What to make of the new trade deal with China? The deal seems to restore the US-China trade relationship to where it was before Trump launched his âeasy to winâ trade war. Nothing that China has agreed to departs markedly from what it agreed to during the Obama administration. In 2015, Obama and Xi Jinping announced an end to cyber-intellectual property theft and embarked on a next round of negotiations over market access.
Trumpâs Phase I agreement barely restores Chinaâs agricultural purchases to where they were before 2017, even though Trump presented it as a victory. If one of your main customers boycotts you and then agrees to start buying again, but is buying fewer goods, itâs disingenuous to announce that they had promised to buy more.
After two years of mounting tariffs hostilities, the Phase I agreement has cost the US more than $30 billion in subsidies to American farmers. It has cost American consumers tens of $ billions in tariffs. It has forced some US companies to diversify their supply chains out of China at an additional cost of $ billions.
Trump and his trade sidekick Peter Navarro, fundamentally misread the relative strengths of both the US and China. They thought that Chinese exports to the US are the key driver of the Chinese economy. If that were true, tariffs would be a potent weapon.
But a recent McKinsey study shows that China has aggressively shifted from an export-driven economy to a domestic consumer-driven one. Much of any gain in Chinese exports primarily accrues to the multinational companies like Apple that source in China, and not to the domestic Chinese economy.
At best, Trump fought China to a draw. At worst, China now understands that less economic engagement with America is in its self-interest. The trade war and its new, paper-thin truce leaves America with less leverage going forward. On to cartoons.
Was Round One a win?
Why are our sports teams held to a higher standard than our politicians?
Are you worried yet? Last week ended with the stock market falling off the cliff. The Dow was down over 700 points, but recovered slightly to lose âjustâ 572 points. With the stock market, no matter what you plan on investing in, there are always risks. Before you do decide to get into this industry though, it is important to understand that there are some things you should know about stocks. It only makes sense to do your research into this before committing to anything. The volatility of the stock market makes it essential that you swallow your ego and seek professional guidance based on thorough and extensive research. Stocktrades can be of service to anyone looking to up their game and make sure their choices are as safe as possible. You’ll never be able to have a 100% success rate, with the risks summed up by recent events involving the President. Trump caused this by seemingly being pissed that the Chinese would fight back after his in-your-face tariff announcements.
Now, the Dow Jones average is down 9% from its January high.
And the administration couldnât seem to get its messaging straight. Former TV pundit Larry Kudlow, now Trumpâs economic advisor, told reporters on Wednesday the threat of trade sanctions was only a negotiating tactic. A rally of more than 3% followed. But Trump upended that notion on Thursday, ordering a review of even larger tariffs. So, on Friday, Kudlow said the opposite, claiming he had just heard about the additional $100 billion in tariffs Trump announced on Chinese imports.
From Bloomberg:
The Republican presidentâs renewed ramblings on trade dominated US equity markets this week, with a tweet-induced swoon on Friday leaving the S&P 500 Index 1.4 percent lower than where it started on Monday.
And there goes Trumpâs reputation as the stock market president. A retired former colleague of Wrongoâs at the big NY bank is all over Facebook touting the Donaldâs success at driving the stock market, but this chart from Bloomberg shows heâs wrong. It compares Trumpâs first 444 days with the first 444 days of other presidents:
So, what to do? Do investors ride the roller coaster that is the Trump approach to trade, and watch Mr. Market deal with it by hammering their 401k? Or do they jump into cash and lock in a loss? From Benjamin Studebaker:
Theoretically, a full blown trade war with China could be really damaging. If the US and China were to stop trading tomorrow, the total value of US-Chinese trade lost would be about $648.5 billion. Thatâs about 3.5% of US GDP and 5.7% of Chinaâs.
US inflation would increase, since American consumers will try to substitute more expensive goods for those they canât import from China. Chinese unemployment would rise, as non-Chinese firms relocate from China to other developing countries to evade the tariffs.
The US wouldnât be hurt as badly, because after a while, firms would find new locations to operate from. But the trade war wonât create many new American jobs â the offshore firms would either stay offshore, or theyâd automate production in North America. The Chinese would be more lastingly damaged, as there isnât a consumer market large enough to replace Americaâs.
Thatâs what Trump means when he says that trade wars are âeasy to winâ for the US. We can damage China more than China can damage us. Studebaker concludes:
But make no mistakeâsuch a trade war would be highly disruptive. In 2009, the US economy contracted by 2.8%. A full blown trade war would blow this figure out of the water. It would be political suicide for the administration.
Trumpâs stated goal is to get China to negotiate to protect US intellectual property rights. This is why his proposals have been relatively small â heâs not looking to break Beijing, just to bring it to the table.
If Trump can get China to make a deal with him, he can pass this off as a major foreign policy achievement. And because the stock market has been in panic mode, any positive result could make Trump look good in the eyes of his supporters.
OTOH, his supporters, like my former Bank colleague, think everything Trump does looks good.
Maybe the trade war wonât happen. But, maybe Trump should remember what Luke Skywalker said in the Last Jedi:
This is not going to go the way you think…
The âArt of the Dealâ guy should know there are two sides to any negotiation.
So, wake up, Mr. Market! Stop jumping off a cliff with every tweet. To encourage you, here are Elvis Costello and the Attractions with their 1978 hit âPump It Upâ. Maybe it will give Mr. Market an idea about the right direction for the stock market:
Sample Lyrics:
Pump it up, until you can feel it
Pump it up, when you don’t really need it
Those who read the Wrongologist in email can view the video here.
