President Trump is expected to provide an update on the China trade war later today. Expectations are that the $200 billion worth of Made in China goods being tossed around to get hit with a 10% duty at American ports will not be upped to 25%.
“We’ll have an update later today,” Sanders told D.C. reporters Wednesday. “The president’s going to continue to hold China responsible for its unfair trade practices. This has gone on long enough, and he’s going to do something about it.”
There are two ways to look at this. First, there is an old adage in financial markets that says the least anticipated risk by the market is what poses the biggest risk to the market. So are $200 billion of China tariffs a surprise? No. Is going from 10% to 25% a huge surprise? Not really. Will the market correct on the news if the tariff charge more than doubles today? Yes. But we have seen this before. Down 400 one day, up 300 the next.
The worst-case scenario is that China is tariffed on everything it exports to the United States or around $500 billion worth of goods.
To date, China has tariffed on at least $50 billion. Beijing has retaliated in kind, with another $50 billion of U.S. imports hit with 25% tariffs at the ports there.
The thing is, China does not import anywhere near $500 billion worth of goods, so it is reaching a point where it has to retaliate by other methods. Some have argued that China can retaliate by blocking access for American companies. Others said that they can block access to American brands, though this is highly unlikely as it would hurt China’s growing consumer economy.
If Trump surprises and says, “Ladies and gentlemen, we have a deal,” China stocks will rally hard in the morning.
If Trump says we are upping the ante to 25%, the market might correct a bit, but no one should be surprised by this.
“There is a real risk that trade tensions lead to price volatility,” says Scott Clemons, chief investment strategist for Brown Brothers Harriman in New York. He thinks that now is the time for a trade war because the global economy is solid. If it was weaker, then all of this could lead to a recession. Clemons also thinks the U.S. has a better hand than the Chinese.
“Threats of tariffs or new tweets from the White House about trade will impact markets. But we do not see trade posing a big risk,” he says.
One reason is that the U.S. economy is not export driven. China’s is.
The lesson China learned from the 2008-2009 Great Recession is that they were too exposed to trade with the U.S. Therefore, a U.S. crisis became a Chinese crisis. Xi Jinping spent trillions stimulating the economy. His policies have since been designed to build a stronger consumer economy. The reason the U.S. has been insulated to some degree from Trump’s trade tirades is that personal consumption constitutes the bulk of our economy.
The global economy is tightly integrated. There are secondary and tertiary effects to any change in trade practice. We’ve seen examples of that with Harley-Davidson deciding to build more motorcycles in Europe in order to avoid tariffs from the EU.
“What the free traders have missed—and I think the White House gets this—is that we have had a set of trade policies with China that were appropriate for a Third World country to help accelerate their development,” says Clemons. “But China has been able to get away with a set of trade policies tilted in their favor despite the fact that at least on the export side of their economy is no developing market. They are a serious global competitor.”