Last night China responded to Trump by announcing a list of 128 commodities and products it would impose tariffs if the U.S. follows through with its own list of some 1,300 Chinese imports being targeted for tariffs. As you’re about to see, this escalation could be the prelude to a 2018 recession.
These tit-for-tat actions are the carefully calculated opening salvos—they both add up to $50 billion on each side- in what many hope will result newly negotiated ‘win/win’ trade deal. While there is still time to make a deal, the current deadline before the tariffs go into effect in May 22, many economist fear Trump may have overplayed his hand is creating a ‘lose/lose’ situation.
But each side deems it necessary to play hard ball, whether to save face with their respective citizens or in attempt to gain leverage and extract the desired concessions, this could lead the U.S., and potentially the global economy, into a recession.
Certainly, the stock market is expressing concern, as broad-based selling swept through, sending the major indices sharply lower on the opening.
So far Trump, who has in the past taken credit for stock market gains, seems unfazed, tweeting comments such as “Trade wars are easy to win.” And “When you have a $500 billion deficit you have nothing to lose.”
Trump’s critics, which come from all corners ranging from farmers to Wall Street, contend that the President not only lacks a firm grasp of trade policy, but that he would also ultimately be hurting American consumers through higher prices on a broad assortment of imported goods.
But the hardest hit might be those in the heartland of Trump’s base supporters in the agricultural industry as China will be targeting imports of U.S. grains and meat products. Prices of soybeans, cattle and pork have all tumble sharply on the news.
Other U.S. companies and industries expected to be hardest hit in trade war include Boeing (BA), Apple (AAPL) Starbucks (SBUX), automakers like Ford (F), and energy companies.
Tough Tech Talk
Trump’s notion that the trade deficit, which is actually $387 billion not the $500 billion he cites, indicates the U.S. is somehow “losing” is also misguided.
The bilateral deficit is also misleading because a large share of the value of goods we import from China actually originate in places other than China.
High-tech items such as the iPhone are assembled in China, but much of its total value is represented by components made in Japan, South Korea, and the United States. Yet under the U.S. government’s trade accounting system, the full value of the iPhone is classified as an “import” from China. When the components of imports from China are assigned to the country where the value was actually added, the bilateral trade deficit drops by an estimated 40%.
Where Trump does have a legitimate complaint is China’s lack of respect for, if not outright theft of, intellectual property.
Many think Trump is using the steel and aluminum tariffs as cudgel to get China to create a fairer playing field to U.S. companies, especially technology, without fear stealing or forcing to share ownership with Chinese entities.
To this end the Trump administration seems to be positioning to play hard ball which will ultimately lead to positive results as Commerce Secretary Wilbur Ross said, “Even shooting wars end with negotiations.”
Let’s just hope we don’t see a 2018 recession before one side rises the white flag.
