amount, lower-income households could feel the squeeze because they are more likely to purchase Chinese products than their higher-income counterparts.

GDP Loss: Consultancy Capital Economics predicts that in the long-run, the global GDP will drop 2-3 percent (and the U.S. GDP 1 percent) more than it would without the trade war. Capital Economics is not the only one with such a prediction. The Wharton School of Business, which happens to be the alma mater of President Trump, predicts that an all-out trade war would reduce the GDP by 0.9 percent relative to status quo by 2027, and 5.3 percent by 2040. The Tax Foundation has a less dire prediction than Wharton, at a decrease of 0.47 percent. As for the Chinese GDP, there is to be an anticipated decrease by 0.1 or 0.2 percent points in the next decade.

Negative Impact on U.S. Businesses: The St. Louis Federal Reserve expressed concern over the prevalence in which U.S. manufacturers use Chinese intermediate inputs in their manufacturing (see below). The cost to businesses goes beyond the immediate price tag of tariffs. There is also the reality that altering supply chains will be time-consuming and costly. These tariffs are going to hit multinational supply chains hard and make it more difficult for the United States to compete in global markets (Lovely and Yang Liang, 2018).

Lower Wages: There are multiple ways that a business can absorb the costs of a tariff, one of them being to cut wages and benefits of workers. The Wharton study mentioned earlier found that wages will fall 1.7 percent by 2027 relative to status quo, and 4.9 percent by 2040.

Lower Employment: For those employers who cannot sustain the tariffs with mere wage cuts, they will go to cutting jobs. If Trump goes all-in on the trade war, the Tax Foundation estimates a loss of 346,786 jobs. This is unsurprising since this has happened with other tariffs, most recently with Trump's steel tariffs. If Trump implements the auto tariff he proposed back in May, that would mean another 195,000 jobs lost in one to three years (Robinson et al., 2018).

Other Long-Term Effects: You might look at the figures above and say that it's not a big deal. "After all, the U.S. economy has a GDP of over $19 trillion. It can handle these tariffs." It is not solely about the short-term impacts I covered above, but also crowding out private investment, reducing consumer confidence, diminishing foreign investment flows into the United States, creating larger external deficits, and creating a level of trade policy uncertainty that we have not seen this century. The Federal Reserve expressed concerns last month about how tariffs are diminishing foreign investment and capital spending. These are the exact sort of economic effects and conditions that slow down economic growth and have a high likelihood of dragging the United States into a recession, which could very well have a contagion effect that drags down other economics down along with the United States.

Conclusion
What should be more worrisome about the sources I cite above are just what research has been produced and released in 2018 alone. I have covered the topic of tariffs before (see here and here). Between economic theory, near unanimity among economists, and the abundance of empirical evidence showing how badly tariffs screw over so many people in many ways, including higher prices, lower wages, lower levels of unemployment, lower economic output, and less economic stability. In case a damning amount of evidence is not enough, the arguments that Trump uses for intellectual property theft, against trade deficits, or for national security to justify the tariffs are flimsy at best, and economically illiterate and deleterious at worst.

Trump's trade war goes beyond retaliatory tariffs on China. Trump labeled the European Union a commercial foe. Trump is even going after Canada and other allies with tariffs. Trump threatened to withdraw from NAFTA. While imperfect, NAFTA has created net benefits, and such withdrawal would mess with North American trade. Trump also reportedly wants to withdraw from the World Trade Organization (WTO), which would diminish the ability to resolve international trade disputes. Between withdrawing from the Trans-Pacific Partnership and these tariffs, Trump is giving China better leverage to strengthen trade relations with China's neighbors while diminishing U.S.-Asian trade.

I'm not here to say that China's compliance with WTO standards have been perfect because it has not. China should be held accountable, which is why we have the WTO. Tangentially, what also worries me is what China could do beyond tit-for-tat, retaliatory tariffs: they could more heavily regulate U.S. companies in China, cut off trade on rare earth metals, or sell of the $1.7T in U.S. Treasury bonds it's holding, thereby increasing interest rates. Trade escalation such as what we are seeing now has never boded well for the United States.

  

I would like to see a bilateral trade agreement with China or at least for the United States to use the WTO Dispute Settlement Process because either would be an example of a preferred policy alternative. However, I am not hopeful of that. We have a bigger issue, and that is a zero-sum mentality on trade when it is, in fact, positive-sum. Protectionism is stupid and immoral, plain and simple. It is the sort of thing that should have died in the 20th century along with Nazism and Communism. If this trade war goes full-blown, history will not be kind to Trump or the legislators who stood by idly as this atrocity took place. I hope Trump comes to his senses or that Congress exercises its constitutional right of setting tariffs to stop Trump from this insanity.




12-4-2018 Update: The Tax Foundation recently ran its data on what the impact of Trump's tariffs on China are. If Trump imposes the 25 percent tariff on all Chinese goods, then it will cause an additional loss of 65,000 jobs and cost $21B to the GDP, which is on top of the damage the current tariffs are causing. Hopefully, Trump and Xi can work out some sort of ceasefire so they can stop causing damage to the global economy.

4-22-2019 Update: The University of Chicago recently released a paper on Trump's tariffs on washing machines. The tariffs brought in $82 million of revenue last year while raising consumer prices of $1.5 billion (or about $92 per washer). This means that the 1,800 washer production jobs created cost about $817,000 per job.

Should Japan and South Korea Go Nuclear in Response to North Korea?

As North Korea becomes an increasing nuclear threat, North Korea becomes a central part of President Trump's foreign policy. Its capabilities are getting to the point where North Korea could hit anywhere in Japan, which means that North Korea could also hit South Korea. These increased capabilities make South Korea and Japan nervous because they are in firing range. However, they are covered under U.S. protection vis-à-vis the nuclear umbrella. At the same time, the United States would rather not get dragged into a military conflict in East Asia, not to mention that President Trump has made U.S.-South Korean relations uneasy since he became president. Instead of relying on the United States to provide protection, one suggested policy alternative is for South Korea and Japan to develop their own nuclear weapons.

Before I start, I would like to state that I would prefer a scenario or option of non-proliferation or nuclear disarmament. The havoc and devastation that nuclear weapons causes is jaw-dropping, as we saw with Hiroshima and Nagasaki during World War II. On the other hand, we have an oppressive despot that is unresponsive to economic sanctions or diplomacy towards disarmament or non-proliferation. Not only is North Korea not responsive, but North Korea's capabilities are getting better and better. There is a good chance that in the next few years, their ballistic missile capabilities will be able to reach the United States with accuracy (see current range below).

Right now, the balance of [nuclear] power in East Asia is that Russia, China, and North Korea are the ones with nuclear weapons. This is a nuclear version of "the bad guys have all the guns."As much as the United States and other developed nations have taken a stance towards non-proliferation, the truth is that we are looking at a bunch of unsavory options. Since North Korea isn't going to acquiesce if we ask nicely, the only way to stop North Korea before it acquires the desired capabilities is through military intervention (and even that is doubtful). Public policy is not about choosing some awesome option, but rather about choosing the least worst option.

One question is how would North Korea and its allies respond to Japan and South Korea acquiring nuclear weapons. Is North Korea pursuing nuclear weapons strictly for defensive purposes (much like it purports) or does North Korea has more nefarious plans in mind? If North Korea views nuclear armament as a way to protect itself, then Japan and South Korea acquiring nuclear weapons could either escalate the situation or create a situation of mutually-assured destruction (MAD). If North Korea has conquest or military conflict in mind, nuclear weapons would make more sense. Even if North Korea is not "suicidal" in the way you saw with kamikaze fighters in World War II, there is still room for miscalculation or elements within the North Korean military that could instigate undesirable outcomes. If North Korea is more unpredictable than the former Soviet Union was during the Cold War, it is going to be difficult to navigate this situation.

It is not just North Korea's response that is dubious. China is in a quandary. China won't meddle in North Korean affairs until it's too late either because it does not want to delegitimize its own regime or because China worries about North Korean retaliation. At the same time, China does not want Japan to have nuclear weapons, especially given China's history with Japan in the Second Sino-Japanese War. Plus, China does not want a scenario that invokes a U.S. military presence in East Asia. China is delicately walking on egg shells, to say the least. And as for Russia, it would benefit because it would reduce American power and increase its power in the region.

North Korea and its actors are not the only ones to have in mind. Japan has a particular aversion towards nuclear weapons because it is the only country that has experienced what nuclear weapons can unleash. When I analyzed South Korea and why the U.S. still guards the border, my concern based on that is that South Korea has been too reliant on U.S. help keeping North Korea in check. South Korean President Moon Jae-in stated last month that he doesn't want to pursue nuclear weapons because he doesn't want an arms race. At least with South Korea, they had nuclear arms on hand until 1991, so at least there is some precedence for South Korea.

Even if Japan and South Korea end up acquiring nuclear weapons, there is still a reality of international politics: alliances shift all the time. During World War II, the United States was allied with Russia until shortly after the end of the war. Afterwards, we had the Cold War. China went through a similar phase. Even now, take India as a more recent example. Historically, India was not particularly friendly towards Israel. Since the Modi regime, Israel and India have become closer than ever. Japan and South Korea have been allies to the United States for many years. However, Japan added Article 9 to its Constitution and took a more pacifist route precisely because of the havoc it reeked during World War Two. The reason I bring up alliances is that I would hate to see one problem be replaced with an even worse one, such as South Korea allying itself with China and sharing U.S. nuclear technology with China. Granted, Japan or South Korea have not given the world reason that they would develop military ambitions, but stranger things have happened before. Even so, there is nothing to indicate that this would end up being the case.

As long as North Korea becomes increasingly antagonistic, there is no easy decision on this front. This could go awry, and it could also become more difficult to persuade others to take a path of non-proliferation or disarmament in the future if we open this door. Nevertheless, based on what information we have, containment and deterrence are the best bet to keep North Korea at bay. Given that primary deterrence is preferable to extended deterrence, perhaps it is time for Japan and South Korea to have a modest stockpile, at least enough for second-strike capability. The U.S. is in no position to plausibly neutralize North Korea's missiles or prevent an initial North Korean attack on South Korea or Japan short of attacking North Korea preemptively. Although there are some risks to having Japan and South Korea having nuclear weapons, there are worse things than giving responsible, democratic nations a viable deterrent against a nuclear power like North Korea. I'll leave you with this quote from South Korean Saenuri party leader Won Yoo-Cheol:

"We cannot borrow an umbrella from our neighbor every time it rains. We need to have a raincoat and wear it ourselves."

Looming Tension Over the South China Sea

It's amazing how China is caught up in a number of territorial disputes with its neighbors, but none might be more important than the South China Sea (南海). Sure, it hasn't gotten as much coverage as Taiwan, but it's arguably more important than Taiwan. For one, the Philippines, Taiwan, Malaysia, and Brunei all have multiple, competing claims. It is not only a matter of geopolitical strategy that other countries fight over it, although it would explain why the two sides accuse the other of overt militarization in the South China Sea. It's not the central location or that about $5.3 trillion worth of trade passes through the South China Sea annually. Although largely uninhabited, the South China Sea is important because of the natural resources. The Chinese government estimated last year that there was 900 trillion cubic feet of natural gas and 130 billion gallons of oil in the South China Sea.

This Sea has been in dispute  for a number of years (read Council on Foreign Affairs research here), but the most recent disputation was when the Hague ruled that under the United Nations Convention on the Law and the Sea (UNCLOS), China's nine-doted line claim [to have sovereignty over a disproportionate amount of the South China Sea] is invalid. While the Hague's ruling is not enforceable, it does stand as a litmus test of how international organizations and international law play a role in the global order. If last week's ASEAN conference reminded us of anything, it is that this dispute is far from over. If anything, the South China Sea dispute is only going to create a greater diplomatic impasse in the foreseeable future.

There are a few scenarios in which this could play out in a more escalated fashion. One such example has to do with the Philippines. Philippines need for this claim to go through since the natural gas from the Reed Bank will greatly help their fast-growing economy. If China continues to exert enough pressure where the Philippines cannot procure the natural gas, it could very well draw a red line for the Philippines. Given the 1951 Mutual Defense Treaty that the United States signed with the Philippines, the United States military might be dragged into the Sino-Philippine dispute.  Hopefully, the Philippines won't provoke China to that level, but the Hague ruling might have overly emboldened the Philippine government. We also have to keep in mind Taiwan's reaction, since the Hague did not rule favorably for Taiwan, either. This has the potential to subtly undermine the Hague's ruling, as well.

The outcome will largely depend on how China reacts or how much China will use the South China Sea dispute as leverage in future diplomatic, economic, or military negotiations. The Chinese government could deny United States ships entry into China's 200-mile exclusive economic zone (EEZ), which could somewhat damper American economic growth. China also can reward countries who side with China by encouraging investment and tourism in the allied countries. But this is a matter of how China fits into the greater world order. To what extent will China cooperate and play ball? To what extent will it completely ignore international law?

Historically, China has preferred to remain a regional hegemon, as opposed to a more global one. While the past can have predictive power of what the future holds, it hardly guarantees that China's aspirations remain the same. Even with a growing economy and military, China still has to watch its step as it figures out how to handle its territorial claims over the South China Sea. After all, the Chinese government's official position is still to solve the dispute amicably and diplomatically. While the direction seems to be diplomatic, we cannot rule out a militaristic approach in the near future, either from China or the United States. I would hope that with its "One Belt, One Road" initiative, that it will lean towards trade and diplomacy over military escalation, especially given that threatening trade flows anywhere would be folly akin to shooting oneself in the foot. However, given that China has historically been difficult to predict, only time will tell.

China's One-Child Policy at 35: Successful Family Planning or Demographic Nightmare?

Family planning policy can be quite the hot button issue because, at least in the context of the Western world, it ranges from whether abortion should legally be a choice or whether employers should be mandated to provide birth control to their employees. It wouldn't cross the minds of most of us in the Western world to debate the merits of the government mandating abortions. However, if we were looking at this from a Sinocentric perspective, it would be the sort of public policy debate one would be having. Tomorrow will be the thirty-fifth anniversary in which the Chinese government enacted the One-Child Policy (计划生育政策). The reason for such draconian policy was social engineering. The Chinese government was worried about the economic and social impacts of overpopulation, and thought that limiting childbearing to one child per family was a good idea.

While the One-Child Policy is administered by the Ministry of Health, it is enforced at the provincial level and experiences varied levels of enforcement. The Chinese government has used heavy fines, firing people from their jobs, and forced sterilization and abortions to keep population growth at a minimum. At this juncture, the laws have been relaxed enough where the law de facto has become a Two-Child Policy for many of the provinces. Regardless of the extent to which the laws have been relaxed, the law has been in place with enough force where it has had impact. According to the Chinese government, there have been up to 400 million prevented births due to the One-Child Policy. Setting the moral implications aside for a moment (as hard as that might be), let's ask ourselves whether it was good public policy.

Let's start with China's fertility rate. After all, it was the fear of excess population growth that triggered the One-Child Policy in the first place. Per the diagram from Pew Research [below], what we see is that the fertility peaked at about 6.0 in the mid-1960s and took a sharp decline by the late 1970s to less than 3.0, which was when Chinese government officials started to consider the One-Child Policy.

Source: Pew Research

One of the major issues with the One-Child Policy is that the Chinese government includes prevented births from the 1970s, which is 10 years before the One-Child Policy is enacted. Peer countries also had similar fertility rate declines in the latter twentieth century. As such, the vast majority of births had been averted due to a naturally declining fertility rate, not because of the One-Child Policy (Wang et al., 2013, p. 121). Even if the One-Child Policy never was enacted, China's fertility rate probably would have been around 1.5 by 2010 (ibid., p. 122). There ended up being 50 million families with only one child (ibid., p. 124). While it would be tenuous to assume that every single of those 50 million families opted for one child only because of the policy, it does at least bring the number of averted births done considerably from the commonly touted number of 400 million.

While the impact of the One-Child Policy was less minimal relative to what the Chinese government estimated, the One-Child Policy still impacted the sex ratio in China (ibid., p. 123). While part of the preference towards males is due to historical patriarchal views (e.g., ancestral worship, property inheritance), it more so has to do with the fact that sons are preferred to help maintain farmland in the rural areas. This de facto gendercide is perturbing to say the least.  The United Nations Population Fund points out that while the sex ratio ticked up a little bit between 1964 and 1982 [to 109:100, which is slightly above the natural sex ratio of 105:100], the ratio was really exacerbated after the One-Child Policy took into effect. When looking at the difference between rural areas and urban areas, the sex ratio is less skewed in urban areas (i.e., the ratio is currently 112:100 in urban areas versus 119:100 in rural areas) since the incentive for son preference is smaller. I have to wonder whether the One-Child Policy has been responsible for an insanely high household savings rate [to the point where people won't spend to help boost the economy] or fewer married men resulted in higher crime rates.

Then there is the matter of the dependency ratio. By 2050, there will only be about two workers to support each retiree (Howden and Zhou, 2014, p. 19). Chinese families face the "4-2-1 dilemma" in which four grandparents are supported by two parents, and two parents supported by one child. This imbalance puts quite the pressure on younger generations to support their elders. China is facing an acute worker shortage. By 2050, it is projected by the United Nations that 13.7 percent of the population will be over 65 years of age, and only 48 percent of the population will be of working age (ibid., p. 21). This downward pressure will be felt in China's GDP growth, which the Chinese government regrettably uses as its sole metric of economic success. None of this gets into the distinct possibility that the One-Child Policy has exacerbated the female suicide rate.

Postscript: Even though its effects have been exaggerated, the One-Child Policy still has caused damage to Chinese society. The One-Child Policy violates the choices of women over the bodies, changed kin relations in Chinese culture, reduced the propensity to conceive (Howden and Zhou, p. 22), created a long-term labor shortage, and it adversely altered sex and dependency ratios. In terms of demographics, China's numbers are going down and will continue going down to the point where China's population might actually decrease. China's focus should not be on a population boom, but rather what to do with its lower fertility rate. China can change its sex ratio, but much like South Korea, such change takes time (Chung and Gupta, 2007).

Increasing fertility rates will face the uphill battles of economic development, urbanization, and cultural shifts, all of which disincentivize Chinese women to procreate. The problem is that China's fertility rate is at 1.5, which is well below replacement rates. Since countries with fertility rates below 1.5 have not been able to recover, I have to wonder if it's too late for China.

Population-boosting policies require more time for its results to take in effect, which is just another way of saying that China is an inevitable, ticking demographic time bomb waiting to happen. Demographically speaking, anything China would do to ameliorate the situation (and that includes reversing the enactment of the One-Child Policy this very second) will take at least three decades to take into effect.

Chinese Yuan Devaluation: Will Things Change for the Better?

Recently, the Federal Reserve Bank of San Francisco commented on China's macroeconomic slowdown, albeit with some optimism towards the end. Shortly after the release of the Fed's report does China decide to devalue its currency: the yuan (¥). The devaluation, which was nearly at 4 percent, was the biggest devaluation in the past twenty years. The analysts over at Goldman Sachs believe that China is devaluing its currency in attempts to jumpstart its economy with a de facto stimulus because it makes Chinese exports cheaper while imports to China become more expensive.

What is interesting about this particular round of devaluation is that China is also allowing for more market forces in the currency market, not less. For one, China announced that it will set its daily reference rate to "the closing rate of the inter-bank foreign exchange market on the previous day," which is significant because it's no longer at the sole discretion of the central bank. China presumedly does this in the hopes that the IMF will add the yuan to its basket of reserve currencies.

Before continuing with my second point, let's consider previous accusations of China being a currency manipulator. I wrote on China's status as a currency manipulator late last year, and I came to three main takeaways: 1) any country with a central bank manipulates currency on some level, 2) China cannot keep up with its currency manipulation, and 3) it doesn't have the impact on America that naysayers think it does. Oh, and let's not forget that in spite of the manipulation, at least China is helping out the American consumer by making Chinese exports cheaper.

That being said, what makes this devaluation different is that China relaxed its monetary policy and allowed for market forces to devalue the yuan, which is different from previous intervention from China's central bank (中国人民银行). This lack of government interventionism, at least in this case, should change the tone for certain individuals running for presidential office launching accusations of "currency manipulator," although it very well might prevent the United States' Federal Reserve Bank from raising its interest rates (Keep in mind that back in May, the IMF stated that the yuan is not undervalued).

For me, it is more disturbing why China took the route of devaluation. On the whole, the yuan had been appreciating in the past five years, so let's remember what preceded China's announcement earlier this week. I think this was realized on the stock market because one did not see the volatility that would have been expected if this fact were forgotten. However, with issues in the euro zone and a lackluster recovery in the United States, demand for China's exports isn't what it used to be. It is not because of Chinese monetary interventionism in this instance (although Southeast Asia and the Euro zone will probably take a hit), but because of the slack in the global economy.

China allowing for some market forces to lead is a step in the right direction. We'll see if China sticks to its commitment to allow for currency market liberalization or reverts back to putting a leash back on its monetary policy as soon as it is inconvenient for China. In either case, China still has a while to go before its currency becomes internationalized. Until China liberalizes its economy, I'm afraid we'll see China continue to ride on a monetary roller coaster.

Why I'm Really Not Worried About a Growing Chinese Military Presence

I don't write about subject matter related to the military all that often. Aside from how the military affects fiscal issues and has macro-effects on society, it really doesn't pique my interest. However, I came across a report from the Rand Corporation entitled China's Incomplete Military Transformation (Chase, Michael et al., 2015), and I was curious. Why the curiosity? Those who would like for the United States to have a more expansionary and interventionist military policy want to point out any potential threat to the United States, whether real or imaginary. Invoking territorial disputes in places like the South China Sea, China's double-digit increase in defense spending over the years, nuclear capabilities, naval modernization. These are all reasons that proponents of the military are saying we should be worried about China's increasing military presence and clout. However, going off the Rand Corporation report, as well as other points I can make, here is a list of why I am not particularly worried about China being a militaristic force majeure:

1. Corruption and organizational structure. China is well-known for its culture of corruption. The People's Liberation Army (PLA) is de jure a separate entity from the Chinese Communist Party (CCP), which means there is essentially no civilian oversight (Chase, Michael et al., p. 48), and essentially created a civil-military gap (p. 45). The PLA's budget is approved without any real discussion as to what the budget entails (p. 47), so it is no surprise that the PLA is going to be riddled with inefficiencies. Corruption is effectively an indirect tax because it decreases the efficiency of spending. China's significantly higher level of corruption means that it would need to spend a lot more money on the military than the United States to even become close to outpacing the United States military. Looking at the proceeding points, I find that to be highly improbable. 
2. Estimating military size. Because of its corruption, China lacks the transparency needed for good governance. This is evident in trying to estimate the size of China's military because China's government estimates are infamously unreliable. In spite of whatever grandstanding the Chinese government might be doing, they could very well be overestimating their numbers.
3. Basic military strategy and geography. But let's assume that the high range of the military's budget of $132B is accurate, a figure that is less than a third of what the United States' expenditures on military spending. China is still at a disadvantage. Why? 
• For one, the United States has much more actual experience in military operations. By extension, the United States has military posts throughout the world, and is able to be much more responsive with its extensive military network. This also means that China does not have the same military network to deploy troops and carry out operations that would greatly expand its military clout.
• Even if China were to go on the offensive, it means that China would most probably be attacking a coastline (e.g., Taiwan, Japan). Defending a coastline is much easier than attacking it, and given that the coastline is going to have U.S. military force, it would be all more difficult for the PLA to succeed. 
• Nuclear deterrence can be a wonderful thing, which is something the United States has. Whether or not China has second-strike capabilities, the fear of mutually assured destruction (MAD) can be adequate to make sure China doesn't agitate the United States.
• Under the neorealist school of thought in international relations, balance of power theory states that national security is enhanced when one state is not so powerful that it dominates all the others. I don't subscribe to this school of thought in its entirety, but if we're so worried about balance of power, there are plenty of countries who have been historic rivals that would want to contain China's growing influence on a regional level. To name a few: India, Japan, Russia, and Pakistan. Russia's concern is going to be contingent upon its relationship with the United States, but it's safe to say that China is going to have to contend with other countries in the region that would rather not see China become too powerful. 
• While we're talking about borders, China borders three of some of the most unstable countries in the world: Afghanistan, North Korea, and Pakistan. China is surrounded by potential enemies and instability. The United States has two large oceans distancing it from any other country that could be remotely considered a world power.
• In spite of qualms that some might have about the United States and its military reach, it still has a lot more military allies than China does. China's main military ally is Russia, and even that has historically been tenuous.
4. Insufficient education, training, and technology. China's military is stymied by undertrained and inexperienced officers (p. 141) who are compensated with an amount less than those in the civilian economy (p. 49). The military exercises are also counterproductive because they do not provide real opportunities for Chinese soldiers to learn from their mistakes (p. 50). China also does not have the military technology to outflank United States submarines or aircraft. Just because China is spending more money doesn't mean its spending is as well-targeted. China is woefully behind the United States on developing its military technology. For China to catch up, it would require a steep investment in new weapons and platforms, all of which are capital-intensive. 
5. Military size. The overall size of the PLA is about 2.3 million individuals. This is not only an issue from a budgetary standpoint. Economies of scale makes it difficult to manage an army of such a size because it takes such logistical and administrative oversight (p. 53). China is also dealing with a rapidly aging populace, which means that it cannot maintain the size of its military because it will have to increase its government expenditures on social welfare programs. This also assumes that manpower is the only prime factor in warfare. However, in modern-day warfare, you also need the equipment to carry out missions. 
6. Potential game changers. China's overall trajectory has been quite difficult to predict, but we cannot assume that the status quo will remain in perpetuity. Most notably, China's GDP cannot expand the way it has indefinitely, and is going to experience an economic slowdown at some point. If the slowdown is more abrupt, the Chinese government is going to have to make some major trade-offs with its military spending (p. 21). China also has some major potential for domestic instability. Although the CCP has been able to quash a good amount of social unrest, there is a real possibility that this might no longer be the case, which means the Chinese government would have to divert its resources elsewhere (p. 22). Also, China might antagonize its neighbors into military conflict. But China could also forge military alliances, which would reduce its propensity to expand upon its military.

Although the future is uncertain, if an educated guess had to be made, the best one is that China will have just enough muscle to make sure that the United States does not intervene in East Asia along China's border. Yes, China's military is growing, but to say that China's military is going to be on par with the United States military is just another reason to increase defense spending in America. I hope the powers that be can see that China's weaknesses are very real, and can pursue constructive relations with China instead of worrying about a bogeyman of worst-case scenario whose probability is next to nil.