Learning to Live With the Trade War
Author: Greg Valliere
May 28, 2019
A U.S.-CHINA TRADE DEAL IS NOWHERE IN SIGHT: Lots of noise this Memorial Day weekend — a rejection of the center in Europe, a fierce Donald Trump assault on Joe Biden, the Democrats’ paralysis over impeachment, etc. — but there’s no question that the biggest development for the financial markets is the likelihood that the U.S.-China trade war will persist for many months.
HOPES OF A BREAKTHROUGH when Presidents Trump and Xi meet in Japan in late June were dimmed by comments from both countries that a trade deal isn’t remotely close. China won’t change how it subsidizes state-owned companies, and the U.S. will not relent on issues such as thievery of intellectual property rights. There are no further talks scheduled; even if Trump and Xi have a warm meeting, it would take many months to iron out the details of a deal..
WHO CRIES UNCLE? Both sides face weaker economic growth in the coming months, and the threat of inflation isn’t out of the question because of much higher tariffs. U.S. investors have to live with daily Trump tweets on trade, confusing spin from Larry Kudlow, and signs of weakness in the Farm Belt and among small companies dependent on Chinese components.
WE ANTICIPATED A MODEST TRADE DEAL by the end of May, but that’s obviously out of the question. Had there been a deal, GDP growth of close to 3% was possible this year. Now a growth pace in the low-2% range seems more likely; the risks are now downside risks. We still don’t see a recession — the monetary and fiscal stimulus is simply too mammoth.
THE POLITICAL IMPLICATIONS: Trump still has solid backing for a tough stance against Beijing; politicians who aren’t from the Farm Belt generally support cracking down on China’s practices. So do we, but there’s a flaw in Trump’s logic — his desire to shift manufacturing back to America depends on strong growth in the U.S. labor market, which won’t happen without an immigration deal, which has no chance of moving in Congress.
THERE’S STILL SOME POSITIVES ON TRADE: Chances of a trade deal with Japan have improved, and with tariffs dropped on Canadian steel and aluminum, Justin Trudeau’s government is moving quickly to ratify the NAFTA replacement treaty, USMCA (but the U.S. House may open up the deal and change labor and trade provisions).
WE STILL EXPECT A CHINA DEAL: Call us stubborn, but a deal between the U.S. and China still seems likely later this year, as Trump and Xi seek to save face amid weakening economic growth. Xi can’t afford public dissent over lost manufacturing jobs, and Trump can’t afford to lose Iowa’s 6 electoral votes in the next election (not to mention Missouri’s 10 votes). The U.S. and China will reach an agreement eventually, but this may be a long and rocky ride for the markets.
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HIGHLY RECOMMENDED READING this morning is a brilliant assessment by David Sanger in the New York Times on Huawei’s role in world communications and politics, which seems unstoppable despite attempts by the U.S. to confront the telecom giant with a wall, literally and figuratively. The rise of Huawei is a complicated issue with enormous implications — which are succinctly and clearly detailed in Sanger’s article today.
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