When it comes to the trade war, Wall Street fears that Donald Trump “may be too dumb to fix” it.
The talks collapsed between the US and China on May 10, and the U.S. increased tariffs on $250bn of Chinese products from 10% to 25%.
Tensions, and hope, were high when Presidents Donald Trump and Xi Jingping met at the G20 conference in late June. While their relationship may remain intact, the trade relationship between the two countries does not.
President Donald Trump recently announced that he would impose a 10% tariff on $300bn more of Chinese goods.
According to the Office of the US Trade Representative, goods traded between China and the US totaled around $659.8 billion in 2018. The US exported $120.3bn but imported $539.5bn. President Trump has long decried this disparity and has claimed that previous administrations political approach was ineffective and the only way to correct it was by imposing stronger tariffs.
Trump, using his favorite platform Twitter, even went so far in March of 2018 as saying that trade wars are “easy to win”. The evidence is beginning to prove otherwise.
A BRIEF HISTORY
The road to this point began in the 1980’s as China began to crack open its door to other economies.
After signing several regional trade agreements, China received observer status in the General Agreement on Tariffs and Trade (GATT): their goal was to become a founding member of the World Trade Organization (WTO) that was taking shape. This would have validated China as a world economic power.
That notion was thwarted by Japan and the West who wanted China to reform their tariff policies. After China had proven its commitment to multilateralism by agreeing to ideas that conflicted with its economic strategy and capitulating to much harsher conditions than were asked of other developing nations, China became a member of the WTO in December of 2001.
Since then, to say that China has not been flexing its muscle as the second largest economy would be spurious. Since 2001, it could be argued that China has been strong arming companies that wish to do business in their country. Excluding accusations of hacking and stealing trade secrets, look at the way most tech firms must do business in China.
Many are required to have a joint venture in China. This is done by transferring their technology through a foreign direct investment (the business interest in China). Sometimes, in order to gain access to certain sectors, China forces foreign companies to enter into joint ventures with Chinese entities to whom they have no connection.
These joint ventures are done prior to having access to the market and usually in secret as they are not allowed by the WTO. Many consider this to be a kind of theft of intellectual property that is forced upon foreign firms.
Maybe that’s flexing . . . or maybe it’s retribution for what it considers to be unfair treatment by the US and the global market. In either case, it is in violation of terms set forth by the World Trade Organization.
Correcting this is on the list of demands that the US has made of made of China. But despite any lack of evidence, President Trump continues to assert that the US is winning the trade war.
If we look at how the trade war has impacted the US agriculture business, that industry has been severely damaged. For example, the US export of soybeans to China fell dramatically in 2018 after the China imposed tariffs. Along with Brazil, the US was China’s dominant soybean supplier, in 2017. After the tariffs were imposed and the US exports to China dropped to near zero, the price of soybeans plummeted. Then the Brazilian exports to China trended higher and the price increased.
Though prices have since re-converged and soybean exports to China have resumed to some extent, US soybean farmers incurred great losses, while those in Brazil benefited from trade diversion and market segmentation. Additionally, it’s incalculable how that dust-up has been viewed by the other countries who import US soybeans. With perceived volatility in the US market, they may easily purchase from a more currently stable soybean supplier, such as Brazil.
While agriculture has been hit the hardest so far, other industries such as the tech and automotive industries could be severely damaged by a continued trade war.
Much of the current measurable evidence suggests that the trade war does not appear to be yielding the kind of results President Trump proclaims, this isn’t that unusual in this era of American politics. Since it’s much too early to attach the adage of “short term pain” to achieve “long term success” here, maybe things are bad, but not that bad.
In a recent article by Vox, they observed that there are three ways in which President Trump may not be in such awful shape:
- If China doesn’t back down and the US economy remains strong, President Trump can say it is strong because of the tariffs.
- Even if they make concessions, President Trump can claim victory.
- And if they offer only minor concessions, President Trump can enjoy a little Wall Street back patting.
In what appears to be a losing situation, it somehow doesn’t look so bad for President Trump. Almost any possible resolution could be a potential political win for him. For others, like either consumers or manufacturers, or both, not so much.
There is no proof to suggest what President Trump said is true, “It’s happening, it’s happening fast and I think things probably are going to happen with China fast because I cannot imagine that they can be thrilled with thousands of companies leaving their shores for other places.” The president also neglected to provide any evidence.
And given the recent update to even more tariffs on China, this trade correction doesn’t seem to be happening at all.
Consumers in the US and China are unequivocally the losers from trade tensions.
We must also consider that, like it or not, the likelihood that any US manufacturer in China would return to the United States is limited. Especially when they have the option of Vietnam, India or Singapore at their disposal.
With so much at stake, a total trade war with China is indeed growing but, hopefully, still seems unlikely. There is still much ire that China can cause the US. For example, if China decided to kick out American service industries, like McDonald’s, Starbucks, Hilton, etc. that moved in after China’s reform. This impact would be captured in stock market valuations. And it’s safe to say, not positively.
I’m guessing the president doesn’t want to raise the fur on the Wall Street titans any more than he has. The recent proclamation by Vanity Fair that “Wall Street fears Donald Trump is too dumb to end trade war before 2020” sure indicates where their head is at.
Perhaps more menacing than Wall Street, but not unrelated, is the Chinese “nuclear option”. The Chinese government made a considerable contribution to stabilizing the US economy in 2008 by buying US debt during the financial crisis. Gobbling up more than $1 trillion of US Treasury bonds. Considering this $1 trillion accounts for 17% of the various securities held by foreign governments, if the trade war should ultimately fail any kind of massive sell-off would be catastrophic to the US.
Some economists worry that more tariffs could spiral the world economy into a recession. However, other economists say that, provided China responds with limited retaliation, the impact would only be a 0.5% impact to GDP for the US and 0.8% impact to GDP for China, over a three-year period. The idea that China would respond with restraint, or perhaps not at all, seems naïve.
In any event, at this point, that is all just conjecture.
These rising trade barriers, should they persist, will continue to disrupt the spread of new technologies, lower global productivity and welfare. Import restrictions would also make tradable consumer goods less affordable and harm low-income households disproportionately. In fact, according to the International Monetary Fund, “Consumers in the US and China are unequivocally the losers from trade tensions.”
As with most things in the era of American politics today, it’s tough to discern fact from fiction. It’s true that the US is having a trade war with China and it’s true that the US has increased tariffs. And it’s true they may increase them again.
While it has influenced certain industries in the US, to say it’s had no impact on consumers is untrue. And the longer it goes on, the greater the chances are of this trade war having a profound impact on not only the US economy, but the world economy.
As it stands now, 2019 is becoming an extremely fragile year for both the US and Chinese economies, as well as the global economy.