I think it was a big mistake, this Chinese escalation, because they’re playing with a pair of twos.  What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.

~Commerce Secretary Scott Bessent

If nothing else, everyone in the Trump administration from the top down is all in when it comes to poker analogies.  Just months after Donald suggested that Ukraine did not hold the cards needed to continue its resistance to the Russian invasion, we have a former hedge fund manager telling the Chinese they have a weak hand when it comes to Trump’s trade war.  The last time I sat around a card table, a pair of twos looked pretty good compared to $36 trillion worth of IOUs.  More importantly, Bessent once again proved that these supposed Wizards of Wall Street often do not know squat about business.  Let me explain with the following example.

Trade wars have a lot in common with price wars except in price wars the goal is to undercut the competition by offering similar goods and services for LESS money.  In a trade war, the prime directive is to INCREASE the cost to your consumers of the competition’s goods and services.  In both situations, the winner is always the entity that has the resources to take a short term hit to achieve its long term objectives.  This is exactly what happened during the 1980’s energy crisis.

I will start with a brief history of oil prices during this volatile period.  In December 1979, the price of a barrel of oil peaked at just under $40 ($158 in 2025 dollars) due to three primary factors: (a) increased demand driven in large part by economic growth in China and India; (b) OPEC’s restructuring of the global production and distribution system; and (c) uncertainty in the Middle East (Islamic Revolution in Iran).  The historic oligopoly of American and British firms (known as the “Seven Sisters”) responded in hopes of retaining their market share. First, the higher per barrel price made it profitable to invest in infrastructure to increase exploration, drilling and production.  Second, oil companies began investing in non-traditional means of extracting oil.

Perhaps the most infamous example was the Colony Shale Oil Project in the Piceance Basin of Colorado.  It began in 1964 as a pilot project between Standard Oil of Ohio and Tosco, which had developed technology to extract and refine the oil embedded in shale rock.  Atlantic Richfield joined the partnership in 1969, followed by Ashland Oil and Shell Oil in 1974.  In 1980, Exxon bought a majority share in the venture for $300 million and began construction of a commercial scale shale oil plant with a capacity to produce 46,000 barrels of shale oil per day.

In the mid 1980s, when I held the position of deputy director of the Texas Economic Development Commission, I was invited to attend a roundtable sponsored by the Hunt Oil and Petroleum Company, owned by the Hunt family then headed by the Lamar Hunt, son of the founder H. L. Hunt.  I wish I had a transcript of Lamar Hunt’s opening comments.  However, I never forgot three things he told us that day.

• All the sheiks who oversaw oil operations in OPEC member nations were educated at the finest American universities including Harvard Business School, University of Chicago and Wharton.
• OPEC members built huge cash reserves while the per barrel price between 1980 and 1986 doubled and even tripled the margin per barrel.
• If and when OPEC believed substitution of alternative sources (e.g. shale oil) would threaten their market share, OPEC would drop the price per barrel of their oil to make any alternative economically unfeasible.

And that is EXACTLY what they did.  In July 1986, the price of oil fell to $9.25 a barrel when OPEC flooded the market.  Over the next four years, U.S. oil fields were abandoned, and the Colony Shale Oil Project was shuttered.  And the price of oil eventually returned to its pre-1980 levels, peaking at $30.86 in October 1990.  FOOTNOTE: In addition to the $5.5 billion dollars of sunk costs Exxon put into the Colony project, they also had to compensate Tosco to the tune of $380 million.

Exxon was not the only loser.  Interest rates, especially for mortgages, rose to 19 percent.  Inflation reached a high of 14 percent.  Unemployment averaged 11.1 precent in 1982 and 12 percent in 1983.  The housing market collapsed with many homeowners holding outstanding mortgages higher than the total value of their real property.

Surviving a trade war depends on the following:  sufficient resources to minimize the negative impact, patience and public support.  Already faced with massive debt, does the Trump administrative really think it can afford to write checks to farmers and companies to compensate them for lost markets?  Or juice the economy with tax cuts?  Both could have dramatic effects on inflation and interest rates.  Will the American public tolerate a new round of inflation and higher consumer prices before taking to the streets?  (Oh, they already have.)  And finally, even if there is a light at the end of this tunnel, business leaders and financial analysts agree it is years in the offing.  Will Americans wait that long for some uncertain payoff?

China’s retaliation is unhampered by any of these three concerns.  They have the reserves.  They can play the long game.  And they can suppress public opposition.  Which is why Secretary Bessent’s assessment in the opening quote is wrong.  China’s hand, at a minimum, holds THREE twos, not just a pair.  And the U.S. still has a stack of IOUs that is likely to grow dramatically in the near future.  Trump may think his on-again, off-again tariff chaos is akin to holding his cards close to the vest.  Does he not realize most of it is public information?  And what is not being reported by the media is probably available on a Signal chat or Gmail.

For what it’s worth.
Dr. ESP