Trade War

Lately, the question being continuously asked around town has been, “doesn’t this Administration need a good economy during an election year, so shouldn’t we expect the President to back off the trade war with China?” Here are my thoughts.

Reports around the White House came out after the decision to go 10% on new List 4 were released stating that the President is feeling increasingly sure that his gut feeling is right. Furthermore, he insists that it is a better resource than his advisers in continuing to put pressure on China. NEC Director Kudlow stated that China may be holding out on a trade deal, but the U.S. can withstand a slowdown to its economy more so than the Chinese. “I think China is getting hurt significantly, much more than we are,” Kudlow said. To me that looks like the Administration doubling down.

What the President and his team are reading this week is that the tariff hikes approved may have infuriated Beijing and escalated the U.S.-China trade war, but American U.S. Treasury coffers are getting much bigger. As of June 30, the U.S. government has collected $63 billion in tariffs over the preceding 12 months, according to the latest Treasury data. What’s more, tariff growth is on the rise. The U.S. is now on pace to generate $72 billion in tariffs annually and could well hit the $100 billion mark that President Trump has tweeted if the newly established 10% tariffs on $300 billion in un-taxed imports take effect on September 1, as threatened. I am sure we will see this new number being tweeted as what “China is paying!”

Regarding the impact on red states and farm country, for every dollar brought in by the new tariffs, a dollar has been authorized to fund rescue programs for farmers who have been harmed by retaliation from China and other countries. The U.S. authorized $12 billion in farm rescue funds in 2018 and an additional $16 billion this year, for a total of $28 billion. Although the U.S. had relatively low tariffs before the Trump administration’s latest actions, it still collected about $30 billion annually in pre-existing tariffs assessed against imports from China, Europe, Japan and other countries, including levies on farm products and passenger vehicles. According to estimates from Tariffs Hurt the Heartland, an interest group created by businesses that oppose the tariffs, the new tariffs have brought in a cumulative $27 billion, essentially the same size as the rescue programs authorized for farmers.

The retaliatory trade war between China and the U.S. is accelerating at a time when Chinese President Xi Jinping cannot afford to make concessions, raising the likelihood of a protracted struggle between the world’s two biggest economies. President Xi is ordering a huge celebration in anticipation of the 70th anniversary of the People’s Republic in October. This event is one that Communist Party observers and the media claim will showcase him as a strong leader of a powerful nation. With his government struggling to rejuvenate a sluggish economy and quell antigovernment protests in Hong Kong, Mr. Xi has little leeway to take steps that would undercut his strongman image.

However, China has refrained from being the party to escalate tensions further. Throughout the trade tensions, China has waited for the U.S. to impose tariffs first before retaliating, and Beijing may mistakenly believe it can wait for the tariffs to damage the U.S. economy and for the declining U.S. stock market to force President Trump into making concessions. But they may be miscalculating, looking at the President’s top negotiators and advisers rather than the fact that the President has doubled down when the Chinese don’t offer real concessions on numerous occasions. His actions have seriously agitated the Chinese leadership, who may now finally be thinking that there is no chance of coming to a deal that they see as fair in the near future. Based on Chinese statements from leadership, they are not only prepping for a longer-term trade war, but also for one that is escalating.

Both governments have left some room for negotiations. The U.S. demands that China ramp up purchases of agricultural goods to relieve the trade war’s impact on farmers. Beijing, for its part, wants the Trump Administration to relax restrictions on transfers of American technology to Huawei Technologies Co and to back off, demanding that changes agreed to be legislated rather than handled administratively. Though those concessions failed to materialize in last week’s discussions, the two sides agreed to a negotiating session in Washington in September which remains on schedule. Again, the President could place his newest tariffs on hold before the Sept. 1 effective date, and the yuan could strengthen. However, my bet is that they go into effect unless there is a movement by China before September 1. Mr. Xi hasn’t popped up on state media in recent days, which fuels speculation that he and other leaders are likely in China’s coastal resort town of Beidaihe, where top officials have gathered in previous summers to discuss policy and political matters in secret. Therefore, he is not likely to come out before September 1 with a new concession.

Of what I am reading and hearing, I still think we are to remain in trade wars with China for some time and are at present time undeterred by the President’s concern about whether it will impact the re-elect. I am sure his advisers are concerned, but he still isn’t showing he is. He may think he has more time and that he can wait until after the election. We may believe that he doesn’t mean that, but if he keeps money flowing to the farmers and gets USMCA along with other bi-laterals signed like with Japan, who knows?!

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