September 1, 2019

IT'S SURPRISINGLY EASY TO WIN:

U.S. - China Trade War: Are There Any Winners in War? (Jon Maier, Michelle Cluver, Aug 15, 2019, Global X)

Unlike China, the U.S. is at the start of a new election cycle. This gives the U.S. a far more short-term perspective to negotiate from. Additionally, a strong stance against China talks well to most of President Trump's base. Therefore, over the next year we expect to see a ramp up in rhetoric. However, we believe that the U.S. is going to need to change negotiating strategies or risk running out of option on how to drive the dialog of the trade negotiation.

While it is true that China imports a lot more into the U.S. than the U.S. does into China, trade negotiations go well beyond the value of goods that can have tariffs imposed on them. Throughout this negotiation, President Trump has threatened to add further tariffs when negotiations are not making enough progress. Should these tariffs come into effect in September, all goods from China will face tariffs. This makes negotiation by threat a more challenging tactic for the U.S. to utilize going forward.

It is also good to remember that tariffs are just a nicer word for a tax on the end purchaser. The U.S. is a consumer driven economy and therefore anything that impacts the end consumer is highly important for overall growth. Up until now, most of the goods targeted for tariffs have been less consumer focused. This means potentially a longer lead times before these tariffs reflect in the inflation numbers. Conversely, this final $300 billion targeted for tariffs are likely to have a more direct impact on consumer prices.

While the Federal Reserve (Fed) has been waiting more than a decade for inflation to return, they want demand driven inflation rather than cost push inflation. Higher prices driven by cost factors such as tariffs, increases the risks of stagflation. This also has the potential to make it more challenging for the Fed to be more accommodative should the economy show further signs of deceleration.

Beyond tariffs, what credible negotiating tactics does the U.S. have left within its arsenal? While the U.S. entered this trade dispute appearing to be the stronger party, what have they gained in almost 18 months?

"Trade wars are good and easy to win" is likely to go down in history as one of the largest miscalculations of the current administration. While it is easy to declare a trade war, finding a solution that leaves both sides believing that they got a good deal is far more challenging.

Of course, if Donald simply ended his wars on trade/immigration and entered the TPP he could then take credit for the economic acceleration that would occur.  

Posted by at September 1, 2019 6:40 AM

  

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