US-China Trade War: Update
Since our first podcast on the subject, the trade dispute between the United States and China has now blossomed into a full-blown Trade War. The Trump Administration has now imposed tariffs on $250 billion of goods from China; China has responded with tariffs on $110 billion of goods from the United States;and talks are at a standstill. In this podcast, Jack discusses the status of the Trade War.
***
Excerpt: “In our first podcast on the subject, President Trump had just slapped 25 percent tariffs on an additional $16 billion of products from China, and China had reciprocated with tariffs on an equal amount of goods from the United States…A great deal has happened since then, but one thing that hasn’t happened is that there has been no movement on either side to reach a compromise and end the war.
Managing the Dragon believes that there are three conclusions that can be drawn”. Listen or read on to find out more.
***
EPISODE TRANSCRIPT:
The Trade War between China and the United States—and I guess we can now call it that—is not only the biggest story in China these days, but also a fast moving one.
In our first podcast on the subject, President Trump had just slapped 25 percent tariffs on an additional $16 billion of products from China, and China had reciprocated with tariffs on an equal amount of goods from the United States. In our podcast, we provided background to the trade dispute; explained its causes; discussed how the country’s controversial “Made in China 2025” initiative had contributed to the crisis; and reviewed China’s options for responding to the new tariffs. On the other side of the equation, we explained how China has already begun opening up key industries to greater foreign ownership, perhaps in response to mounting trade pressure.
In the end, we concluded that this is a war that China cannot win—the numbers are simply not in its favor. Every year, China exports over $500 billion of products to the United States, but only imports about $130 billion from its American trading partner. Clearly, high tariffs on exports will have a greater impact on China’s economy over the long term than on the economy of the United States. While China has other ways to retaliate—further depreciation of the renminbi, dumping of U.S. Treasuries and/or making life difficult for American companies doing business in the country, none come without cost to the country. At the time, we believed that there was some chance that President Xi might reach out to President Trump as early as this September at the meeting of the United Nations General Assembly in New York.
A great deal has happened since then, but one thing that hasn’t happened is that there has been no movement on either side to reach a compromise and end the war. On September 24th, President Trump made good on his promise to impose tariffs on an additional $200 billion of goods from China, and 10 percent tariffs went into effect on these products on that date. In the beginning of next year, after all the Christmas shopping is done, the tariffs will increase to 25 percent. Also on that date, President Trump said that he will impose tariffs on an additional $267 billion of goods from China if the country retaliates. China did, in fact, respond by imposing tariffs on an additional $60 billion worth of products from the United States, and by cancelling https://www.nytimes.com/2018/09/22/business/china-cancels-plans-for-trade-talks-in-washington.html planned trade talks between Liu He, Vice Premier of China, and Steven Mnuchin, the U.S. Treasury Secretary.
As it stands today, the United States has levied tariffs on $250 billion of imports from China, and China has levied tariffs on $110 billion, virtually all, of its imports from the United States, and trade talks between the two countries are at a standstill. As far as anyone knows, there are no talks planned anytime soon. China and the United States, and indeed the whole world, are now in a waiting game to see how the Trade War plays out and impacts the world’s two largest economies.
So far, China has suffered the greater impact economically. When President Trump first announced his new trade policy towards China, stocks on the Shanghai Stock Exchange began selling off. At their low point in mid-September China stocks were down almost 19 percent from March 22 when President Trump made his announcement. Since then, stocks have recovered somewhat, but are still off 13.5 percent from their level in March. Likewise, the yuan, China’s currency, has lost about eight percent of its value against the dollar. Meanwhile, US stocks are up over 10 percent during this period.
As far as the real economy is concerned, the U.S. also seems to be faring better than China. The U.S. economy grew by 4.2 percent during the second quarter, its highest level in over four years; unemployment is at an all-time low; and consumer confidence at its highest level in nearly twenty years. In a related issue, the Trump Administration signed a new trade deal with South Korea at the UN meeting in New York in late September, and on October 1 announced that it had reached agreement with both Mexico and Canada on a new trade deal that essentially replaces NAFTA and involves $1.3 trillion of trade among the three countries. The trade deals with South Korea and Canada and Mexico remove two major trade issues from the Trump agenda and give the Administration more time to deal with China.
While China’s Gross Domestic Product (“GDP”) grew by 6.7 percent in its second quarter, only slightly below the Government’s target, other leading indicators are sending mixed signals. Housing prices have been on a decelerating trend; credit extension and liquidity has been slowing; and auto sales have been very weak in recent months. Discussions which we have had with business leaders in China all suggest that the country’s economy is slowing.
To be fair, tariffs only first went into effect in August and cannot be blamed for weakness in China’s housing and auto sectors and general economy. Rather, the Government’s effort to deleverage, which has led to tighter credit, including the collapse of the internet lending platforms that have played such a large role in financing consumer purchases in recent years, is the primary cause. However, China goes into the Trade War with the United States with a weakening economy, which tariffs on $500 billion of exports will only exacerbate.
Calculating the eventual impact on the economies of China and the United States, as well as the global economy, is difficult due to the number of economic and political variables in the equation. Ballpark estimates https://www.reuters.com/article/us-usa-trade-china-economics-explainer/how-trade-war-with-u-s-can-hurt-growth-in-china-and-beyond-idUSKBN1JV37K by economists suggest that every $100 billion of imports affected by tariffs reduces global trade by 0.5 percent and GDP growth by 0.1 percentage point, but these are based on theoretical economic models that must be taken with a grain of salt. The reality is that economists have had no experience dealing with reciprocal tariffs by two countries that together account for 40 percent of global GDP.
Conclusions:
Given all of the above, MTD believes that there are three conclusions that can be drawn:
1. It’s still early. Tariffs only went into effect in August, and neither China nor the United States has felt their full impact. For example, China’s exports to the United States—and the U.S. trade deficit with China— were the highest they have ever been in July. What the trade deficit is in November and December, however, will be far more instructive. Unfortunately, we may now have to wait until then to determine how the tariffs are cutting economically.
Meanwhile, companies are re-considering their global supply chains. The American Chamber of Commerce has surveyed its members and has found that one-third of those with factories in China are considering moving those factories. At JFP Holdings, one of our clients that is considering an expansion in China has now asked us to look at the economics of manufacturing in other Southeast Asian countries as a result of the Trade War.
2. Reaching a successful resolution is now more difficult than ever. Now that the United States has tariffs on $250 billion of goods from China, and China has tariffs on virtually all its imports from the United States, whatever negative economic impact might result to either or both countries is greater than ever. Ironically, even though the potential adverse economic effects are at their highest point, it will be even more difficult for the two countries to reach a successful resolution. At the risk of invoking a cliché, both countries—and both Presidents—have a lot of “face” at stake in these discussions. It is now a test of wills as much as anything. Skilled negotiating on both sides will be needed.
Apart from the trade issue, tensions between China and the United States are mounting in other areas. There have been near collisions of Chinese and U.S. warships at sea; the Trump Administration says there is growing evidence that China is trying to influence the 2018 and 2020 elections; and in the last week, a major hardware hack https://www.bloomberg.com/news/features/2018-10-04/the-big-hack-how-china-used-a-tiny-chip-to-infiltrate-america-s-top-companies affecting many of the servers at Amazon, Apple an and thirty other companies, as well as at the Defense Department and CIA, has been uncovered. Apparently, the servers have been embedded with a tiny chip in the mother boards that were manufactured in China, providing access to sensitive data at these organizations.
In a tough speech towards China at a recent event, Vice President Mike Pence commented https://www.washingtonpost.com/politics/pence-says-china-is-trying-to-undermine-trump-because-it-wants-a-different-american-president/2018/10/04/5ff79ebc-c7d2-11e8-b2b5-79270f9cce17_story.html?noredirect=on&utm_term=.25acedf2689d that China “wants a different American President.
3. Only two people can make the decision to end the Trade War. While China’s cancellation of the planned trade talks between its Vice Premier and the US Treasury Secretary was symbolic, it will have no bearing on the outcome. At this point, negotiations between individuals below the President level are of no consequence. Only two people—President Trump and President Xi—can bring the Trade War to a successful conclusion. If either one or both decide that it should end, they will reach agreement at a high level, and then instruct their negotiators to work out the details.
We will continue to follow this big and fast-moving story and will keep you apprised of further developments.
Since our first podcast on the subject, the trade dispute between the United States and China has now blossomed into a full-blown Trade War. The Trump Administration has now imposed tariffs on $250 billion of goods from China; China has responded with tariffs on $110 billion of goods from the United States;and talks are at a standstill. In this podcast, Jack discusses the status of the Trade War.
***
Excerpt: “In our first podcast on the subject, President Trump had just slapped 25 percent tariffs on an additional $16 billion of products from China, and China had reciprocated with tariffs on an equal amount of goods from the United States…A great deal has happened since then, but one thing that hasn’t happened is that there has been no movement on either side to reach a compromise and end the war.
Managing the Dragon believes that there are three conclusions that can be drawn”. Listen or read on to find out more.
***
EPISODE TRANSCRIPT:
The Trade War between China and the United States—and I guess we can now call it that—is not only the biggest story in China these days, but also a fast moving one.
In our first podcast on the subject, President Trump had just slapped 25 percent tariffs on an additional $16 billion of products from China, and China had reciprocated with tariffs on an equal amount of goods from the United States. In our podcast, we provided background to the trade dispute; explained its causes; discussed how the country’s controversial “Made in China 2025” initiative had contributed to the crisis; and reviewed China’s options for responding to the new tariffs. On the other side of the equation, we explained how China has already begun opening up key industries to greater foreign ownership, perhaps in response to mounting trade pressure.
In the end, we concluded that this is a war that China cannot win—the numbers are simply not in its favor. Every year, China exports over $500 billion of products to the United States, but only imports about $130 billion from its American trading partner. Clearly, high tariffs on exports will have a greater impact on China’s economy over the long term than on the economy of the United States. While China has other ways to retaliate—further depreciation of the renminbi, dumping of U.S. Treasuries and/or making life difficult for American companies doing business in the country, none come without cost to the country. At the time, we believed that there was some chance that President Xi might reach out to President Trump as early as this September at the meeting of the United Nations General Assembly in New York.
A great deal has happened since then, but one thing that hasn’t happened is that there has been no movement on either side to reach a compromise and end the war. On September 24th, President Trump made good on his promise to impose tariffs on an additional $200 billion of goods from China, and 10 percent tariffs went into effect on these products on that date. In the beginning of next year, after all the Christmas shopping is done, the tariffs will increase to 25 percent. Also on that date, President Trump said that he will impose tariffs on an additional $267 billion of goods from China if the country retaliates. China did, in fact, respond by imposing tariffs on an additional $60 billion worth of products from the United States, and by cancelling https://www.nytimes.com/2018/09/22/business/china-cancels-plans-for-trade-talks-in-washington.html planned trade talks between Liu He, Vice Premier of China, and Steven Mnuchin, the U.S. Treasury Secretary.
As it stands today, the United States has levied tariffs on $250 billion of imports from China, and China has levied tariffs on $110 billion, virtually all, of its imports from the United States, and trade talks between the two countries are at a standstill. As far as anyone knows, there are no talks planned anytime soon. China and the United States, and indeed the whole world, are now in a waiting game to see how the Trade War plays out and impacts the world’s two largest economies.
So far, China has suffered the greater impact economically. When President Trump first announced his new trade policy towards China, stocks on the Shanghai Stock Exchange began selling off. At their low point in mid-September China stocks were down almost 19 percent from March 22 when President Trump made his announcement. Since then, stocks have recovered somewhat, but are still off 13.5 percent from their level in March. Likewise, the yuan, China’s currency, has lost about eight percent of its value against the dollar. Meanwhile, US stocks are up over 10 percent during this period.
As far as the real economy is concerned, the U.S. also seems to be faring better than China. The U.S. economy grew by 4.2 percent during the second quarter, its highest level in over four years; unemployment is at an all-time low; and consumer confidence at its highest level in nearly twenty years. In a related issue, the Trump Administration signed a new trade deal with South Korea at the UN meeting in New York in late September, and on October 1 announced that it had reached agreement with both Mexico and Canada on a new trade deal that essentially replaces NAFTA and involves $1.3 trillion of trade among the three countries. The trade deals with South Korea and Canada and Mexico remove two major trade issues from the Trump agenda and give the Administration more time to deal with China.
While China’s Gross Domestic Product (“GDP”) grew by 6.7 percent in its second quarter, only slightly below the Government’s target, other leading indicators are sending mixed signals. Housing prices have been on a decelerating trend; credit extension and liquidity has been slowing; and auto sales have been very weak in recent months. Discussions which we have had with business leaders in China all suggest that the country’s economy is slowing.
To be fair, tariffs only first went into effect in August and cannot be blamed for weakness in China’s housing and auto sectors and general economy. Rather, the Government’s effort to deleverage, which has led to tighter credit, including the collapse of the internet lending platforms that have played such a large role in financing consumer purchases in recent years, is the primary cause. However, China goes into the Trade War with the United States with a weakening economy, which tariffs on $500 billion of exports will only exacerbate.
Calculating the eventual impact on the economies of China and the United States, as well as the global economy, is difficult due to the number of economic and political variables in the equation. Ballpark estimates https://www.reuters.com/article/us-usa-trade-china-economics-explainer/how-trade-war-with-u-s-can-hurt-growth-in-china-and-beyond-idUSKBN1JV37K by economists suggest that every $100 billion of imports affected by tariffs reduces global trade by 0.5 percent and GDP growth by 0.1 percentage point, but these are based on theoretical economic models that must be taken with a grain of salt. The reality is that economists have had no experience dealing with reciprocal tariffs by two countries that together account for 40 percent of global GDP.
Conclusions:
Given all of the above, MTD believes that there are three conclusions that can be drawn:
1. It’s still early. Tariffs only went into effect in August, and neither China nor the United States has felt their full impact. For example, China’s exports to the United States—and the U.S. trade deficit with China— were the highest they have ever been in July. What the trade deficit is in November and December, however, will be far more instructive. Unfortunately, we may now have to wait until then to determine how the tariffs are cutting economically.
Meanwhile, companies are re-considering their global supply chains. The American Chamber of Commerce has surveyed its members and has found that one-third of those with factories in China are considering moving those factories. At JFP Holdings, one of our clients that is considering an expansion in China has now asked us to look at the economics of manufacturing in other Southeast Asian countries as a result of the Trade War.
2. Reaching a successful resolution is now more difficult than ever. Now that the United States has tariffs on $250 billion of goods from China, and China has tariffs on virtually all its imports from the United States, whatever negative economic impact might result to either or both countries is greater than ever. Ironically, even though the potential adverse economic effects are at their highest point, it will be even more difficult for the two countries to reach a successful resolution. At the risk of invoking a cliché, both countries—and both Presidents—have a lot of “face” at stake in these discussions. It is now a test of wills as much as anything. Skilled negotiating on both sides will be needed.
Apart from the trade issue, tensions between China and the United States are mounting in other areas. There have been near collisions of Chinese and U.S. warships at sea; the Trump Administration says there is growing evidence that China is trying to influence the 2018 and 2020 elections; and in the last week, a major hardware hack https://www.bloomberg.com/news/features/2018-10-04/the-big-hack-how-china-used-a-tiny-chip-to-infiltrate-america-s-top-companies affecting many of the servers at Amazon, Apple an and thirty other companies, as well as at the Defense Department and CIA, has been uncovered. Apparently, the servers have been embedded with a tiny chip in the mother boards that were manufactured in China, providing access to sensitive data at these organizations.
In a tough speech towards China at a recent event, Vice President Mike Pence commented https://www.washingtonpost.com/politics/pence-says-china-is-trying-to-undermine-trump-because-it-wants-a-different-american-president/2018/10/04/5ff79ebc-c7d2-11e8-b2b5-79270f9cce17_story.html?noredirect=on&utm_term=.25acedf2689d that China “wants a different American President.
3. Only two people can make the decision to end the Trade War. While China’s cancellation of the planned trade talks between its Vice Premier and the US Treasury Secretary was symbolic, it will have no bearing on the outcome. At this point, negotiations between individuals below the President level are of no consequence. Only two people—President Trump and President Xi—can bring the Trade War to a successful conclusion. If either one or both decide that it should end, they will reach agreement at a high level, and then instruct their negotiators to work out the details.
We will continue to follow this big and fast-moving story and will keep you apprised of further developments.
