“It was a tumultuous first week of the quarter that has left the markets caught between more truculent tweets on trade from President Trump, and slightly more diplomatic messages from his advisors. Predictably China countered with $50 bln in tariffs of their own against a variety of U.S. imports, while the White House threatened to lump on another $100 bln tariffs to the $50 bln already on the table. Advisors Navarro and Kudlow, along with Treasury’s Mnuchin, said this was not a full blown “trade war,” but were vague as to whether negotiations had even begun, while China’s commerce ministry denied any talks had been launched.” – Action Weekly! Global Edition, April 9
“Trump’s ‘Good’ And ‘Easy To Win’ Trade War Actually Might Be Neither. States that had voted for Obama and then swung Trump’s way could be hit the hardest.” – Huffington Post headline, April 4
“White House Press Secretary Sarah Sanders said Friday that the president doesn’t want to enter a trade war with China, but if he does, he’ll win. Key quote: President Trump ‘absolutely’ still believes trade wars are easy to win. ‘If he is in charge of those negotiations, then absolutely. He’s the best negotiator...’” – Axios.com, April 6
“Donald Trump is right – the United States is not in a trade war with China. At least, not yet. As the rhetoric has flown back and forth between Washington and Beijing, breathless news coverage has made it seem as though the war of tariffs has already begun. It has not – hardly any new duties have been levied. At most, the world is in its July 1914 moment, with the clouds of trade war gathering but shots not yet fired. We’ll know soon enough whether that is indeed the correct historical analogy. For now, the war is just words, and it would be best for the planet if that’s as far as it goes, because the only way to win a trade war is not to fight it.” – Politico, April 7
“Just six words suffice to sum up President Trump’s approach to trade (and, you may mutter, too much else): make threats, strike deals, declare victory.” The Economist, March 31
We thank our friends at TLR (The Liscio Report) for their kind words about our commentaries about trade (and we thank David Blond, Bob Brusca, and Mike Drury for their guest pieces on trade and Trump). By the way, in our opinion TLR is one of the highest-frequency reports (it’s weekly) that might discern some impact on the US economy from the trade war or trade rhetoric. This research publication tracks employment data in each of the 50 states. I read it regularly and recommend it highly. Call 518-827-7094 to obtain subscription information or a trial. So far it is too soon to see any signs of trade war talk-induced change in the employment data. Our view is that it won’t be long before we see the first signs of negative impacts from Trump’s destructive bluster.
That is why the White House has already started to warn about some short-term pain for the sake of long-term gain. Larry Kudlow knows the pain is coming. He has seen the impact on the stock market, and he has seen the dramatic swings in certain commodity prices. He knows that an expectations-induced retrenchment is underway. Why would a farmer order a tractor today to plant a legume crop tomorrow when he is uncertain about future demand and prices? Why would a pig farmer build a new barn? If you made a specialty part for an airplane that was purchased by Chinese users, would you adjust your business model? Would you still order that new robot, or would you delay?
The first negative reactions to a trade war threat are changes in business expectations. And they are happening fast now.
US exports to China are varied and substantial:
“American exports of agricultural and other primary products to China totaled nearly $20 billion in 2016, which accounted for 25 percent of the industry’s exports in that year. There were also significant amounts of exports of aircraft (nearly $15 billion), motor vehicles and parts (about $11 billion) and chemicals (more than $13 billion) in 2016.” – Wells Fargo special commentary, April 5
Remember that these figures represent only exports to China, which receives just 7.8% of total US exports. Also remember that the US economy is 70% services, and services are a minuscule part of exports. The pain mentioned by President Trump and his advisers will be levied directly on the American manufacturing and goods-producing sectors and on American agriculture. My dentist in Sarasota is not impacted, but my friends in the heartland of America are already hurt because of the price changes in their markets. And every 401k in the United States has been hurt by an amount that equals all it gained in anticipation of economic growth and the benefits of tax cuts, repatriation, and fiscal stimulus. Yes, Mr. President Trump, there will be pain. You have brought it upon us.
It is clear that nobody wins a trade war. No credible person can point to net gains. A trade war is never a zero-sum game; it’s a loser’s game on both sides. So the big talk about who wins is actually a debate about who will lose more, and that’s about as dumb a debate as anyone can imagine.
Okay, what happens next? The US would like to see a negotiation and an agreement so Trump can declare victory and tell everybody how great a negotiator he is. He might get to that result with some of his other trade talks, for example those regarding NAFTA or trade with Europe; and he did enjoy a positive outcome in his talks with South Korea.
But with China the test is different.
Chinese policymakers know the US system and thoroughly understand US politics. They know what the midterm elections mean, and they see how Trump has intensified the political activism of the Trump haters while not energizing the Trump lovers. They know that presidents are vulnerable in midterms to start with – history demonstrates that fact. They know that a Democratic party swing in the midterms means a Pelosi-led House and a bill of impeachment on Trump. And they know the midterm elections are only six months away.
The Chinese political leadership doesn’t face midterms. Xi is now president for life if he wants to be and is commander in chief of the armed forces and the head of his political party, which is the only party in China. He is patient. He also knows that in another 5–6 years the Chinese economy will be the largest in the world, and the US will be second. And he knows that China is already the largest if you measure by manufacturing alone rather than including services. He knows that in the US 17% of GDP is produced by the healthcare sector. Xi knows. His advisers know. Many of them were trained in the US. Those of us in the economics field and financial markets know several of those key people. We have met with them and have visited them in China and hosted them in the US.
Rest assured that Chinese policymakers have a multi-year war plan for trade-related conflicts with the US.
We refer the president’s advisers to the Bully Buster Program. The program emphasizes control and prevention. The purpose of control is to reduce occurrences of bullying. The aim of prevention is to promote conditions in which bullying is less likely to occur. You can check it out, too. Read Bully Busters: A Teacher’s Manual for Helping Bullies, Victims, and Bystanders – https://www.researchpress.com/books/455/bully-busters.
By the way, Mr. President, the Koch brothers have read this book, too.
For our market comments let’s just summarize. We remain invested in our US stock market ETF accounts. We think the power of the tax cuts, repatriation, and fiscal stimulus may be blunted by the Trump trade rhetoric, but it won’t be killed. And a midterm election swing will not be enough to repeal those laws. A midterm swing means a stalemate in Washington and an ugly political scene – if one can imagine it more ugly than it is at present. But the economics of the new tax law will not change.
Finally, we want to leave our readers with a bit of wisdom that has been attributed to Will Rogers. We are drawn to this quote because our president is reputed not to read much and to limit his viewing to only one TV channel:
“There are three kinds of men: The ones that learn by reading. The few who learn by observation. The rest of them have to pee on the electric fence and find out for themselves.”
