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Trump Wins Trade War As Global Markets Plummet
It’s early July, well before this article goes online, yet the landscape is pretty clear from where I’m standing. The US and China both raised tariffs on $34 billion of goods on Friday, July 6. This did not stop the S&P 500 from continuing its charge to the all-time high of January 26. For starters, unemployment is historically low and the Fed is poised to raise rates twice before the year is out — all this amid a hidden discretionary spending recession.
So, how about that trade war? Let’s summarize. Most people would agree that free trade in goods would be best for all concerned. Goods would be less expensive and those who could not compete on price would do so on quality, leading to a useful improvement of goods. All is well until protectionism and nationalism rear their ugly heads. Some nations have goods that are difficult to compete on the basis of price and/or quality. Globally, world leaders of such nations are relentless in pursuing their nation’s interests at the expense of others. In trying to avoid the image of the ugly American, we often put ourselves at a disadvantage. Nowhere is this more evident than in business, where our business partners often have a clear advantage.
US Census Data shows that we have a trade deficit with every trading region except South and Central America and Australia/Oceania. At just $33.14 and $14.38 billion, respectively, in the last four years and a combined trade of $310.44 billion this pales in comparison to the deficit for the rest of the world, – $844.66 billion, whose combined trade is $3.578 billion. Below are 2014-2017 averages for most of the world in billions:
European Union: -$149.61
China is an example. Aware of the enormous financial benefit that comes with their 1.38 billion consumers, they extract huge concessions from their trading partners, including the U.S. When they haven’t banned certain U.S. business sectors, they restrict or regulate trade, place tariffs on goods, or enforce intellectual property rights. . property release. Note that this goes one way; there is no sharing of intellectual property.
These uncompetitive business practices are not fair, but so far, American companies have accepted them without much pushback as a cost of doing business there. That’s up to Trump. What Chinese leaders need to realize is that they are not in a good bargaining position and the longer they hold out, the more damage will come to their economy.
This is why. Government economic leaders know their history well and realize that China’s huge population will not tolerate bad conditions forever. To keep discontent at bay, they have a policy of inflated economic growth. According to Business Economics, they have averaged 11.7% GDP growth over the past 10 years, but cracks in their armor are showing. From the heyday of 2010-2011, when GDP grew 19% and 24%, growth has declined steadily and sometimes sharply. It was 5.56% and 1.14% in 2015 and 2016, respectively. No wonder that worrying central government figures have made a big push since then to increase their global exports, including those to the United States, resulting in a resumption of GDP growth to 9.35% in 2017. The prospect of increased tariffs that would make their goods. less competitive, miss those plans. China’s economy is struggling and their stock market is proof of that. The smaller Shenzhen composite moved into bearish market territory in February and the Shanghai composite closed in bearish territory on Tuesday, June 27. The indices were as low as -26.5% and -25.0 on July 5 but recently recovered to -22.5 and -21.2. %, respectively, as global markets climbed along with US markets. That’s still in bear market territory, which will limit much-needed foreign investment. Meanwhile, US GDP is growing steadily, the economy appears to be healthy, and the stock market is nearing new heights. Trump can prolong the tariff game knowing he has more economic wiggle room. Besides, he can cause more pain to the Chinese economy than they can to ours.
To see why, let’s look at the business numbers. The trade deficit with China averaged -358.68 billion USD the last four years in an increasing trend. While US exports have fluctuated between $110-129 billion since 2012, Chinese imports have steadily increased from $315 to 375 billion. Last year the deficit was -$375.58 billion, of which $129.89 billion were US exports to China and $505.47 billion were US Chinese imports. Not only is trade out of balance, so are tariffs. Before this year, US tariffs on Chinese agricultural and non-agricultural goods were 2.5% and 2.9%, respectively, while Chinese tariffs on US goods were 9.7% and 5% for the same. True, these were down from a 14.1% average before 2001 when China joined the World Trade Organization, but that was part of the price and tariffs are much higher for some industries.
Below are the top 10 US exports to China in 2017 according to the International Trade Center Trade Map http://www.intracen.org/marketanalysis:
Aircraft, spacecraft – $16.3 billion
Vehicles – $13.2 billion
Oilseed – $13 billion
Machinery – $12.9 billion
Electronic equipment – $12.1 billion
Medical, technical equipment – $8.8 billion
Mineral fuels including oil – $8.6 billion
Plastics – $5.7 billion
Wood pulp – $3.4 billion
Wood – $3.2 billion
Total – $97.7 billion
Together they account for 74.8% of all exports that year. Note that apart from oilseeds, mostly soybeans, the rest are non-agricultural products. But their rates are not the same and depend on how strategic the product is. For example, Chinese cars cannot compete with American ones, so the latter have duties between 21% and 30%. Compare that to a maximum of 2.5% for Chinese car imports to the US
Therein lies the rub. The Chinese can only raise imports much more on these goods, some of which have few suppliers outside the United States. As a result, some of the announced tariff increases are empty rhetoric with few teeth. For example, China announced 25% tariffs on aircraft, but not all aircraft – only those with an “empty weight” of 15,000 to 45,000 kilograms. While it may appear that China is targeting Boeing, it turns out that the terms are only aimed at getting older 737s out of production, while not affecting the larger models that make up the bulk of Boeing’s business. China desperately needs to grow its airline industry. It is estimated that 7000 new aircraft will be needed in the next 20 years. With Airbus operating at almost full capacity, there is no alternative but to turn to Boeing for the remainder.
The same goes for soybeans, the bulk of China’s agricultural imports. China is the world’s main pork market and they need soybeans for feed. It turns out that Brazil and the United States are the two main global suppliers of soybeans. Brazil has been increasing production for years and now accounts for 57% of China’s soybean imports. This has come largely at the expense of the United States, but Brazil does not have the capacity to offset the remaining 31% in US soybean exports to China. As a result, the planned 25% increase in tariffs will directly hurt Chinese pig farmers.
Ultimately, the sheer size of the trade imbalance will play in Trump’s favor. With $500 billion worth of goods at risk for China versus just $130 billion for the US, China’s fate is sealed. That is, as long as Trump persists in raising the bar while keeping disgruntled American traders at bay. Historians may recall a similar relentless raising of the bar that eventually led Russia to capitulate during Reagan’s tenure. It doesn’t help China that it already opposes its tariff cap.
We are already seeing that endgame unfold. Just four days after both countries raised tariffs in parallel, Trump announced 10% tariffs on $200 billion in Chinese goods. There was no equal-pronged retaliation that China could take after the late Tuesday, July 10 announcement. Instead, China announced that it would retaliate in a different way – likely by selling US Treasuries, which would flood the medium- and long-term bond market causing bond prices to fall and yields to rise.
As for the latter, Trump’s victory will come at a cost. Buoyed by his success with China, Trump will continue to pursue his trade normalization agenda with other trading partners. Although trade is fairly balanced with the UK, the European Union had a trade advantage of 173.58 billion dollars last year on a trade of 839 billion dollars. Not only that, but the EU has made a habit of chasing US tech giants that it cannot compete with. Think Qualcomm in 2018, Google in 2017, Facebook in 2017, Apple in 2016, and Microsoft in 2013. Japan is in the same boat. Our deficit with Japan averaged -$68.59 billion from 2014-2017 and last year was -$68.88 billion in trade of $204 billion. Although government regulations have eased under Prime Minister Abe, Japan has a culture of preventing foreign investment, especially in the financial sector. In addition, they have high tariffs on dairy (up to 40%) and meat (38.5% on beef) products, which account for $6.1 billion of US exports to the country. Trump explained that they were also playing and they fired volleys in return.
Considering the position of all parties involved, rates will be higher going forward than before. This will raise the price of American goods abroad, making them less competitive. This in turn will affect revenues for our larger international firms. Our stock market may be flirting with highs right now, but I believe this will be the catalyst to the market decline as Investors, looking ahead, are bidding on these stocks. Moreover, tariffs on imports will inevitably lead to inflation. We’re already at the Fed’s comfort level of 2%, so any visibility of higher inflation will encourage the Fed to stave it off by raising fed funds rates beyond their current path. Their incentive to do so will increase if China retaliates with a Treasury sales program, as higher 10-year Treasury rates relieve the Fed of yield curve inversion concerns.
A stock market decline will reverse the wealth effect we have seen recently on our economy and combined with export losses, this will undoubtedly lead to job losses and higher unemployment. On top of all that, the hidden voluntary recession we’ve been living through will make itself evident as US top spending populations continue to decline until 2023. This is not an event unique to the US World population growth increased from 1946 to 2023. 1968, peaking at 2.09% per year that year, coinciding with the bulk of our Baby Boomer baby bump. Since then it has been steadily decreasing until it reached 1.09% at the beginning of this year. Top spenders are those 46-50 years old and if we take 1968 as the midpoint of their population zenith, they surpassed in 2016. That is a main reason that populous nations, like China, have been concerned about slowing down consumerism in the past couple. for years The result is that we will see a global drop in discretionary spending for at least the next five years. This will result in accelerated global economic decline over the next five years and lower global stock markets over the next few years.
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