Cash Chronicles is back from the road in sunny California and gained a wealth of insight into an issue that the markets and media have been focused on, but has been little discussed in this blog: the trade war with China.
What the Experts Had to Say
Over 3 days of talks which dealt with international payments, trade and economics, some top industry experts weighed in on what they expect in terms of the economy, investment and trade. I was surprised to see that the mood was upbeat and there was even talk that there isn’t an imminent recession around the corner but rather, we could be in for another spurt of growth.
However, there was caution that if there is a recession in the next year, many think it will be due to self inflicted wounds due to the escalating trade war. If industry experts are worried about this, it could explain why the stock market is seeing many swings which commentators are attributing to the twists and turns of the trade negotiations.
Given that, like many of you, I have not been paying close attention to the trade war, I decided to look up some resources to see if I could get a broad overview of what has happened so far and what may yet happen in the near future and why it matters.
The Current State of Things
To start with, I found a pretty good article from the BBC which gave a brief overview of what has happened so far.
I think most of us know that Trump wants tariffs against China because he thinks he can punish them for unfair trade practices and will protect American jobs. Although this is just fundamentally untrue, it isn’t the point here because it’s what this administration believes. Either way, the US has imposed 3 rounds of tariffs totaling more than $250 billion. These tariffs range from 10-25% of the value of the goods and cover a wide range of products from steel to handbags.
Source: BBC
China has retaliated to these levies with their own tariffs but these are more targeted and aimed at areas of the US that are more heavily Republican. These tariffs range anywhere from 5%-25% of the value of the goods.
Currently Chinese negotiators are set to go to Washington on May 8 to continue talks. There is no specific deadline currently. Once an agreement is reached, the Chinese would like all tariffs lifted at once, while the Americans want them lifted gradually while leaving some in place.
One commentator at the event I attended this week noted that there are some important factors not being discussed that are influencing how the Chinese are approaching the negotiations. In theory at the moment, when a deal is ready, President Xi Jinping and President Trump would meet to sign an accord. However the Chinese saw what happened with the meeting between Trump and Kim Jong Un, where Trump left the talks and in their view embarrassed the North Korean leader.
China wants to avoid any semblance of weakness on the world stage and does not want to risk a repeat of what happened in the North Korea talks. For this reason, the commentator didn’t expect a meeting of the Trump with his Chinese counterpart until a detailed agreement is hashed out and finalized.
Why Does it Matter?
I have to admit, I’m not really feeling any effects of the trade war in my personal life and I think it’s the same for the majority of Americans. Yes, tariffs are unfair because they single out particular products, so if I am say, a soybean farmer or work at a steel plant and get laid off due to the drop in demand for steel then yes, it would have a big impact in my life. Unless the price of gas, my internet bill or groceries go up by 25% though, I am not really going to pay much mind to it in the daily course of my day.
In contrast, the IMF produced a study in January of this year which predicted that the trade war could cut GDP growth by 0.3% to 0.6%. When growth has been in the 1-3% range since the recession, a half point decrease in GDP just due to a trade war would definitely have an impact on the broader economy.
This is what the experts at the conference I attended were pointing to when they discussed “self inflicted wounds” due to the trade war. Growth sometimes can be a confidence mindset but a negative mindset can also work the opposite way. If people fear for their jobs, maybe they don’t spend as much, if businesses don’t anticipate growth, maybe they don’t invest as much and so on and so forth until what was a small downtick in growth turns into a downward cycle of negative growth.
So there are real world consequences for this in terms of the economy and as much as it’s hurting the US, the study found that it could be hurting China in terms of their GDP growth even more. Hence why China may be hesitant to up the ante and put up tariffs as big and broad as the opposing US tariffs on China.
Opportunity in Crisis
Another interesting take away from the discussion on the trade war was that, although it is hurting potential growth in both China and the US, it’s a net positive for Mexico, Canada, the EU and other parts of Asia.
As can be seen below, a 25% increase in tariffs for all US China trade could make GDP growth lower in both countries but have some positives for countries not involved.
Source: The Wall St. Journal
Why would this be? Well it was pointed out by one of the bankers at the event that “you should never miss an opportunity to take advantage of a crisis”. He discussed how in the case of soybeans, the trade war has been a net positive for his bank.
He explained his example in more detail: in the case of soybeans, China buys less soybeans from the US due to the tariffs. China then buys more soybeans from Brazil and Argentina, but these countries also need to meet their domestic demand, so they end up exporting soybeans to China but then importing (tariff free) soybeans from the US. In the end, China still gets its soybeans but the banker got to finance the trade of the soybeans from the US to Brazil and then got to finance the trade of soybeans from Brazil to China, rather than the previous arrangement of just financing the US to China trade.
In essence, what he was saying another way was: due to the interconnectedness of today’s world, 2 countries putting up trade barriers against each other is like putting a bolder in a stream: The water still gets downriver but just has to take a different path.
Source: Steven Fey Photography
Additionally, some commentators at the event noted that other countries had many of the same complaints about China’s trade practices as the US did but that the Trump administration had scuttled trade deals meant to counter China like the Trans Pacific Partnership (TPP) and then pursued a go it alone policy to pick a fight with China. A multilateral, coordinated approach may have achieved even better terms than the ones that come out of the bilateral negotiations.
Conclusion
In reality, it just goes to show that the whole exercise is just an illusion. It doesn’t really help anyone, as evidenced when Harley Davidson moved some operations overseas due to other tariffs on the EU. The goods still get to us, they just have to take a different route which has no logical sense. It’s strong evidence that the US is fighting a 20th century trade war while the world depends on and operates by a 21st century international supply chain.
What are your thoughts on the trade war and how it’s being covered in the media and followed by the markets? Feel free to leave a comment.
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