June 2018: A Shift in China-U.S. "Trade War"
Written May 21, 2018
On March 1 President Trump announced a 25% tax on steel and 10% tax on aluminum coming into the U.S. from abroad. The reaction across the globe was fast and furious and, as a result, former economic policy director Gary Cohn quit the administration. The shock and awe didn’t stop there. On March 22 Trump signed tariffs on up to $60 billion on Chinese imports. China responded with their own tariffs targeting American farmers shortly thereafter. Trump raised the stakes by releasing a list of 1,300 product categories that would be hit by his tariffs, from televisions to dishwashers, and even vaccines. China answered the next day with their own list of 25% tariffs on American products including cars and soybeans; a heavy blow to those industries in particular.
The world was convinced at that point that the U.S. and China were careening toward the first all-out trade war since the Great Depression. Almost everyone was pretty vocal about how incredibly destructive it would be. “In a trade war, no one wins” was the mantra on everyone’s Twitter feed. Everyone except President Trump, that is. He was on a mission to narrow the $325 billion trade deficit with China and stop their blatant theft of our intellectual property and, due to his devil-may-care nature, no one was sure how far he would go. Previous presidents would have backed down by that point and would have followed the proper political process. Trump’s tactics are in largely untested waters, and the stock market responded by returning to February’s lows. Things were looking quite dire.
The stock market has traded sideways ever since. I’d wager that the biggest reason lies in this very issue. Why is that? Because a trade war would almost instantly threaten the global expansion. No one wins a trade war because the tit-for-tat nature is like lobbing financial bombs at the private sector until even the industries you are trying to protect are battered. This would be enough to spark the next recession and it would be brutal. Until the tensions between China and the U.S. are lessened, investors will have their guard up. Think about it: who wants to invest in a company that might have their direct costs go up by 10% or more overnight? No one that thinks a trade war is a real threat.
But do we think this is a big enough threat to batten down the hatches? Should anything that has a possible future tariff attached to it be sold? What I expressed in my March Commentary still holds true1. I think it’s premature to make investment decisions based on the slim chance of a real trade war. With the developments from this past weekend, the odds are even slimmer.
China and the U.S. have agreed to drop their tariff threats while they work on a wider trade agreement. A trade war is now “on hold” according to U.S. Treasury Secretary Steven Mnuchin. Although the announcement was short on specifics, China said it would ‘significantly increase’ the import of goods and services from the U.S. Now comes the hard part: will there be meaningful follow-through or will this fall flat, and leave us where we were before? Critics of this trade agreement say Trump should have hit harder on intellectual property theft; that he rolled over too easily. Ironically, to begin with, they’re the same critics that disparaged him from going down this road. I suppose when you’re a critic, you have to be critical about something.
My opinion is that a halt on the tariffs and a tentative compromise was the most likely outcome from the start. This dispute between the U.S. and China isn’t over by a long shot but, as we head into the summer, these recent developments relieve some of the pressure on the market for now.
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