- The U.S.-China trade war is heating up with recently announced tariffs and retaliations.
- Today, Alexander Green explains how the trade war has affected the economy and what the impact could mean for Trump’s reelection.
The trade war between the U.S. and China is heating up.
And while both sides are suffering, American businesspeople, investors and consumers – as well as President Trump – stand to lose a lot.
A quick recap of what’s happened lately…
Unhappy with the lack of progress in trade negotiations, Trump threatened a 10% tariff on $300 billion worth of Chinese goods beginning September 1.
(The previous tariffs primarily hit American farmers and manufacturers. These will hit consumers, driving up the prices of smartphones, laptops, toys and video game consoles.)
China, in retaliation, let its currency slip to an 11-year low, partially offsetting the negative impact of the tariffs.
The Trump administration, in turn, labeled China a “currency manipulator.” (That really means nothing since it merely sets the stage for negotiations, something that is already going on.)
Some say the U.S. is winning this war since Chinese exports to the U.S. fell $5.6 billion in June – and the country’s second quarter GDP grew at its slowest rate in 27 years.
But U.S. exports to China fell by $1.8 billion in June.
The Trump administration has also had to send $16 billion in aid to farmers whose products are rotting rather selling.
The markets have reacted negatively to the uncertainty… though they are rallying this morning after the Trump administration delayed until December 15 the tariffs set to begin September 1.
But this may be only temporary.
Moody’s Analytics estimates the trade war is shaving a point off annual U.S. GDP growth – and has already cost the U.S. about 300,000 jobs.
Some claim that China will just keep devaluing its currency to offset tariffs. But that is not a genuine threat.
A weak currency causes a capital outflow that can quickly become a torrent. (No one likes owning assets denominated in a depreciating currency.)
It means Chinese citizens have to pay more for imports and travel abroad. And it makes it tougher for Chinese entities to service their dollar-denominated debts.
However, Trump has a problem that the Communist Party doesn’t worry about: reelection.
A new Washington Post-ABC News poll shows that 53% of Americans disapprove of Trump’s performance as president. More specifically:
- 57% oppose his policies on immigration.
- 54% oppose his policies on healthcare.
- 56% oppose him on women’s issues.
- 52% oppose his policies on gun violence.
- 55% oppose him on foreign policy.
- 62% oppose him on climate change.
The one bright spot? Fifty-one percent approve of his handling of the economy.
That is a big plus, indeed. Americans care deeply about their jobs, their household income and their 401(k) balances.
My take on next year’s presidential election is this: If the economy is strong, Trump wins. If it isn’t, he doesn’t have a prayer.
(This analysis assumes that Democrats are smart enough not to nominate someone slightly to the left of Hồ Chí Minh.)
Trump has tied himself to the economy in a way that few presidents have. He regularly brags about GDP growth, job creation and the performance of the stock market.
This is not entirely unjustified. Tax reform and deregulation have spurred innovation, capital investment, hiring and share buybacks.
But a recession, higher unemployment and a bear market would not be conducive to his reelection.
Part of Trump’s problem is that he has not clearly articulated his goals in this trade conflict.
Yes, we run a persistent trade deficit with China. But that’s partly because we have a lot of wealthy consumers who can afford products made in China.
China has a lot of poorer consumers (average household income is just over $10,000) who, aside from agricultural and energy exports, cannot really afford American products.
However, China does engage in a number of unfair trade practices. If Trump would concentrate on these – and forget about the trade deficit – we might put this unpleasantness behind us sooner.
The Dow Jones Industrial Average is lower today than it was a year and a half ago, when Trump first announced his tariff strategy.
As I’ve said from the beginning, trade wars are not “good and easy to win.”
Expect the market to remain volatile until a resolution appears likely.